Subsidies granted in 1980's still state aid
This reference for a preliminary ruling had been made in the context of proceedings between fellimento Traghetti del Mediterraneo SpA (‘TDM’), a maritime transport undertaking in liquidation, and the Presidenza del Consiglio dei Ministri, concerning compensation for the damage which TDM allegedly suffered as a result of an incorrect interpretation by the Corte suprema di cassazione (Supreme Court of Cassation) of the European Union rules on competition and State aid, and because of that court’s refusal to bring the matter before the Court of Justice in accordance with the third paragraph of Art. 234 EC.
TDM and Tirrenia were two maritime transport undertakings which, in the 1970s, ran regular ferry services between mainland Italy and the islands of Sardinia and Sicily. In 1981, TDM brought proceedings against Tirrenia before the Tribunale di Napoli (Naples District Court) seeking compensation for the damage which it claims to have suffered as a result of the low-fare policy operated by Tirrenia between 1976 and 1980.
TDM submitted that there had been unfair competition and alleged infringement of Arts 85, 86, 90 and 92 of the EEC Treaty (subsequently Arts 85, 86, 90 and 92 of the EC Treaty and now Arts 81 EC, 82 EC, 86 EC and, after amendment, 87 EC respectively). In particular, it maintained that Tirrenia had abused its dominant position on the market in question by operating with fares well below cost owing to its having obtained public subsidies, the legality of which was doubtful under European Union law.
However, its action was dismissed by decision of 26 might 1993, upheld on appeal by judgment of the Corte d’appello di Napoli (Naples Court of Appeal) of 13 December 1996.
The appeal brought against that judgment by the administrator of TDM was dismissed by judgment of the Corte suprema di cassazione of 19 April 2000, which, in particular, refused to accede to the administrator’s request to submit questions of interpretation of European Union law to the Court of Justice, on the ground that the approach adopted by the court ruling on the substance complied with the relevant provisions and was consistent with the Court’s case-law.
By writ of summons of 15 April 2002, the administrator of TDM, an undertaking which had in the meantime been put into liquidation, instituted proceedings against the Italian Republic before the Tribunale di Genova (Genoa District Court) for compensation from that Member State for the damage allegedly suffered by that undertaking as a result of the errors of interpretation of the European Union rules on competition and State aid committed by the Corte suprema di cassazione and of the breach of its obligation to make a reference for a preliminary ruling pursuant to the third paragraph of Art. 234 EC.
On 14 April 2003, the Tribunale di Genova made the reference for a preliminary ruling to the Court of Justice. Further to that latter judgment, the Tribunale di Genova found that the “State judiciary [had] acted unlawfully’, and by a separate order directed that the proceedings should continue so that the claim for damages from that unlawful conduct might be heard.
The Court held that question referred must be construed as asking whether under European Union law subsidies paid in circumstances such as those in the main proceedings, pursuant to national legislation providing for payments on account prior to the approval of an agreement, might constitute State aid.
The Court reiterated that classification as aid required all the following conditions to be fulfilled. First, there must be intervention by the State or through State resources. Second, the intervention must be liable to affect trade between Member States. Third, it must confer an advantage on the recipient. Fourth, it must distort or threaten to distort competition (see Case C-142/87 Belgium v Commission , Case-C-280/00 Altmark Trans GmbH and Regierungspräsidium Magdeburg v. Nahverkehrsgesellschaft Altmark GmbH , Joined Cases C-341/06 P and C-342/06 P Chronopost and La Poste v UFEX and Others ; and C-206/06, Essent Netwerk Noord and Others, , on which I wrote this post).
The Court held that in the present case, the first of those conditions was not the subject of the question referred and was not in dispute, since the subsidies at issue in the main proceedings were paid under Law No 684 and, as was clear in particular from Arts 18 and 19 thereof, borne by the State budget.
The Court found that, in the light of the grounds of the order for reference, the third condition must be examined, first, then the second and fourth conditions together.
The advantage conferred on the recipient undertaking
The Court reiterated – referring to the above mentioned case law - that, measures which, whatever their form, were likely directly or indirectly to favour certain undertakings or were to be regarded as an economic advantage which the recipient undertaking would not have obtained under normal market conditions were regarded as aid.
By contrast, where a State measure must be regarded as compensation for the services provided by the recipient undertakings in order to discharge public service obligations, so that those undertakings did not enjoyed a real financial advantage and the measure thus did not have the effect of putting them in a more favourable competitive position than the undertakings competing with them, such a measure did not constitute State aid under European Union law.
However, for such compensation to escape classification as State aid in a particular case, a number of conditions must be satisfied
- the undertaking receiving such compensation must actually have public service obligations to discharge, and the obligations must be clearly defined.
- the parameters on the basis of which the compensation was calculated must be established in advance in an objective and transparent manner, to avoid it conferring an economic advantage which might favour the recipient undertaking over competing undertakings
- the compensation could not exceed what was necessary to cover all or part of the costs incurred in the discharge of public service obligations, taking into account the relevant receipts and a reasonable profit for discharging those obligations.
- the compensation must be determined on the basis of an analysis of the costs which a typical undertaking, well run and adequately provided with the requisite means so as to be able to meet the necessary public service requirements, would have incurred in discharging those obligations, taking into account the relevant receipts and a reasonable profit for discharging the obligations.
The subsidies at issue in the main proceedings were intended for the provision of services linking the larger and smaller Italian islands, which had to satisfy requirements relating to the economic and social development of the regions concerned. The agreements signed with the undertakings receiving those subsidies had to lay down obligations concerning the routes to be served, the frequency of those services, and the types of vessels allocated to each route. It followed that the recipient undertakings were required to discharge public service obligations.
However, the Court stressed that it was only in July 1991 that the Italian State concluded the agreements of 20 years’ duration with each of the Tirrenia group undertakings, to run from 1 January 1989. For the entire period in question in the main proceedings, that was to say from 1976 to 1980, and until the agreements were approved, the subsidies at issue in the main proceedings were
paid on account under Art. 19 of Law No 684.
The Court thus found that, in the absence of those agreements, the subsidies at issue in the main proceedings were paid during the entire period referred to above without the public service obligations imposed on the recipient undertakings being clearly defined, without the parameters on the basis of which the compensation for those obligations was calculated being established in advance in an objective and transparent manner, and without ensuring that that compensation did not exceed what was necessary to cover the costs arising from the discharge of those obligations.
The Court held that since the fourth condition referred to above was not satisfied either, those subsidies did not therefore fulfil any of the conditions for the compensation of public service obligations to escape classification as State aid under European Union law on the basis of no advantage being conferred on the undertaking concerned.
The fact that the subsidies were paid on account, pending approval of the agreements which, moreover, were concluded and took effect only many years later, was, according to the Court, of no consequence.
The Court held that such a fact did not eliminate the advantage conferred on the recipient undertaking or the effects which an advantage of that kind might have on competition since all the conditions referred to have not been fulfilled.
Effect on trade between Member States and risk of distorting competition
The Italian Government had at the hearing stated that no operator from another Member State operated on the domestic routes where Tirrenia was present during the years 1976 to 1980, whereas TDM referred to the presence on those routes of an undertaking formed by the merger of an Italian and a Spanish undertaking.
The fact that the restrictions on the freedom to provide maritime transport services within Member States were abolished after the relevant period in the main proceedings did not, in the view of the Court of Justice, necessarily exclude the possibility that the subsidies at issue in the main proceedings were liable to affect trade between Member States or that they distorted or threatened to distort competition.
The Court concluded that subsidies paid in circumstances such as those in the main proceedings, pursuant to national legislation providing for payments on account prior to the approval of an agreement, constituted State aid if those subsidies were liable to affect trade between Member States and distort or threaten to distort competition, which it was for the national court to determine.