If you have seen the recent Star Wars movie, you will know that what started out as one film now looks like lasting for at least nine episodes. The same could be said of the European Commission’s involvement in state aid given to the steel industry across Member States. Every six months or so the European Court has to make a decision on the rights and wrongs of national subsidies and the effect on competition. The most recent decision concerns state aid for the Irish steel industry.
Background
The starting point is that the Treaty establishing the European coal and steel community prohibits state aid to the steel industry. However the Treaty does give the Commission scope to endorse proposals within the coal and steel industries for the benefit of the community. With this in mind and in order to meet the needs of restructuring the steel sector, the Commission set up a scheme under which the grant of aid to the steel industry could be authorised in a limited number of cases. Since the 1980s this scheme has undergone a number of amendments to resolve specific economic difficulties of the steel industry. The scheme became known as the Community Code under which exceptions were established allowing state aid in specific circumstances.
In tandem with the Code, from time to time the Commission adopted individual decisions authorising specific aid. For example, back in April 1994, the Commission authorised state aid to six steel producers (two in Germany and Spain; one in Italy and Portugal). Subsequently, British Steel applied to the European Court, supported by Danish and Swedish companies, to annul the state aid to these six steel producers but the application was dismissed. (This case was discussed in Construction Europe’s March 1998 issue.)
The Facts of the Irish Case
Irish Steel was a 100% state owned company. Between 1980 and 1985 it received aid worth Irish £183 million from the Irish Government with the Commission’s approval. It then suffered a spell of continuing financial difficulties as a result of which the Irish Government notified the Commission, in 1995, of plans to restructure the company. The plan contemplated state aid in exchange for the acquisition of Irish Steel by Ispat International, a privately owned company based in Indonesia, controlled by Indian capital. The state aid, which totalled just over Irish £38 million, was to be a mixture of writing off interest free government debt, cash contributions and indemnities. The plan provided for Ispat to purchase all of the shares in Irish Steel for Irish £1 and to assume all debts and outstanding liabilities save for the interest-free government loan which was to be written off. Additionally, Ispat undertook to make an immediate capital injection of Irish £5 million and further investments over the next five years of Irish £25 million.
The Commission approved the Irish Government’s proposed plans for state aid.
The Complaint
British Steel brought an action for annulment of the Commission’s decision. A month later, Wirtschaftsvereinigung Stahl brought a similar action. The British Steel action was supported by Dutch steel producers. The Defendant was the European Commission supported by the Irish Government and Ispat. There were a number of issues to resolve; some procedural, some substantive.
Admissibility and Time Limits
The Commission tried to defeat British Steel’s application on the basis that it was out of time and hence inadmissible. This argument was rejected. The Court decided that time for bringing an action only started to run from the moment when British Steel acquired precise knowledge of the content of the Commission’s decision and the reasons on which that decision was based, in such a way as to enable British Steel to exercise its rights of action. On the facts, British Steel’s application was not out of time.
The Commission’s Competence to Endorse the Grant of State Aid
The Court decided that the Code referred to certain general categories of aid which were compatible with the Treaty. Therefore the Code constituted an exhaustive and binding legal framework but only for the types of aid which it lists specifically and which it deems compatible with the Treaty. So for categories of state aid falling within the Code’s exemptions, the Commission must comply with the Code. However, for categories of aid not falling within the Code exemptions the Commission may exercise its discretion under the Treaty.
In the present case, state aid to Irish Steel for restructuring and privatisation fell outside the scope of the Code. Thus, the Court decided that the Commission was entitled to authorise that aid by an individual decision made under the Treaty. Therefore, the Commission’s support of state aid to Irish Steel could not be regarded as an unjustified derogation from the Code but rather a measure, rather like the Code, based on the Treaty itself.
Distortion of Competition
It is settled EC case law that the Commission cannot authorise the granting of state aid likely to give rise to distortions of competition on the European market in steel. Furthermore, there is a duty to act with “circumspection and to intervene only after carefully balancing the various interests concerned whilst so far as possible restricting the foreseeable damage to third parties”. Nevertheless, the Commission enjoys a wide discretion. Therefore the test is that a Commission’s decision to support state aid can only be overturned if the decision is “manifestly inappropriate”.
One factor in determining appropriateness was the Court’s view that the impact on competition of the aid to Irish Steel was likely to be no more than 1% in the market for steel beams. This impact was minimal and thought unlikely to distort competition significantly.
Conditions Imposed on the Grant of State Aid
British Steel had argued that capacity reductions should have been imposed as a condition for granting state aid. The Court rejected this argument saying that the only obligation on the Commission was to require appropriate counterpart measures in order to curb the anti-competitive effects of the aid. This did not mean capacity reductions per se; alternatives included measures such as production and sales restrictions, provided they serve to minimise the impact of the aid on competition.
The Commission had duly imposed production and sales restrictions on Irish Steel, for example overall tonnage limits on sales in Western Europe. The Court thought that these restrictions were the outcome of a balancing exercise weighing up factors such as existing over capacity in the steel sector, Irish Steel’s position within the market, Ispat’s capability of restoring Irish Steel as a commercially viable entity and the need to impose counterpart measures whilst permitting Irish Steel to increase its productivity. Accordingly, the Court decided that there was no evidence that the Commission had imposed inadequate counterpart measures to off set the possible distortion of competition as a result of state aid.
Non-Discrimination
British Steel had argued that the Commission’s decision discriminated in favour of a public undertaking to the detriment of private undertakings; that Irish Steel received the aid only because it was a state owned undertaking. EC case law makes clear that the responsibility for granting aid rests primarily with the government concerned but that the Commission should not approve aid which may result in manifest discrimination between public and private sectors.
The Court found a very simple answer to this issue. It pointed out that Irish Steel was the only steel producer established in Ireland so there could be no discrimination between the public and private sector. Furthermore, there was nothing to suggest that the Commission’s decision had in any way been influenced by the fact that Irish Steel was a public undertaking. Therefore there was no obvious discrimination between the public and private sector.
Infringement of Procedural Requirements
British Steel alleged that (i) the reasons given by the Commission for its decision were insufficient (ii) the Treaty procedure requiring the Commission to inform interested parties of any request for a decision (so that interested parties may submit comments) was not initiated and (iii) the need to obtain consent from the ECSC Consultative Committee to the final aid package was not fulfilled. However, the Court adjudged that British Steel failed on all three of these counts.
Decision
The Court dismissed British Steel’s application to annul the Commission’s decision to endorse the grant of state aid to Irish Steel. British Steel was ordered to pay its own costs and those of the Commission and Ispat notwithstanding that British Steel had defeated the Commission’s arguments on the out of time/admissibility issue. The Irish Government and the Dutch company which supported British Steel’s application were ordered to bear their own costs. For now, that is the end of the story. However, one suspects, as in Star Wars, that there will be further episodes in the saga of state aid to steel producers.
For further information please contact John Uwins at [email protected] or on 0171 367 2502.
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