EU Shipping Law

Vincent Power

Document

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CHAPTER 15 European Union state aid law: shipping and ports

A. Introduction

15.001 This chapter considers the application of European Union (“EU”) State aid law1 to shipping2 and ports3 while considers state aid in the context of shipbuilding. 15.002 The law on this area is complex and complicated because it represents interference by the EU with Member State sovereignty, discretion, policy choices; involves the enactment of relatively new law; and, very often, involves the interplay of State aid, public procurement, tax law and the law relating to State authorities. This chapter does not seek to consider the whole of the law of State aid (which is an enormous topic in its own right and the subject of entire books)4 but rather concentrates on the law of State aid in the maritime context. 15.003 While many jurisdictions around the world have competition law regimes dealing with topics such as cartels, abuse of dominance and merger control, the EU is virtually unique in having a body of rules controlling and supervising State aid provided by its Member States; in effect, the Member States have established a system whereby the European Commission may determine whether Member States may spend their own national resources (e.g. money).5 While many States around the world have rules controlling the provision of unfair funding or financial support by foreign governments (so-called dumping laws), the EU is different in that it controls the provision of aid by its own States by means of its own State aid law. 15.004 State aid law is part of EU competition law. The primary rules on State aid are set out in Articles 107–109 of the Treaty on the Functioning of the European Union (“TFEU”). They are supplemented by regulations, decisions, guidelines/notices and case law. The Commission’s notices/communications are extremely important in the area of State aid and are tantamount to quasi-legislation in that the Commission adopts these notices and then follows them very often as if they were legislation.

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15.005 The purpose of EU State aid law is to ensure that competition is not distorted by controlling the intervention by EU (and, indeed, European Economic Area (“EEA”)) Member States; if the aid was not controlled then State aid could distort competition in the internal market in a very material and damaging manner. This is clear when one recalls that the average Member State has multiples of the economic power of even the largest global corporations not only because of their economic resources but their legislative ones too. 15.006 EU State aid law is a balancing act: there is a general prohibition of State aid in Article 107(1) of the TFEU followed by some exceptions which are either exceptions to the prohibition which are permitted automatically under Article 107(2) (i.e. the aid is automatically authorised) or authorised in certain circumstances under Article 107(3) (i.e. the aid is authorised on a case by case basis or on the basis that it falls within a particular category). So, it is not that there is an absolute prohibition on State aid (that would be both undesirable and unworkable) but rather there are choices made in different circumstances. 15.007 EU State aid law and policy is evolutionary. For example, the rules on State aid have been updated recently as part of the EU’s so-called State Aid Modernisation (“SAM”) programme.6 The law on this area is certainly not static. Instead, it has begun to examine new sectors (e.g. aviation, energy and maritime transport). It could be said that the rules are being devised over time7 but that would be slightly misleading; in reality, the basic rules are set out in Articles 107–109 of the TFEU (and those rules remain largely (though not entirely))8 unchanged since the first provisions in the EEC Treaty (i.e. Articles 87–89 of the EEC Treaty) but what has changed is how they are applied and the relevant policy and jurisprudence involved. 15.008 It is useful to highlight, by way of an introduction to the chapter, a selection of issues which potentially involve the State aid so as to contextualise the chapter. Member States could give aid to build ships, repair ships, modernise or extend vessels, make vessels more environmentally friendly (e.g. by subsidising scrubbing) or safer, build or expand ports, construct infrastructure, employ seafarers, train seafarers, reduce tax bills for shipowners and seafarers, subsidise financing costs, transfer cargo or passengers from one mode of transport to another and so on. Some of these interventions raise State aid law issues and the interventions should be prohibited or curbed to some extent while other interventions are desirable. State aid law seeks to draw a distinction between the two types of interventions. State aid can also be used by competitors to complain about competitors; such complaints (which are usually self-serving) must nonetheless be taken seriously because competitors are often the only ones aware of the issues on the ground. 15.009 The administration of the State aid rules lies largely in the hands of the Commission subject to appeal to the General Court and, in turn, to the Court of Justice of the European Union (“CJEU”). The Commission was chosen (as opposed to the Council or the Parliament) because the Commission is meant to be more detached and independent than other institutions – the political nature of the Commission should not however be

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underestimated and some of the decisions (particularly in the area of State aid) have been political in nature and in motivation – there is almost always a legal basis to what has been decided but the underlying motivation can be political. The structure of the regime is that Member States must often notify to the Commission proposed aid so as to allow the Commission to decide on whether the aid should be permitted and the aid must not be granted until the Commission approves it. This gives the Commission the power to prevent measures which could distort competition but it also gives the Commission the power and discretion to decide policy. Given the fact that the General Court and the CJEU gives, in appeals to those courts from Commission decisions, considerable leeway to the Commission in its decision-making, there is a great deal of power lying with the Commission in this area. In essence, the rules are primarily enforced by the European Commission. 15.010 It is worth highlighting that the primary relationship in State aid law lies between the Commission (as adjudicator) and the Member State providing what might be aid. The recipient or beneficiaries of the aid are somewhat distant from the relationship; they can be (and increasingly are) involved in the process but they are like children in a custody battle between the parents. It is not possible for a recipient/beneficiary to notify the aid to the Commission (they may of course inform the Commission of the aid but that may annoy the Member State involved) but only the Member State involved in providing the aid may notify it. Of course, anyone (including entities outside the EU) may complain to the Commission about alleged State aid. Indeed, the centrality of the Commission is clear from the fact that it is largely the only institution which may authorise State aid and even the Member State courts may not do so (but they may find that State aid exists). 15.011 Unlike competition law where the undertaking breaching the competition law rules is usually fined and the fine is paid to the Commission by the errant undertaking or association of undertakings, the position is more complicated with State aid. If a Member State gives illegal State aid then it is not a fine which is paid but rather the Commission usually orders the Member State to recover the illegal State aid (usually with interest) from the beneficiary. This means that the beneficiary loses out but, ironically, the Member State recovers the aid which it paid out so it could well be seen as being on an “even bet” in that if the aid turns out to be illegal then it gets it back but it also could have the benefit of the aided project succeeding. 15.012 The fact that the EU’s State aid rules involve a policy choice is clear from the fact that in the maritime sector, the Commission allows Member States to provide tax breaks for ship-owning and ship management companies as well as seafarers so as to allow them to compete with third States and to retain tonnage in the EU. It is therefore clear that the EU is making a choice to protect the EU and its Member States rather than taking a pure “let the world market decide” approach. This is, unlike many other areas of EU State aid and competition law, an example of the EU using State aid law as a form of protectionism. The EU is not however making a choice which would involve supporting the EU shipping sector at any price – instead, it is seeking only to support efficient, new, environmentally friendly and safe shipping but, it has to be said, EU-based, managed and linked shipping. 15.013 While the EU has done a great deal for shipping over the years, the decline in tonnage, numbers of ships and employment have been significant. Member State accession has helped with the likes of Greece and Malta as well as Cyprus which brought its prowess

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in ship management to the EU. However, problems remained relating to issues such as fiscal/tax rules and social arrangements which meant that EU-registered vessels were more expensive than vessels which were flying flags of convenience or other low-cost regimes. In some ways, the EU adopted an approach of “if you can’t beat them, join them to some extent” by relaxing the EU State aid regime to some extent. It did so first in 1989, then in 1997 and most recently in 2004 with State aid guidelines which were accommodating to investment in the sector. The EU did so in a way which is quite clever because it insisted that the management, ownership and operation of the vessels remain within the EU. Equally, the EU will not support measures which encourage or tolerate overcapacity or anti-competitive activity but would support a lean, efficient and modern EU shipping industry.

B. Concept of State aid

15.014 Before examining the rules in detail, it is useful to consider the concept of State aid. There is no finite list of aids or precise definition of an aid so care is needed. State aid may take many forms. The concept of State aid includes direct subsidies, guarantees, tax breaks, tax measures, financial guarantees, preferential commercial terms and so on. The Commission has issued a notice on the concept of an aid9 so as to give guidance on what the Commission regards as constituting a State aid. It summarises the Commission’s decisional practice and the CJEU’s jurisprudence. The notice is helpful in giving guidance on the Commission’s views but the notice is always subject to the views of the CJEU (including the General Court). 15.015 A “State aid” is usually seen to involve:

(a) intervention by a Member State or through Member State resources (i.e. there is a use of Member State resources);10
(b) providing the beneficiary with an advantage (i.e. there is an advantage);11
(c) an advantage provided on a selective basis which means that it is not available to others in comparable situations (i.e. there is selectivity);12
(d) a distortion of competition;13
(e) an effect on trade between EU Member States.14

15.016 The CJEU used in Belgium v Commission (the TSE case) a formulation which it has used in many cases:

“31. For the purposes of the present appeal, it should be borne in mind that, for a national measure to be categorised as State aid within the meaning of Article 107(1) TFEU, there must, first, be an intervention by the State or through State resources; second, the intervention must be liable to affect trade between Member States; third, it must confer a selective advantage on the recipient and, fourth, it must distort or threaten to distort competition.”15

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C. Sources of EU State aid law

Introduction

15.017 The primary source of EU State aid law is always the TFEU. Articles 107–109 of the TFEU deal with State aid.16 Every other source of EU State aid law (e.g. decisions in particular cases) must be compatible with the TFEU generally and, in particular, Articles 107–109 of that treaty.

Treaty provisions

Introduction

15.018 The primary rules are contained in Articles 107 to 109 of the Treaty on the TFEU.

Article 107 of the TFEU

15.019 Article 107 sets out the general rule of EU State aid law. The Article generally prohibits State aid and only allows aid in limited circumstances where the aid is justified by reasons of general economic development. It is useful to parse the three paragraphs of Article 107 separately. 15.020 First, Article 107(1) provides that

“[s]ave as otherwise provided in the Treaties, 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 internal market”.

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