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When the state imposes obligations which create extra costs for a single undertaking, that undertaking suffers a disadvantage in relation to its competitors. The extra costs are abnormal because normal costs are those borne by all competitors.

 

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Introduction

On 14 July 2016, the General Court rendered its judgment in case T 143/12, Germany v Commission.1 The outcome was a victory for Germany as the General Court annulled Commission decision 2012/636 which had ordered Germany to recover incompatible aid that had been granted to Deutsche Post.

In that decision, the Commission found that Deutsche Post had benefitted from several aid measures: a pension subsidy, public transfers and a public guarantee. The public guarantee was found to be existing aid and as such was not subject to recovery. The public transfers were considered to be compatible with the internal market. However, the pension subsidy was incompatible and had to be recovered. The pension subsidy aimed to offset the extra costs borne by Deutsche Post due to the fact that when it was privatised its employees retained the privileges they enjoyed at the time as civil servants.

The reasoning of the General Court on the concept of advantage departs, I think, from established case law and does not appear to be congruent with seminal judgments of the Court of Justice.

Deutsche Post has been involved in several State aid and anti-trust cases. The judgment of the General Court provides a summary of the various Commission decisions and related court rulings dealing with State aid. This article does not examine those cases.

The judgment

Germany advanced several pleas the first of which was that the Commission did not sufficiently explain its reasoning. The General Court recalled that the Commission is not obliged to respond to all of the arguments put forth by those involved in State aid proceedings, especially if they are irrelevant or insignificant. [paragraphs 59-60 of the judgment] It concluded that the Commission had provided sufficient explanation.

Then, Germany argued that the Commission instructed recovery of revenue that was based on regulated prices. The Court observed that the recovery order had not specified that the recovery had to affect any particular revenue stream. Germany, as the sole addressee, of the decision, only had to obtain from Deutsche Post an amount that was equivalent to the incompatible aid. [paragraph 71]

Germany also claimed that the Commission used State aid rules to compensate for its failure to find that Deutsche Post had abused its dominance under Article 102 TFEU. The reply of the Court was that the Commission’s decision not to pursue its inquiry of abuse of dominance was in fact the right decision since it did not have sufficient evidence. [paragraph 83]

The German state covered, for the years 1995-1999, the difference between the total pension cost of the former employees of Deutsche Post and an annual contribution by Deutsche Post of about EUR 2.05 billion and, from 2000 onwards, the difference between the total cost of the pensions of the former employees and 33% of the gross salaries of the current employees.

Germany tried to argue that there was no transfer of state resources but the Court dismissed it outright. Deutsche Post was relieved of a cost it would otherwise have to bear. [paragraphs 92-94] It also dismissed quickly the claim that there was no affectation of trade and no distortion of competition. The postal market was open to competition and cross-border trade. [paragraph 96] It also rejected the relevance of the argument that the direct beneficiaries – i.e. employees – were not undertakings. Indeed they were not undertakings. However, the measure in question relieved Deutsche Post of costs it would otherwise have to bear. Clearly, it benefited from the measure. [paragraph 101]

Having dealt with these rather secondary pleas, the Court turned its attention to the main issue at hand which was whether the subsidies for the pensions conferred an advantage to Deutsche Post. The Court began its assessment of the existence of an advantage in the meaning of Article 107(1) TFEU by recalling the case law on this concept. The advantage must be economic and selective. [paragraph 106]

The economic nature of the advantage entails that the Commission is obliged to carry out a complete analysis of all of the relevant aspects of the measure and its context, of the beneficiary and of the market concerned in order to determine whether the beneficiary derived an advantage it would not otherwise have under normal market conditions. [paragraph 107] The Commission must take into account all of the specificities of the measure and of the relevant national law. [paragraph 108]

In the same paragraph, the General Court reiterated, the well-understood principle, that a measure is classified as State aid not on the basis of its objectives but on its effects. Then it proceeded to add that a measure that does not place the aid recipient in a more advantageous position in relation to its competitors is not state aid. The General Court quoted paragraph 87 of the Altmark judgment [C-280/00]. Paragraph 87 of that judgment very specifically refers to “compensation” which does not confer “a real financial advantage”. It is important to note that the Court of Justice in its Altmark judgment also defined four conditions – the famous Altmark criteria – that had to be satisfied before compensation would not be regarded as State aid [see paragraphs 88-93 of the Altmark judgment].

The General Court went on to state that compensation for provision of public service does not confer an advantage as long as the compensation does not exceed the net cost of the service in question. [paragraph 109] The General Court here quoted paragraph 92 of the Altmark judgment which laid down the 3rd Altmark criterion but ignored the other criteria.

Then the General Court concluded that a state measure that relieves an undertaking, which is obliged by law to continue to employ staff of its legal predecessor and to compensate (indemnify) the state for their extra pension costs, from the structural disadvantage of the privileged status of those employees in relation to the status of employees of competitors is not an intervention that reduces normal costs and therefore it is not State aid. The aid may not exceed the extra costs of the pensions. [paragraph 110]
 
As already noted, the General Court arrived at this conclusion without taking into account the other Altmark criteria. It ignored crucially that compensation can be offered only for the provision of a service of general economic interest and that any revenue and costs not linked to the SGEI must be disregarded. In this case, pension costs are not directly linked to any SGEI and, above all, pension costs can be covered by Deutsche Post with the use of any revenue regardless of whether it comes from the supply of SGEI or not. More importantly, the extra costs of the SGEI do not have to be compensated when commercial revenue is sufficient to cover costs. Any compensation may also offset the extra costs of the SGEI. It is not so clear what the extra pension costs of Deutsche Post may be presumably because it pays the same pensions for all its staff.

The General Court then turned its attention to the selective nature of the advantage. It reiterated the well-established definition of selectivity, that a measure is selective when it treats favourably certain undertakings in relation to other undertakings which are in the same legal or factual situation. [paragraph 111]

Then it inferred that the selectivity of an advantage had to be determined “only” in relation to the competitors of the aid beneficiary. [paragraph 112]

In paragraph 111 of the judgment, the General Court referred to the landmark cases of Adria-Wien pipeline and Heiser. Certainly in those cases the analysis was not limited to competitors. In Adria-Wien pipeline the issue at hand was the favourable treatment of manufacturers in relation to service providers, while in Heiser the issue was selective treatment of certain VAT payers. In paragraph 112 of the judgment, the General Court referred to the case of T-257/10, Italy v Commission. That was the infamous case of WAM where the crux of the issue was whether the aid to WAM had distorted competition. Hence the analysis of the Court in that case was about the fourth criterion of Article 107(1) [affectation of trade and distortion of competition], not selectivity.

The General Court examined the main argument advanced by the Commission that the measure was selective because it relieved Deutsche Post from a cost that was imposed by law and therefore was part of its normal costs. [paragraph 116] Here, too, the General Court appears to be mixing selectivity with another criterion of Article 107(1), namely that of advantage. The Court also referred to a point made by the Commission that whether Deutsche Post incurred costs higher than those of its competitors was an issue concerning the compatibility of the aid, not the existence of aid. [paragraph 118].

Inevitably, the General Court cited the Combus case [T-157/01, Danske Busvognmænd v Commission] where it was found that compensation for the costs of the employees of Combus, who had civil servant status, was not State aid. The General Court then reached the conclusion that it cannot be claimed that the excessive cost of pensions is part of the normal costs of an undertaking. [paragraph 130]

The General Court asserted that it was following the “same logic” as that of Combus and, therefore, returned to the question of advantage and asked whether the measure in question conferred an advantage to Deutsche Post in relation to its competitors. [paragraph 132] The General Court appeared to ignore the countless judgments where both EU courts rejected precisely this view when it was advanced in their defence by Member States or aid recipients. According to established case law, an alleged disadvantage in relation to the competitors of the aid recipient is irrelevant. The only thing that matters is whether the aid reduces the recipient’s normal costs. And normal is whatever is determined by the relevant law.

The General Court did return to its inquiry whether the costs of Deutsche Post were normal, although it did not use that word. It referred to the need to consider the obligation of Deutsche Post to pay for pension costs which were not incurred by its competitors. To justify this view, the Court repeated that, just like the compensation for the costs of public service obligations is not State aid if it does not exceed any extra costs, compensation for extra pension costs is not State aid if it does not exceed the amount that is necessary to put Deutsche Post on the same level as its competitors. [paragraph 132] Please note that the Altmark criteria do not mention any equalisation of costs or obligations.

Yet, the Court found that the aid reduced the disadvantage of Deutsche Post in relation to its competitors. Interestingly, the Court referred to the analysis of the Commission itself that without the aid, Deutsche Post would not have been able to cover all its costs and would have exited the market. [paragraph 143] This may appear as a convincing element in the reasoning of the Court, but it should be recalled that the case law has also made it clear that aid that prevents exit from the market still confers an advantage.

More broadly, an undertaking may derive an advantage even if costs are imposed on it exclusively. This can happen when another undertaking is capable of performing more efficiently the task assigned by law to the first undertaking. Therefore, compensation provided to offset any extra costs may still confer an advantage in relation to another, more efficient undertaking. This is in essence the advantage that Altmark sought to neutralise through the 4th criterion. This, however, is missing in this judgment of the General Court.

Then the General Court made the important statement that normal costs are not those which are imposed on a single undertaking by law which derogates from rules which have general application to competing undertakings and therefore imposes obligations on that undertaking which are not applicable to the competitors. Normal costs are those which are imposed by general regimes. [paragraph 144] The Court implicitly understood the “general” regime to be that which applied to undertakings which are competing with each other but, again, there is plenty of case law that has examined the obligations that stem from regimes that apply to several sectors, not just competitors in a single sector. A case in point is the recent judgment of the Court of Justice on a Belgian measure that subsidised the costs of BSE tests imposed by law. Belgium argued that all bovine producers received equal relief. Both the Court of Justice and the General Court observed that similar relief from the costs of obligatory tests was not provided to farmers or undertakings in other sectors. [see C-270/15 P, Belgium v Commission and T-538/11, Belgium v Commission]. The normal costs are those imposed by law regardless of whether the law is narrow, specific, sectoral, wide or general.

Since over the years several pension relief measures applied to Deutsche Post, the General Court also stated that in case of consecutive measures whose aim is to compensate an undertaking for obligations which deviate from rules that apply generally to competitors, the Commission has to take into account the effect of individual measures so as to determine whether the recipient obtained an advantage in relation to its competitors. [paragraph 149]

On the basis of the reasoning above, the General Court annulled the Commission decision that found that the compensation for the extra costs of pensions was State aid.

Conclusions

This is an important judgment not because it advances our understanding of the scope of the notion of State aid because it re-interprets fundamental components of that notion. It defines advantage in relation to the costs borne by competitors, rather than just by the aid recipient. And it defines as normal only the costs borne by all competitors, rather than those imposed by law.

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[1] The judgment does not exist in English. The text of the judgment can be accessed in languages other than English at:
http://curia.europa.eu/juris/fiche.jsf?id=T%3B143%3B12%3BRD%3B1%3BP%3B1%3BT2012%2F0143%2FJ&pro=&lgrec=en&nat=or&oqp=&lg=&dates=%2524type%253Dpro%2524mode%253D1Y%2524from%253D2015.09.16%2524to%253D2016.09.16&language=en&jur=C%2CT&cit=none%252CC%252CCJ%252CR%252C2008E%252C%252C%252C%252C%252C%252C%252C%252C%252C%252Ctrue%252Cfalse%252Cfalse&td=%3BALL&pcs=Oor&avg=&mat=CONC.AIDE%252Cor&etat=clot&parties=Germany&jge=&for=&cid=881839

[Photo credit: Guy Dickinson from flickr.com]



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Comments

by Phedon Nicolaides, Monday, 10 October 2016, 08:24:51

Many thanks for the clarification. Much appreciated. Indeed I admit I was speculating on this issue (that is why I used the words “it is not clear” and “presumably”) because the Court did not carry out any exhaustive investigation. Of course, the Court does not have to carry out any such investigation itself, but it could have at least tried to consider how the extra pension costs affected Deutsche Post. As you indicate, companies that do not employ Beamte have an initial higher cost. This means that companies that do employ Beamte have an initial lower cost and therefore advantage. Perhaps Deutsche Post also derived an indirect advantage because it was able to retain more experienced staff rather than losing them to the competitors who entered the market after liberalisation. Perhaps Deutsche Post was able to reduce gross wages to offset the higher pension costs. The Court merely focused on one cost component – the pensions – and inferred that it reduced the overall competitiveness of Deutsche Post without considering how Deutsche Post may have responded to neutralise that disadvantage, if it was a disadvantage. Competitiveness is a composite concept and the Court did not seem to understand that. The intention of the German authorities was to compensate Deutsche Post, but what were the actual effects of the pensions obligation? Recent decisions of the Commission on compensation of postal operators for public service obligations have also considered benefits from these obligations, such as network effects, visibility, etc. Legally, the Court did not ask what were the actual effects of the pension obligation. It applied instead only half of the Altmark criteria


by Dr. Hans Arno Petzold, Thursday, 6 October 2016, 11:31:20

For the author, "It is not so clear what the extra pension costs of Deutsche Post may be presumably because it pays the same pensions for all its staff". This sentence does reveal a considerable misunderstanding of the German System of OAP for employees (Angestellte) vs. public servants (Beamte). The former receive their pensions (Rente) from a social security system equally fed by employers and employees, plus funds from government Budgets. The latter do not pay into that System, nor do their employers, who have to take the full burden of the pension from their budget. Obliging a company to employ public servants, who maintain their Status, means having to carry a substantially higher financial burden, compared to "normal" employees, where the Company only has to budget the 50%-share of the social security contribution. Companies not obliged to employ Beamte may have a higher burden while the employees are still active, but a substantially lower one after their retirement: zero. Apart from pensions, Beamte receive further benefits directly from thier employer that are otherwise covered by social insurance systems. Summing up, the court was right in assuming a higher financial burden for Deutsche Post than for its competitors, without Deutsche Post being able to avoid this disadvantage.



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Professor at the College of Europe, Bruges, and at the University of Maastricht, and Academic Director at lexxion training

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