Competition Law, State aid and Regulation, part 2

(The second part of a general lecture on competition law, state aid and regulation, separated into three posts: Part 1, Part 2, Part 3.)

The Competition Rules and State Action

For a US antitrust lawyer, discussion of the competition rules does not extend to State (or state) action. For the drafters of the EC Treaty, however, it would have been obvious that State action would need to be covered. Looking at the different Member States, it would have been very clear that it is not just laws prohibiting trade, or actions of companies that could distort competition on the market. State owned companies were common – in some Member States they still are (even before the nationalisations caused by the financial crisis); state granted monopolies were also common. So completing the single market meant completing the competition rules with control on state action, control being exercised through Articles 86 – which imposes limits on the state’s ability to grant special or exclusive rights – and Article 87 – which imposes limits on the state’s ability to grant aid to individual companies or sectors.

From the description of the system of the Treaty above, you can see that these rules aimed at the States have a dual origin – they are part of completing the single market (for example, state monopolies could effectively prevent free movement of goods and services), and they are part of the competition rules (for example, state aid could undermine productive efficiency, and incentives to invest and innovate).

No other jurisdiction had, or has, comparable rules – the anti-subsidy provisions of the WTO are a shadow of the EU’s State aid provisions.

This means that when a European lawyer thinks of the competition rules, they tend not to think only about the conduct caught by our equivalent of s1 and s2 of the Sherman Act. We see the competition rules in a rather broader manner, encompassing any actions that can distort competition on the market.

State Aid Control

Article 87

Article 87 is constructed in a similar way as Article 81 – a prohibition combined with criteria for approval:

“87(1): …any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the common market.”

87(2) and (3) set out possible reasons for approving the aid: these have been fleshed out in the Commission’s decisional practice, in various recommendations, guidelines and exemption regulations, and of course in Court cases: for example, regional aid, employment and training aid, investment in research and development, rescue aid to companies that are about to fail (something we have used rather more often in recent months) are all potentially compatible with Article 87.

A few things to note:

– The definition of an undertaking is the same as under the other competition rules: “…every entity engaged in economic activity, regardless of the legal status of the entity and the way in which it is financed” (C-41/90, Klaus Hoefner and Fritz Elser v Macrotron GmbH., 1991 ECR I-01979, at para.21)

– Non economic activities are excluded, although the border is sometimes hard to draw: regulatory, supervisory tasks, activities based on solidarity, for example, are excluded. That something is being carried out as a non-profit activity is not necessarily enough – essentially there has to be not even a potential to make profit.

– The Article encompasses aid “by a Member State or through State resources” so regional or local authorities are covered, as are public or private bodies if the aid decision is “imputable” to the Member State.

– The concept of aid covers direct capital transfers (cash), or guarantees. Guarantees reduce the cost of capital – banks will lend more readily and at a lower interest rate against the background of a State guarantee. Aid can also be indirect – foregone income, such as tax breaks, or assets sold below or purchased above market price.

For there to be “aid”, there has to be some element of “favour”, something for the recipient that is not available to others. One exception is that Member States can grant aid that favours an undertaking, provided that the state is simply acting as any other investor would – ie the aid complies with the “market economy investor principle”. This is a sensible principle (at least if you accept that states should be able to make profit-seeking investments), but in practice it is extremely difficult to make the determination.

Another perpetually difficult area is that which in European bureaucrat-speak is known as “services of general interest”, more commonly known as public services. There is no state aid if the beneficiary has clearly defined public service obligations, where the parameters for determining the compensation are objective, transparent and established in advance, and provided there is no overcompensation. (C-280/00, Altmark Trans GmbH and Regierungspräsidium Magdeburg v Nahverkehrsgesellschaft Altmark GmbH, and Oberbundesanwalt beim Bundesverwaltungsgericht., 2003 ECR I-07747)

All of the above would be tricky enough, but the Commission – with the support of the Court – has taken an extensive interpretation of what constitutes an effect on trade and a distortion of competition, to the extent that cases often turn on issues of favouring and the market economy investor principle, rather than effect on trade and distortion of competition.

Effect on Trade and Distortions of Competition

Effect on trade is interpreted very broadly. It is sufficient that a product or is subject to trade between Member States, even if the aid beneficiary does export, or exports virtually all of its production outside the EU, or even if the aid beneficiary’s activites are local:

…since it is not inconceivable … that medical practitioners specialising in dentistry, such as Mr. Heiser, might be in competition with their colleagues established in another Member State, the second condition of [Article 87(1)] of the Treaty must be considered to be fulfilled… (C-172/03, Wolfgang Heiser v Finanzamt Innsbruck., 2005 ECR I-01627)

Effect on trade under Article 87 is interpreted at least as broadly as it is under Article 81, notwithstanding the different language used. Agreements restricting competition fall within Article 81(1) if they `’`may” restrict competition between Member States. Under Article 87, State aid is caught by Article 87(1) “in so far as” the aid affects trade between Member States. The wording of Article 87 suggests a higher threshold than under Article 81, but that distinction is not reflected in the case law.

Distortion of competition is similarly interpreted in a very broad manner: a small amount of aid, small size of beneficiary or small market share do not exclude distortion. Look at the de minimis rules in State aid, for example. Under Article 81, we usually look at the size of the market, and the market share of the parties (5, 10 or 15% market shares may be de minimis depending on the type of agreement and the market we’re examining). Agreements involving companies with a turnover of less than 40 million euro are also regarded as de minimis..

However, under Article 87 the de minimis rules are 200,000 euros over 3 years (increased temporarily to 500,000 euros as part of our measures in response to the financial crisis. Even the revised figure seems rather low if were to use the same analysis for distortion of competition under Article 87 as we do under Article 81.

One way to look at the difference is to think of the type of aid. Some aid is inherently distortive with no realistic arguments in favour of its beneficial effects – simple cash payments to pay for the ongoing operating expenses of a business for example (referred to as “operating aid”). You can think of operating aid as the State aid equivalent of a cartel – violations with no realistic arguments in favour of their beneficial effects. And of course there are no de minimis criteria for cartels, or any need to demonstrate their effectiveness on the market. Cartels and operating aid are both types of behaviour which should simply be forbidden at any level.

So operating aid may be part of the explanation for why distortion of competition is treated so differently under Article 87. Another is that the State aid rules are also designed as part of the single market rules to prevent distortions of competition between Member States and not just between companies. Take an example of two Member States offering money to attract a particular company : aid may be allowed in these circumstances (as rescue aid, research and development or environmental aid, regional aid, or employment aid, for example). But we want to stop subsidy races, where Member States simply use cash to attract companies to their country. Under Article 87, it is not just the harm caused directly to consumers that is relevant, harm caused by inefficient competition between states is important too. This harm – which manifests itself indirectly in wasted taxpayer money – does not depend on issues of market power.

Finally, the State aid rules are very concerned by aid which keeps inefficient companies on a market. So even when looking at consumer welfare, rather than focussing on the use of market power as we do for the competition rules directed toward companies, the focus on the State aid side may more properly be on companies with relatively low market shares.

The Commission recognised several years ago that its State aid policy needed review. Beginning in 2005, with the “State Aid Action Plan”, the Commission began reviewing all of its major instruments and policies, and looking again at the basic economic arguments for the control of State aid. If you look at Eleanor Fox’s questions in relation to Article 87, the first one she asks is whether a distortion of competition means the same thing under Article 87 as it does under Article 81. That is an extremely pertinent question: the points made above go some way, I think, to answering it, but it is also one we have been working on in more detail – we have refined the economic analysis that we undertake in individual cases and in overall policy decisions. So analysis has improved, but there remains more to do.

This continues at part 3.

(Competition Law, State aid and Regulation: Part 1, Part 2, Part 3. Full text available as a PDF: Competition Law, State aid and Regulation))