Europe Clarifies State Aid Rules for Infrastructure and Other Markets

The European Commission has today published guidance on when public spending falls within, and outside, the scope of EU State Aid control. The new guidance doesn’t specifically change the way in which we already understand state aid to be applied to broadband infrastructure, but some may find its clarification(s) useful.

The problem with public funding of new infrastructure or products is that it sometimes distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods. In keeping with that the EU’s State Aid rules exist to govern how public funding is applied and to prevent it handing an unfair advantage to one company over another.

As such the new guidance is intended to help public authorities and companies to identify when public support measures can be granted without needing approval under EU State aid rules. In keeping with that its aim is to clarify the different constituent elements of the notion of State aid: the existence of an undertaking, the imputability of the measure to the State, its financing through State resources, the granting of an advantage, the selectivity of the measure and its effect on competition and trade between Member States.

In addition, given the need for specific guidance expressed by Member States, the Notice includes specific clarification with respect to public funding of infrastructure.

Two Examples of Key Clarifications:

* Public investment for the construction or upgrade of infrastructure is free of State aid, if it does not directly compete with other infrastructure of the same kind.

The Notice clarifies that such projects can, therefore, be implemented by the Member State without needing to be checked under EU State aid rules. This is typically the case for roads, railway infrastructure, inland waterways and water supply and waste water networks. In contrast, infrastructure in fields such as energy, broadband, airports or ports is often in competition with similar infrastructure. In these sectors, if one project is financed with public money while competing projects have to operate without public support, this can give the subsidised project a selective economic advantage over its rivals. Therefore such financing is subject to prior Commission scrutiny under EU State aid rules.

* Even if infrastructure is built with the help of State aid, there is no aid to its operator and users if they pay a market price.

When infrastructure is built with public financing that involves State aid in line with EU rules, public authorities need to make sure that such aid is not passed on to the operator or users of this infrastructure. The Notice clarifies that this is the case, if an operator or user pays a market price to use the infrastructure in question, for instance as a result of a competitive, transparent, non-discriminatory and unconditional tender.

The Government’s Broadband Delivery UK programme must be constantly mindful of these rules, although there’s no shortage of those who believe that far too much public money has been hoovered up by BT. On the other hand not many operators were willing or able to do what BT has done, which is arguably also an issue of historic regulation. On top of that councils are understandably risk averse and will often pick BT over a more radical alternative because of its financial security.

Most local authorities manage this aspect by conducting periodic Open Market Reviews (OMR), which is the mechanism for establishing which areas are being left neglected through a lack of superfast broadband (i.e. areas where commercial operators won’t invest because it’s too expensive to upgrade). But the OMR process is also a somewhat imperfect and bureaucratic approach, which occasionally fails to adapt to rapid developments on the ground.

For example, OMRs often struggle to cope with the establishment of new housing developments or the emergence of an alternative network in areas that have previously been identified as viable for state aid use. BDUK has said that local authorities should be able to think outside of an OMR and de-scope areas where an overbuild is likely to occur, but the reality can be complicated (examples here and here)

Speaking of State Aid, the UK Government is still busy negotiating a new umbrella agreement with the EU after the last one expired at the end of June 2015 (details). It’s expected that a new deal should be done within the next couple of months, which could favour smaller alternative networks.