A fight over state guarantees for a massive tunnel between Germany and Denmark is turning into a defining test of whether the EU can fund mega projects in future.

The Fehmarn Belt tunnel is a strategic priority for the EU as it seeks to build a better-connected single market. It’s meant to slash travel times between Scandinavia and Germany.

The project is also meant to foster political ties: The Fehmarn Belt straddles two jurisdictions and is an archetypal example of the EU’s strategy to bind countries together by dishing out infrastructure financing and promoting construction.

But the 19-kilometer submarine link between Rødby in Denmark and Puttgarden in Germany faces strong legal objections from ferry companies, who argue that an unusually generous model of public funding will turn the tunnel into unfair competition for their vessels.

“The only problem we face is the cross-border dimension. Germany is involved, Denmark is involved,” said Lena Sandberg, a lawyer working on the case for ferry company Scandlines. “It’s political.”

‘Common European interest’

The case is moving into a decisive endgame: A hearing on the arguments was held April 26, and a decision at the EU’s General Court is set to come in the fall. The ferry lines Scandlines and Stena Line filed their appeal in November 2015.

Brussels is giving EU funds of 7 billion kroner (€940 million) to the Fehmarn Belt and considers the project to be as important as other massive ventures to create pan-European transport corridors, like the Brenner Tunnel under the Alps between Austria and Italy.

In July 2015, the European Commission gave a green light to the Danish government's guarantees for the project. Denmark’s European Commissioner Margrethe Vestager decided it was unnecessary to conclude whether the public financing measures for the tunnel constituted state aid because Fehmarn was “an important project of common European interest.” This justifies the aid under Article 107 (3b).

That decision is now at the center of the heated legal battle between Brussels and the two ferry lines. The companies do not object to the construction of the new infrastructure but argue that the public money gives the tunnel operator the unfair ability to drive their Denmark-Germany routes out of business by charging low tolls. One of their main grievances is the peculiarly long guarantees of 55 years offered by Copenhagen.

This so-called state guarantee model means the Danish state underwrites loans for the work, ensuring low-interest financing that will ultimately be paid back by toll payers.

“I think the Commission has an interest in making this case go away; it’s not good for anyone,” said Søren Poulsgaard Jensen, the chief executive of Scandlines. “The fact that a government makes a competing entity to a private company and needs to use state aid to get it off the ground is a fantastically wild principle case that nobody wants to deal with.”

Timeline questions

The case rests on whether the aid was actually necessary, and whether a state-owned business called Femern started work on the project before the Danish government cleared its plan to offer state aid. Lawyers pressing the case for Scandlines at the EU’s General Court argue work dates back to 2013, some two years before the aid was approved.

That means the company could have pushed ahead with the project without the need for a state incentive, Sandberg said.

If the decision comes down in favor of the ferry operators, then work could cease on the project while a new financing structure is developed for the €7 billion tunnel.

“The Commission is defending its decision in court,” a Commission spokesperson said. “All competition decisions are based on the facts, the law and the economics.”

Femern plans to repay the multi-billion euro cost of the project over 36 years using money from tolls, the same financing model used to support the Øresund bridge connecting Copenhagen and Malmö. According to estimates, some 3.3 million vehicles and up to 35,000 trains are forecast to travel the route each year.

An estimate developed for project planning pitched the average price of a ticket through the tunnel for motorists at 494 kroner (€66) in 2015 prices. Trucks will be charged more than four times that amount under the estimate. A single car and passenger running one-way on ferry route must pay €66.25 for the trip.

But Poulsgaard Jensen fears the forecast for traffic flow through the tunnel could have been inflated, with the ministry only likely to configure the final cost for motorists shortly before the tunnel opens. Ferry operators fear this means tolls could be lowered on the route to attract more traffic, undercutting the ferries as long as is needed to drive them out of business.

“If they stick to [the forecast] we have no problem, but if they can’t, they will use the state guarantees to outcompete us. That’s the issue,” Poulsgaard Jensen said. “Our concern is that in order to make a good business case they have possibly inflated the traffic forecast.”

European Commission officials are convinced that Copenhagen’s broad oversight over tolls will prevent the practices that the ferry companies fear.

The Danish Ministry of Transport is responsible for setting the tolls but said it would not comment on an ongoing case and the final rate for the route has not yet been finalized. “When the tunnel opens, Scandlines is free to continue its operation of the ferry service between Rødby and Puttgarden,” a ministry spokesperson said.

European Commission officials are convinced that Copenhagen’s broad oversight over tolls will prevent the practices that the ferry companies fear. They see the appeal as an attempt to play for time and potentially push back the opening of the tunnel, set for 2028.

Should the court rule against the Commission on the Fehmarn case it would force further delays: The scheme has already been pushed back by German authorities over environmental approval.

That would affect plans in Brussels to finish work on a strategic transport corridor, which is meant to stretch from Scandinavia through to Malta by 2030.

This article is part of POLITICO’s new coverage of competition, antitrust and state aid issues, Competition Pro. This coverage includes the Fair Play newsletter every Monday morning. Email pro@politico.eu to request a complimentary trial.