In a powerful reminder of the importance of complying with the EU’s rules on State Aid, on 18 February 2016, the European courts upheld a decision of the European Commission ("Commission") in 2012 ordering the German state to recover unlawful state aid granted to Zweckverband Tierkörperbeseitigung in Rhineland-Palatinate ("ZT"), a company providing services for the disposal of animal carcasses and slaughterhouse waste.

HOW HAD THE GERMAN STATE HELPED ZT?

ZT provides services for ensuring that the disposal of dead animal carcasses and slaughterhouse waste is carried out in compliance with EU regulations regarding safe handling of animal by-products and derived products not intended for human consumption. 

After it emerged that ZT had been receiving government support worth in the region of €2 million every year for over 35 years, the Commission decided to inquire into the legality of this funding under EU State Aid rules and duly opened an investigation. German officials insisted that government payments were justified because they enabled ZT to meet a public service obligation; namely, to retain surplus capacity for situations in which a substantially increased number of carcasses would need to be disposed of – notably, in case of an livestock epidemic outbreak (such as foot-and-mouth disease).

WHY DID THE COMMISSION DECIDE THAT GERMANY'S SUPPORT INFRINGED THE RULES?

However, following an in-depth investigation, the Commission published findings that the support given to ZT was not necessary in order to allow it to satisfy a public service obligation because:

  • ZT could deliver additional spare-capacity at no further cost to its business, because it could rely on unused capacity at night and on weekends in times of crisis;
  • ZT could and ought to have recovered any additional costs from farmers and slaughterhouses, since applicable case law judgments showed that polluters are fully liable to pay for all costs related to the disposal of animal waste;
  • ZT had taken advantage of the state’s support in order to make an aggressive and unsustainable price offering of disposal services at a loss;
  • the EU State Aid rules and guidance for the agriculture and forestry sector provide that only farmers are eligible for financial support to cover the disposal costs of dead animal carcasses, whereas support to other private operators would be deemed as distorting competition in the market.

The Commission ruled that ZT was not delivering what is known in State Aid parlance as a 'Service of General Economic Interest' ("SGEI") and that the support it had received was, therefore, simply to cover its normal operating costs, thus conferring an undue economic advantage over its competitors (which have to run their businesses without the benefit of such a subsidy). 

The Commission therefore ruled that the payments had been made contrary to the prohibition on unlawful State Aid contained in Article 107(1) of the Treaty on the Functioning of the EU ("TFEU") and, as such, would have to be repaid to the German Government with interest.

WHY DID GERMANY AND ZT’S COURT APPEALS FAIL?

ZT and Germany both appealed the Commission’s decision to the EU General Court, claiming that the Commission had been wrong to rule that ZT was not providing an SGEI. However, the Court rejected these arguments, ruling that the annual payments to ZT from the state could not be justified as a form of public service compensation and that the Commission had correctly interpreted Article 107(1) and the applicable accompanying guidance.

On 4 July 2015, Germany decided to appeal the General Court's judgment further to the European Court of Justice (“ECJ”). Germany asked the ECJ to consider that, in particular, the Commission had wrongly assessed the support given to ZT against the criteria for identifying genuine SGEI, under the case of Altmark (C-280/00 - Altmark Trans and Regierungspräsidium Magdeburg). Germany claimed that the General Court had not correctly assessed the necessity of the payments made to ZT, insofar as these purportedly provided for reserve capacity to cope with epidemics, and asked it to consider whether the Commission and General Court had in fact been wrong to consider that its support exceeded the net additional costs of the provision of that reserve capacity. 

However, importantly, the Commission and the General Court had not simply questioned the level of cost coverage, but, moreover, refused to accept that it was necessary to incur such costs at all at the state's expense, disputing the need for separate reserve capacity to be maintained in order to cope with epidemics.

The ECJ recognised that EU case law clearly provided for an exception from the general prohibition on State Aid under Article 107(1) TFEU where the state provides finance to cover the cost of discharging a public service obligation placed upon the recipient undertaking. However, in each case, for this exception to prove available a number of cumulative conditions have to be satisfied (known as the 'Altmark conditions'), notably:

  • there must be clearly defined public service obligations to discharge;
  • clear parameters for calculating the amount of the finance provided must be established in advance in an objective and transparent manner to avoid conferring an undue advantage; and
  • payments cannot exceed what is strictly necessary to cover all or part of the costs which a typical, well-run and adequately-resourced undertaking (with means of transport enabling it to meet the requirements of the public service in question) would have incurred in the discharge of the public service obligation, accounting for relevant income and allowing for a reasonable profit to be made by the recipient.

Having considered the way in which the General Court and Commission has assessed these criterion, the ECJ concluded that it was not necessary to re-consider their failure to assess whether the payments to ZT exceeded the net costs of providing reserve capacity. Since the criteria above were cumulative, having considered that the reserve capacity was entirely unnecessary in and of itself, no further assessment as to whether the payments given were commensurate to the costs of providing it was required.

Germany also argued that the General Court had not given the Member State its due margin of discretion in defining what constitutes an SGEI. However, the ECJ could not find any error of judgment in either the Commission’s Decision or the General Court’s subsequent ruling and dismissed this ground of appeal in its entirety. Again, having determined that the General Court was not wrong to conclude that maintaining reserve capacity did not satisfy the first criterion under Altmark, there was no need for its (or the Commission’s) assessment of any other limbs of that test to be further scrutinised.

REMINDER: DO NOT RULE OUT STATE AID RISK - SEEK ADVICE BEFORE PROCEEDING

This case issues yet another stark warning, to public bodies and private businesses alike, that state support of any kind always raises the potential spectre of a State Aid issue and that the possibility of such an issue arising must be explored with expert advice prior to formailising any venture or undertaking benefiting from government subsidies. As ZT found to its considerable cost, in the event that a purported exemption from the rules is found not to apply, sums of aid over an extended period could be ordered repayable with punitive interest (under the Commission's enforcement powers). Exemptions, such as those for SGEI (which Germany sought to rely on in the case of ZT), are only ever applicable subject to numerous conditions laid down in case law and/or Commission legislation and guidance, and have are often qualified or limited depending on the circumstances. To note, for example, the Altmark criteria and other aspects of the treatment given to SGEI (e.g. a higher de minimis threshold above which notification of aid to the Commission becomes mandatory) are now codified in a package of legislative measures issued by the Commission at the end of 2012. 

As with various other categories of State Aid (ranging from renewable energy to healthcare, to infrastructure to sports and leisure), support (and the structuring of such support) for so-called public services needs to be carefully assessed before any state support is formally agreed and, certainly, before payments commence. The repayments (plus State Aid recovery interest) in the event of an adverse Commission finding can be debilitating to many businesses! In the event an issue might arise in relation to support already given, (and which thus might become repayable) there are also measures parties can take to mitigate their risk - in a corporate sale and purchase scenario, for instance, the parties might agree a suitable indemnity provision.