04 Nov 2020

Montenegro Airlines: The Next Accession ‘Shipyards’ Case?

Here we bring you a more detailed overview of the State aid package granted to Montenegro Airlines A.D. Podgorica, Montenegro’s national airline. We touched on the topic a few weeks ago.

Introduction

To recap, just days after announcing a EUR 133 million aid package for Montenegro Airlines the country’s national competition and state aid authority, the Protection of Competition Agency (“Agency“), launched an investigation into the State aid package. The Agency’s investigation found that the MEO test conditions had not been fulfilled, therefore qualifying this boost to Montenegro Airlines as State aid. On foot of that finding the Agency ordered the Ministry of Transport and Maritime Affairs to freeze the allocation of funds to Montenegro Airlines.

Agency’s Decision

On September 3, 2020, the Agency adopted a decision by way of which it found that: (i) the Investment in Consolidation and Development of the Company for Transport of Passengers and Goods in Air Transport Montenegro Airlines AD Podgorica Act (“Act”) has not fulfilled the conditions for applying the market economy operator (MEO) test for assessing the existence of aid; (ii) the measures constitute State aid and (iii) it is necessary to commence an ex officio investigation in order to establish the compliance of the Act with the State Aid Control Act.

The Act’s Ground Zero

First and foremost, the legislator’s aim was to financially restructure Montenegro Airlines by:

1. Settling EUR 34 million in taxes, fees, and other debts;

2. Settling EUR 32 million in debt owed to Airports of Montenegro;

3. Settling EUR 6.5 million in debt owed to SMATSA;

4. Settling EUR 6.5 million in debt owed to Hipotekarna banka;

5. Providing funds for settling EUR 6 million in debt to suppliers;

6. Providing funds for settling EUR 11 million in debt in 2020;

7. Financing a EUR 50 million procurement of an aircraft, in the period from 2021 to 2024;

8. Financing a EUR 8.8 million engine restoration.

What Previously Went Down?

In June 20, 2012, Montenegro’s Commission for State Aid Control, which was the authority responsible for state aid affairs in Montenegro before the adoption of a new State Aid Control Act in 2018 , found that the restructuring plan for Montenegro Airlines was compatible with the State Aid Control Act. If you take a look at the ‘final tally’, Montenegro Airlines has received aid totaling EUR 35,565,622 for the 2012-2015 restructuring period.

Once again, in 2018, Montenegro Airlines was allocated another EUR 7,266,658 in aid. The Agency launched an investigation into its compliance with the new State Aid Control Act.

But 10 years has not yet passed … that is, since adoption of the restructuring plan.

In principle, no company, including Montenegro Airlines, is eligible for fresh aid owing to the “first time, last time” principle. Accordingly, it is the Agency’s standpoint that the company may avail of measures but only if they fall within the categories and for a purpose determined by the restructuring plan, subject to an assessment of the compliance of those measures with the State Aid Control Act.

Is MEO Test the Key?

We have mentioned it before, and now we will explain.

The behavior of public bodies should be compared to that of similar private economic operators under normal market conditions to determine whether the economic transactions carried out by such bodies give an advantage to their counterparts. Here comes the ‘market economy operator’ (MEO) test as the relevant method to assess whether a range of economic transactions carried out by public bodies take place under normal market conditions and, therefore, whether they give an advantage (which would not have occurred under normal market conditions) to their counterparts.

The decisive element when investigating allocated aid is the question of whether state authorities acted as any other rational private entity would have in a similar situation. If the answer to that is no then the company is benefiting from an advantage and strengthening its position vis-à-vis its competitors, i.e. the aid allocated constitutes State aid.

The Agency did not shy away from laying down the law (in this case literally):

1. Coverage of a debt by the State cannot be likened to the actions of a private investor;

2. Coverage of the debt owed to Airports of Montenegro, at the same time releasing Montenegro Airlines from its debt, constitutes a related-party transaction;

3. Coverage of Montenegro Airlines’ debts to Hipotekarna banka via direct payments constitutes State aid;

4. The total investment amounts to EUR 155.1 million and the investment will not be recouped by the State other than through a capital return. Therefore, such investments constitute State aid.

To sum up the Agency’s stance:

The Agency ruled that Montenegro Airlines is a company in difficulty, to which State aid has been granted repeatedly, once through a restructuring plan in 2012, and then again in 2018 and 2019. According to the Agency, Montenegro Airlines’ business has been kept afloat through the continuous allocation of State aid and there are no grounds for conducting the MEO test.

So What’s The European Commission’s Take On It All

Reading the Progress report (“Report”) left us with the impression that the situation is not so rosy…

Well, in the Report, the Commission finds that State aid is largely concentrated in state-owned transport companies. In support of this claim, it is stated that the state budget for 2019 earmarked EUR 32 million (0.7% of GDP) for subsidies, or EUR 5 million more than was the case a year earlier, and that approximately half of this assistance went to Montenegro Airlines, which has already benefited in the past through several support measures. It also notes that on December 27, 2019, the Parliament adopted the lex specialis, which recognized Montenegro Airlines as a company of special importance, granting additional state support of EUR 155 million over the next six years to avoid bankruptcy and ensure its future development.

Furthermore, the Commission points out that in 2019, the most important case of State aid was the Act on Investment in Consolidation and Development of Montenegro Airlines from December 2019, providing for up to 155 million euros of state funds for the airline. The reason for such thinking lies in the fact that the Law was adopted without previous decisions of state aid authority, although this is provided for by national legislation and the Stabilization and Association Agreement. This has raised concerns about compliance with the relevant provisions of Montenegrin law and the SAA, which require only state aid to be assessed by an operationally independent body (i.e. the APC Council). However, Montenegro stated that it currently applies the standstill clause and to not have made payments on the basis of the law. Finally, the Commission is of the opinion that now is an important time for Montenegro to demonstrate that there is a functioning and independent state aid authority.

Let’s track back to the headline – what’s this about shipyards?

This is a reference to an issue that arose around Croatian shipyards in the EU accession phase. Under Annex VIII of the Accession Agreement Croatia undertook significant commitments with regard to certain shipyards that had been beneficiaries of state aid for many years (4. Maj, Brodosplit, Brodotrogir and Kraljevica). In fact, resolving the issue of State aid was a condition for joining the EU.

Given that the Commission in the Report took a hard-line stance on Montenegro’s non-compliance with the provisions of the Agreement and noted the importance of resolving this issue for the accession process going forward, it remains to be seen whether a new “shipyards” scenario is on the horizon further along the Adriatic coast?

Authors: Miluša Okiljević and Nadja Kosić