Municipality Obliged to Reclaim Unlawful State Aid from Recipient 

March, 2008 - Anna Ulfsdotter Forssell and Kristian Pedersen

Are Municipality has been ordered by the European Commission to reclaim the unlawful state aid which the municipality paid to Konsum in Jämtland? The Commission’s decision underlines the importance of governmental authorities, municipalities and county councils monitoring the provisions on state aid in business transactions involving private players. However, the problems of state aid can often be avoided if the transaction is prepared in the right way and without detracting from the purpose of the transaction write Anna Ulfsdotter Forssell and Kristian Pedersen.

Provisions on State Aid
On 5 October, 2005 the municipal council in are resolved to sell land to Konsum Jämtland for SEK 2 million. The original intention was that the decision was to have been reached on 24 January 2005 and that the price was to be SEK 1. However, on the day prior to the decision being taken, Lidl Sweden presented a bid of SEK 6.6 million for the same land. The municipality decided, however, to sell the land to Konsum Jämtland anyway.

On the 14 November, the foundation ”Den Nya Välfärden” in conjunction with Lidl Sweden filed a complaint to the European Commission which decided to review the matter. After a comprehensive exchange of correspondence between the Commission, the Swedish Government and are Municipality, the Commission reached a decision on the matter on 30 January this year.

In its decision, the Commission noted by way of introduction, that judgment on the matter must be made in the light of the Commission’s notification on elements of state aid on the sale of land and buildings 1. This notification contains guidelines for determining the existence of state aid on the sale of publicly owned properties and prescribes, inter alia, two methods for avoiding problems relating to aid in such sales. One way is to arrange the sale through a tendering process where the best tender is accepted. The other method is to determine the price through a valuation carried out by one or more independent valuers with specific qualifications and suitable experience.

However, the Commission concluded in its decision that, firstly the municipality had not carried out a tender process. Secondly, the Commission noted that whilst an independent valuation had taken place, it had been carried out nearly two years prior to the sale and that it had not subsequently been updated. In addition, there existed, in the view of the Commission, an alternative and more reliable indicator of the market price, namely Lidl Sweden’s bid on the property.

The Commission also noted that an assessment of whether the municipality’s sale to Konsum Jämtland constituted state aid should be made on the basis of the principle of a private investor in a market economy. This principle means in brief that the actual sales price is to be compared with what a buyer would have been prepared to pay under normal market conditions. If the price which the buyer was prepared to pay exceeds the actual sales price, there exists state aid in the form of pricing below market value.

Having reviewed the circumstance of Lidl Sweden’s bid, the Commission deemed the bid, which was higher than the actual sales price, to be a better indicator of the market value of the land sold as the bid reflected how much the market was willing to pay for the land at the time of the sale. In the light of this, the Commission found that Konsum Jämtland had received a financial benefit which corresponds to the difference between Lidl Sweden’s bid and the actual sales price, i.e. SEK 4.6 million.

The Commission then concluded that the financial benefit, which Konsum Jämtland obtained, constituted a distortion of competition, that trade between member states could be affected and that the contested measure therefore constituted state aid in the meaning the EC treaty.  The Commission, it is decision, draws the conclusion that the municipality’s land sale constitutes unlawful state aid which is not entitled to an exemption under the EC treaty. The aid must therefore be reclaimed from Konsum Jämtland with interest from the date on which Konsum Jämtland received it until it is repaid.

Damages as a Result of a Breach of the State Aid Rules
It is our opinion that the Commission’s decision underlines the importance of governmental authorities, municipalities and county councils monitoring the state aid provisions in business transactions with private players. Not only because of the risk that the aid must be repaid and the transaction thus falls through, but also because the giver of the aid may be affected by other sanctions as well.

Companies which suffer from unlawful aid can, besides reporting the aid to the Commission, also request that a Swedish court stops the payments and claim damages from the body paying the aid. A breach of the state aid rules can, therefore, be very expensive for the body giving the aid. In other words it is important to ensure that transactions – both purchases and sales – are carried out on market terms. It is also important to note that the law on public procurement, which is also based on EC rules, applies to the majority of public procurements.

The Problem Can Be Avoided
However, the problem of state aid can often be avoided by planning and executing the transaction in the right way. The public party can therefore often achieve the purpose of the planned transaction, even if the route may look different than first imagined. It may be a matter of exposing various potential contractual parties to competition, getting an independent valuation or in another way ensuring that the transaction takes place on market terms.

There are also opportunities to report a planned aid measure in order to get it approved by the Commission. The Commission is, however, very restrictive in allowing public aid to private companies. In complicated cases, the handling of the case can take a great deal of time, which sometimes can be sufficient to cause the planned transaction to fall through. Therefore it is best in the majority of cases to structure the transaction in such a way that there is no question of state aid.

The broad application of the provisions on state aid means that it is important for governmental authorities, municipalities and county councils planning business transactions with private companies to thoroughly consider the alternatives and to examine how the transaction can be structured so that the goal can be achieved without risking a liability to repay the aid or damages being imposed.



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