sou · GWB338d2 · 2009-01-01 00:00:00 — States, beneficiaries and interested parties, competitors as well as trade associations, to provide comments. Such comments strengthen the hand of the Commission considerably. The comments will be submitted to the concerned. 156.According to Art. 7(6) of the Regulation, the Commission has 18 months in which to adopt a decision. Upon the lapsing of this period the concerned can request the Commission to take a decision within two months. This brings the total time limit for the Commission under this procedure to 20 months. The combination of the two procedures, Art. 88(3) and 88(2) EC leads to a maximum of 22 months. 157.After completing the Art. 88(2) EC procedure, the Commission may either: (a) declare the aid compatible with the Common Market, with or without conditions; or (b) declare it incom- patible. Either decision may be subject to review by the ECJ or the CFI. 158.A final positive decision, that the aid is compatible, concludes the standstill of Art. 88(3) EC. A positive decision may be accompanied by conditions which should alleviate the effect on competition.164 The Commissions decision in the case165 provides a good example of this practice. In case of a final negative decision, that the aid is not compatible, the standstill contained in Art. 88(3) EC does not lapse, but it is henceforth based on the negative decision. 159.Complainants have, according to Art. 20 of the Regulation a right to inform the Commission of any alleged unlawful aid or the misuse of aid. Complainants can bring an Art. 232 EC action if the Commission fails to act.166 Furthermore, as the ECJ observed in the Sytraval judgment,167 complainants will, as third parties which are directly and individually concerned, have a right to challenge State aid decisions addressed to governments of Member States. The ECJ also pointed out that although the Commission is not obliged to hear complaints, it must nevertheless respond to facts and points of law raised by the complainant. 164According to Art. 87(3)(c) and (d) EC such aid should not affect trading conditions and competition in the Community to an extent that it is contrary to the common interest. 165Air , 94/653/EC, OJ 1994 L 254/73. 166Case T-95/96 v Commission [1998] ECR II-3407. 167Case C-367/95 P Commission v Chambre Syndicale (Sytraval) [1998] ECR I-1719. 160.Finally, unlawful168 State aid is not automatically incompatible with the common market. The Commission is also under a duty to review such aids.169 According to Art. 13(2) of the Regu- lation the Commission shall not be bound by the normal time limits in this case. It has powers to issue injunctions to suspend or provisionally recover the unlawful aid under Art. 11 of the Regulation. b.Application of the State aid provisions to the Swedish housing market 161.The European Property Federation () filed two com- plaints with Commission arguing that the repeatedly infringed the EC provisions on State aid control by granting various support measures to the municipalities and the public housing companies on the Swedish housing market. In its first complaint letter of 1 2002, the EPF referred to a government proposal which foresees the establish- ment of a new government authority, , with the objective to restructure public housing com- panies and to turn them into economically viable undertakings.170 This new authority would be empowered to grant the following aid measures to the public housing companies to the exclusion of private housing companies: (1)direct financial support granted to the municipalities, which is ultimately for the public housing companies; (2)provision of loans to municipalities and public housing companies; (3)capital injections through the State becoming a share- holder in the housing companies; 168It is important to realise the distinction between unlawful and incompatible state aid. The former is a procedural issue: aid is unlawful if it has not been correctly notified to the Commission or has been implemented before a positive decision of the Commission has been granted. The latter is an issue to be decided by the Commission, namely whether the aid in question can benefit from one of the exemptions provided for in Art. 87(2) or (3) EC. Thus, an illegal (un-notified) aid may still be deemed to be a compatible aid upon the application of the criteria by the Commission. 169Case C-301/87 v Commission (Boussac) [1990] ECR I-307. 170The proposal was approved by the Swedish Parliament on 6 2002 and the authority was established on 1 2002 (of 24 2005, p. (4)State loan guarantees for loans taken by public housing companies which will enable them to obtain better finan- cial terms in the form of lower interest rates; (5)the authority is empowered to acquire houses from the public housing companies in order to liquidate them or develop properties for alternative uses.171 162.The Swedish government apportioned the total amount of billion for the entire restructuring effort. The re- structuring should be concluded by 2010. 163.In a second complaint letter, dated 30 2005, the EPF added various other aid measures to those already identified in the first complaint as it considered the scale of the State aid in question far greater than it had originally presumed. The measures identified in the second complaint, which were granted in the year 2002, comprise: (1)direct subsidies in the form of e.g. operating grants, loss coverage grants, compensation for winding-up, etc. amounting to million;172 (2)credit guarantees provided by the municipalities resulting in lower interest rates to the benefit of public housing companies, amounting to million; (3) the provision of equity capital amounting to million in the form of the forgoing of returns on dividend payments.173 171The information on the aid measures is taken from a Memorandum prepared by , dated 24 2002, which is annexed to the first complaint letter of the EPF, and the answer by the Swedish government to the complaint, dated 16 October 2002. It should be noted that the description of the aid measure in the first complaint is rather vague as the government proposal does not seem to offer more details on the proposed aid measures. 172This category of aid excludes possible support in the form of lower prices charged by the municipalities for the provision of services to the public housing companies. It also excludes aid in the form of interest subsidies (of 24 2005, p. 173This information is taken from a Memorandum, dated 24 2005, prepared by in the context of the second complaint. The Memorandum refers to a report pre- pared by , dated , which identifies the various aid measures based on the annual accounts for 2002 of almost all public housing companies and indicates the level of support. The report includes a fourth measure consisting in low depreciation costs, amounting to million. According to , this measure does not involve any State aid element and is therefore not included in the complaint. In total, it is estimated that the State aid granted by the muni- cipalities to their public housing companies amounted to million in the year 2002.174 164.In the following, I will determine whether the aid measures identified by the EPF indeed constitute State aid according to Art. 87(1) EC and if so, whether they could be exempted according to Art. 87(2) and (3) EC or Art. 86(2) EC. i.Transfer of State resources 165.The measures brought forward by the EPF in the two com- plaints have to qualify as a transfer of State resources. In the case of the direct payment of funds in the form of e.g. direct financial support and capital injections, a transfer of resources from the State to the public housing companies can un- doubtedly be assumed. 166.A transfer of State resources can, however, also consist in the foregoing of revenue as in the case of loan guarantees and pro- vision of loans as well as in the acquisition of houses from the public housing companies, provided that the conditions under which those transactions take place do not correspond to normal market conditions. Thus, the granting of a loan guarantee could lead to the foregoing of revenue if the guarantee is not remu- nerated by an appropriate premium corresponding to the risk associated with such a guarantee. The foregone amount would consist in the difference between the cost of borrowing on the open market for similar transactions and the rate actually ob- tained with the benefit of the guarantee. For loans, the aid element consists in the difference between the interest rate which the recipient should pay and that he actually paid. However, whether the transactions at issue did or did not take place according to normal market conditions will be considered in 174 the Public Support to Com- patible with the EU rules on State aid?, dated 24 2005, p. I should point out in this context that I do not discuss whether the aid measures identified by EPF indeed exist or whether the aid amount alleged by in its report is correct. I do not have the necessary data to assess the precise amount of the aid granted and whether the calculations employed by are correct according to standard practice. I will therefore take the aid measures of the two EPF complaints and the amount stipulated in the report as the basis for my analysis. the following section when discussing whether the measures conferred an economic advantage on the aid recipient. 167.As to the State body granting the alleged aid measures, it seems that, at least in the case of the first complaint of EPF, the State resources were not granted by the State directly to the public housing companies but through a State body, . This does not change the finding that the measures have been granted by the State as for Art. 87 EC to be applicable, the aid must either be effected by the State itself or by a public (or private) body which is under the direction or supervision of the State.175 With respect to the second complaint, it is not entirely clear if the contested measures have also been granted by or by the municipalities themselves. Either way, the measures can clearly be attributed to the State. 168.The question whether the transfer of State resources in fact results in the conferral of an economic advantage depends on two issues. First, it needs to be determined whether the transactions identified by the EPF took place according to normal market conditions in line with the Market Economy Investor Principle (MEIP). If that is the case, the measures cannot be considered to constitute an advantage for the re- cipient. Secondly, the ECJ ruled in its Altmark judgment176 that an aid is not considered to confer an advantage if it merely compensates an undertaking for the carrying out of a SGEI, provided that four cumulative conditions are met. These two tests will be discussed next. (i) MEIP 169.This tends to be the key issue in any determination of whether or not a measure constitutes State aid. The concept can be defined as follows: 175Hancher, Ottervanger and Slot, E.C. State Aids, Sweet & (1999), para. 176Case C-280/00 Madgeburg v Nahverkehrs- gesellschaft beim Bundesverwaltungsgericht [2003] ECR I-7747. the aid must be assessed as the difference between the terms on which the funds were made available by the State to the public enterprise, and the terms which a private investor would find acceptable in providing funds to a comparable private undertaking when the private investor is operating under normal market eco- nomy conditions (hereinafter market economy investor prin- ciple).177 If it can be proven that a private investor would, or indeed did, invest on the same terms as the State then there is no question of State aid. 170.The inherent limitation of this test is that the State will in- evitable be in a different position from any hypothetical private investor. Thus, when applying the MEIP, the Commission re- cognises that where the public authority controls an individual public undertaking or group of undertakings it will normally be less motivated by purely short-term profit considerations [] and its time horizon will accordingly be longer. The Commission will take account of the nature of the public authorities holding in comparing their be- haviour with the benchmark of the equivalent market economy investor.178 therefore has to be allowed wide of judgment when taking entrepreneurial decisions but measures will be condemned 177Commission 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 undertakings in the manufacturing sector, OJ 1993 C 307, para. There is no doubt that the principles laid down in this Communication also apply to the housing sector. The Commission explains in the introduction to the Communication, that although it refers to the manufacturing sector, this will not preclude the Commission from using the approach described by this Communication in individual cases or sectors outside manufacturing to the extent that the principles in thic Communication apply in these excluded sectors and where it feels that it is essential to determine if State aid is involved. 3 of the Communication). Moreover, the principles used in the Communication are also embodied in Directive 93/84 on transparency of financial relations, recently amended by Directive 2006/111 (OJ 2006, L 318/17). See also para. 8-013 and 14 in Hancher, Ottervanger and Slot, E.C. State Aids, 3rd edition, Sweet & (2006). 178Commission 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, para. when it is beyond doubt that there is no other plausible ex- planation for the provision of public funds than considering them as State aid.179 171.With respect to the granting of direct financial support and direct subsidies by the municipalities, it can be assumed that a private investor would never have undertaken such transactions without any appropriate return. However, the issue is more complex with respect to the remaining measures. 172.Capital injections or the provision of equity capital are con- sidered to be an aid when it is made under circumstances which would not be acceptable to an investor operating under normal market conditions. This is normally taken to mean a situation where, inter alia: (1)the structure and future for the company are such that a normal return (by way of dividend payments or capital appreciation) by reference to a comparable private enterprise cannot be expected within a reasonable time. A normal economy investor would normally provide equity finance if the present value180 of expected future cash flows from the intended project (accruing to the investor by way of dividend payments and/or capital gains and adjusted risk) exceed the new outlay;181 (2)the company, because of its inadequate cash flow if for no other reason, would be unable to raise the funds needed for an investment programme on the capital market; (3)the holding is a short term one, with duration and selling price fixed in advance, so that the return to the provider of capital is considerably less than he could have ex- pected from a capital market investment for a similar period; 179Commission 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, para. 180Future cash flows discounted at the companys cost of capital (in-house discount rate). 181Commission 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, para. further explains: If a public undertaking has an inadequate rate of return, the Commission could consider that this situation contains elements of aid []. Similarly, if the State foregoes dividend income from a public undertaking and the resultant retained profits do not earn a normal rate of return then the company in question is effectively being subsidised by the State. (Paras 43 and 44) (4)the public authorities holding involves the taking over or the continuation of all or part of the nonviable opera- tions of an ailing company through the formation of a new legal entity; (5)the amount of the holding exceeds the real value (net assets plus value of any goodwill or know-how) of the company.182 The aid in the above instances consists in the cost of the in- vestment less the value of the investment, appropriately dis- counted.183 173.When applying these conditions to the case at issue, the first complaint lodged by EPF which refers to the government proposal does not include any further details on the capital injections. With respect to the second complaint, the parties to the proceedings disagree184 as to the method employed by to identify the capital contributions.185 It is outside my competence to assess whether the method and the figures brought forward by are correct. Be that as it may, the Swedish government explained with respect to the capital injections in the context of the second complaint: State share ownership in and possible capital contributions to municipal housing associations may occur if the ongoing re- structuring of the housing association requires further capital investment which the municipality cannot afford. Capital con- tributions must, however, be subject to interest and repaid as the housing associations financial position improves and the States share ownership must be terminated with the acquisition of the States shares by the municipalities or another party as soon as possible.186 182These conditions are alternative not cumulative. of 1984, . 183Commission 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 under- takings in the manufacturing sector, OJ 1993 C 307, para. 184See the Public Support to Com- patible with the EU rules on State aid?, dated 24 2005, p. 12 and Response by to second complaint, , pp. 9 and 10. 185Ernst & report, Public support to municipal housing companies, dated . 186Response by to second complaint, , p. 174.This statement is too vague to assess whether the conditions set up by the Commission with respect to an adequate rate of return are respected. The governments practice, however, is already doubtful considering the fact that the State aid is ne- cessary in order to ensure the survival of many public housing companies and to prevent financial collapse.187 The fact that the public housing companies are in a very critical financial situation makes it rather unlikely that they could raise the necessary funds on the market without any State support. 175.An issue closely related to State aid granted in the form of capital injections, which is raised by EPF in its second com- plaint, constitutes aid granted through the forgoing of adequate returns in the context of divided payments. The Commission in its Communication to public undertakings in the manufacturing sector explains in this context: , in common with any other market economy investor, should expect a normal return obtained by comparable private undertakings on its capital investments by way of dividends or capital appreciation. The rate of return will be measured by the profit (after appreciation but before taxation and disposals) ex- pressed as a percentage of assets employed. If this normal return is neither forthcoming beyond the short term nor is likely to be forthcoming in the long term (with the uncertainty of this longer-term future gain not appropriately accounted for) and no remedial action has been taken by the public undertaking to rectify the situation, then it can be assumed that the entity is being indirectly aided as the State is foregoing the benefit which a market economy investor would expect from a similar investment. Similarly, if the State foregoes dividend income from a public undertaking and the resultant retained profits do not earn a nor- mal rate of return as defined above then the company in question is effectively being subsidized by the State.188 176.Therefore, the fact that the level of dividend payments from the public housing companies to the municipalities is, a priori, limited to a fixed percentage by Swedish law indicates that the return received from the investments is not normal as de- 187Response by the , Housing Division, to the first complaint of the EPF, dated 16 October 2002, p. 188Commission 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 43 and 44, with more detailed information on the method of calculation of a normal return. fined by the Commission (depending on the level of invest- ment). Also the fact that the return is defined as reasonable but not the maximum possible189 does not change the assess- ment if it can be concluded that the dividend payments received by the government for its equity participation is lower than under normal market conditions. 177.This does not, however, necessarily imply that the municipal housing companies should strive for the highest possible profits in the long run and that it is not relevant to look at the return on injected capital, retained profits and equity with origin in market value increases.190 As explained above, the government has a wide of discretion when taking entrepreneurial decisions, even more so in the context of long-term invest- ments. Yet, for present purposes it is irrelevant to determine the origin of the equity or whether the market value of pro- perty increases due to higher demand or other reasons. What is crucial is that the rate of return on all capital, irrespective of origin, is not the same as a private investor would expect.191 178.With respect to the acquisition of houses from the public housing companies, this does not, in principle, constitute aid to the com- panies provided that it takes place according to market condi- tions. 179.The aid element in the granting of guarantees consists in the difference between the rate which the borrower would pay in a free market and that actually obtained with the benefit of the guarantee, net of any premiums paid for the guarantee.192 The benefit of a State guarantee is that, firstly, the risk associated 189See question 1 of your memo of 9 2007 and pt. 2.1.1 of your memo of 5 2007. 2.1.1 of your memo of 5 2007. 191The origin of the equity is only relevant in the context of the level of the rate of return. As you rightly state, equity capital usually demands a higher rate of return than loans (p. 4 of your memo of 9 2007). Yet again, each rate of return depending on the origin of the equity has to be compared with the corresponding rate of return a private investor would expect. In a similar , if it is, e.g., possible to obtain additional profits by selling condomi- niums to housing cooperatives because of higher values of housing on the condominium market and if market conditions are such that a private housing company would behave in this way, the fact that public housing companies do not behave according to reasonable and profitable company practice constitutes an infringement of the MEIP (this issue was raised in your memo of 5 2007). 192 The aid element is assessed at the moment the guarantee is granted. The fact a guarantee may never been called does not change the finding of State aid. (Commission Communi- cation 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 undertakings in the manufacturing sector, OJ 1993 C 307, para.