Unexpected turn: Court annuls EC decision to approve state aid for Paks 2 NPP

At the end of July, we reported that opposition MP Bence Tordai had lodged a complaint with the European Commission, requesting a review of the state aid authorisation for the Paks II project. He argued that the circumstances and reasons on which the EU based its authorisation of the project in 2017 had changed completely, and that the legitimacy of the aid should therefore be re-examined. However, as we pointed out in our article at the time, this was not the main risk for the Paks II project.

Let's look back in time!

By decision of 6 March 2017, the European Commission approved investment aid which Hungary intended to grant to the State-owned company MVM Paks II for the development of two new nuclear reactors at the Paks nuclear power station site. The new VVER-1200 reactors were gradually to replace the four existing reactors. MVM Paks II was intended to become, free of charge, the owner and operator of the two new reactors. Their construction was to be carried out by Russias Rosatom and financed entirely by the Hungarian State (EUR 12.5 billion) from a massive EUR 10 billion Russian loan.

The construction of the new reactors was entrusted, by means of a direct award (i.e. without public procurement), to the Russian company Nizhny Novgorod Engineering, in accordance with an agreement between Russia and Hungary on cooperation on the peaceful use of nuclear energy. Russia also agreed under that agreement to provide Hungary with a State loan in order to finance most of the development of the new reactors.

“The investment therefore involves state aid within the meaning of Article 107(1) of the Treaty on the Functioning of the European Union (TFEU). These rules require state aid to be limited and proportionate to the objectives pursued in order to be approved," the EU executive said.

“Hungary has demonstrated that the measure avoids undue distortions of the Hungarian energy market. In particular, it has made a number of substantial commitments to limit potential distortions of competition," it added.

Regardless of the state aid decision, the European Commission investigated the issue of selection without a tender in a separate procedure. Ultimately, however, the infringement procedure was closed without sanctions being imposed on Hungary.

Austria contested the Commission’s approval decision before the General Court. By judgment of 30 November 2022, the General Court dismissed the action. Austria subsequently lodged an appeal with the Court of Justice against the judgment of the General Court.

The Court of Justice sets aside the judgment of the General Court and annuls the approval decision of the Commission.

The Court of Justice holds, in particular, that, contrary to what the General Court ruled, the Commission could not confine itself to ascertaining whether the aid at issue complies with the EU rules on State aid, but should have also ascertained whether the direct award of the contract for the construction of the two new nuclear reactors complies with EU public procurement rules.

The construction of the two reactors forms an integral part of the aid measure notified by Hungary, aimed at the provision of those reactors free of charge to MVM Paks II. Moreover,

the direct award of the construction contract was indispensable for the attainment of the objective of that aid and is thus an aspect that is inextricably linked to it.

The Court points out that the organisation of an open tender procedure for the award of a contract for the construction of infrastructure can have an impact, inter alia, on the cost of the investment required for that construction and on the properties of that infrastructure. Accordingly, such a procedure may influence the extent of any advantage granted to an undertaking or group of undertakings by that means.

Furthermore, in so far as the Commission took the view, in the approval decision, that, in any event,

the direct award of the construction contract complied with the rules on public procurement, that decision is not sufficiently reasoned.

The mere reference to the infringement proceedings that the Commission had initiated against Hungary in 2015 in respect of the direct award of the construction contract and had closed by taking the view that

that award complied with the rules on public procurement is not sufficient because it does not make it possible to understand the specific reasons leading to that conclusion.

Consequences

The ruling means that

the Commission's authorisation for 2017 is no longer valid. This calls into question the legal basis of the Paks II project under EU law.

On this basis, the Commission must reopen the case and review its decision from both the state aid and public procurement perspectives. According to our information, the latter is a particularly interesting issue, given that Austria's request only indirectly refers to the public procurement procedure. This is because the Commission had previously examined the direct award procedure in separate infringement proceedings, independently of its state aid decision. This decision was challenged by the Austrians, but the Commission approved the procedure at that time.

This could even mean that if the omission of the public procurement procedure forming part of the state aid objected to by the court is deemed to be contrary to EU law in the new proceedings,

Hungary may be obliged to conduct a new public procurement procedure,

which could easily make it impossible to implement the project with the Russian party.

It should be noted that the decision was made at a politically sensitive time. The project was initiated by a Hungarian-Russian intergovernmental agreement in 2014, long before the outbreak of the Russian-Ukrainian war. However, Russia's direct involvement could prove particularly controversial in the current geopolitical climate.

As this is a unique case, we must wait for the Commission's response, as the outcome of the new proceedings is uncertain. It is certain, however, that the Commission will have to re-examine the investigations that formed the basis of its previous decision. This does not automatically mean that it will take an entirely different position, though.

We also learned that, for the time being, this will not affect the progress of construction, as the concrete work, which marks the start of nuclear power plant projects, could begin within weeks. Only domestic regulatory approvals are required for this. Otherwise, technically everything is good to go on site.

In summary, this means that,

over the next few months, the Commission will need to reconsider the circumstances that led to its decision to approve state aid for the Paks II project.

Although the ruling does not prohibit the continuation of the investment, it creates serious uncertainty, which affects the progress of the construction work itself. Those involved in the project must also consider the above scenarios: if the investment ultimately fails, the money spent so far would be lost. To our knowledge, this currently amounts to around EUR 1.5 billion.

Quick response by the government

The government wishes to emphasise that the Court of Justice of the European Union's current ruling did not find any violation of EU law by Hungary. This means that the Court did not rule that investments in Hungary are in violation of EU law, János Bóka, Hungary's Minister for European Union Affairs, told journalists on Thursday morning.

However, it is important to note that the court did not rule that the public procurements were unlawful, but only that the committee did not examine this properly during the state aid procedure,

Bóka emphasized.

Since neither the state subsidy system nor the public procurement procedure has been found to be unlawful by the court,

there are no legal obstacles to the Paks II project continuing as planned,

he added.

Cover photo: Portfolio