EU State Aid in Public Services

A proposal for a reform of State aid rules on Services of General Economic Interest (“SEGI”) is expected in the foreseeable future (potentially by the end of 2011) with the objective of boosting the contribution SGEI can make to the wider EU economic recovery and guaranteeing that certain services at affordable conditions to the general population.

In its Communication published on 24 March 2011 the Commission launched the political debate with stakeholders and other institutions on the upcoming revision of the State aid Package on SGEI (“SGEI Package”). The Package includes a series of measures adopted in 2005 in which the Commission has clarified the application of the EU competition provisions to compensation for SGEI.

The review of the Package is part of the Commission's wider policy objectives in the area of public services. The Commission undertook to adopt, by 2011, a series of measures on services of general interest, underlining that the EU and its Member States must ensure that public services are easier to operate at the appropriate level, adhere to clear financing rules, are of the highest quality and actually accessible to all.

Public services

The EU and Member States, each within their respective powers and competences, have to take care that such services operate on the basis of principles and conditions, particularly economic and financial conditions, which enable them to fulfil their missions. The European Parliament and the Council can adopt, on the basis of a proposal by the Commission, regulations establishing those principles and conditions.

EU competition rules do not apply to all services of general interest, but only to those that are “economic” in nature. Social services of general interest, which can be both economic and non-economic in nature, are only subject to EU competition law where they are indeed economic.

National and local authorities have the wide discretion in providing, commissioning and organising SGEIs. Providers of SGEIs are also subject to competition rules in so far as the application of such rules does not obstruct the performance, in law or in fact, of the particular tasks assigned to them.

Funding of public services and State Aid control

The legal basis for State aid control of SGEI compensation lies in Articles 106 and 107 TFEU.  Article 106 TFEU reserves to the Commission the task of controlling the conformity of such compensation with competition rules.

The compensation granted by public authorities for the performance of a SGEI is subject to State aid scrutiny. But not all State funding for public services which have an economic nature is to be regarded as State aid. In 2003 in the Altmark case the European Court of Justice clarified the application of State Aid rules to State financing of public service obligations. According to the ruling of the Court, there is no State aid where

• the public service obligations are clearly defined; 
• the parameters used to calculate the compensation are established in an objective and transparent manner; 
• compensation for the public service merely covers costs and a reasonable profit; 
• where the undertaking is chosen by a public procurement procedure allowing for the selection of the tenderer capable of providing those services at the least cost to the community, or the compensation is determined on the basis of an analysis of the costs of an average “well-run” undertaking in the sector concerned. 

If any one of these cumulative conditions is not met, then the State intervention may be regarded as State aid and in principle has to be notified to and assessed by the Commission.

The SGEI Package

The Commission adopted in July 2005 the "SGEI Package" in order to define the conditions under which State aid in the form of public service compensation can be considered compatible with EU competition law. The "SGEI Package" includes:

• Decision on the application of Article 106(2) TFUE (ex-Article 86(2) TCE) to State aid in the form of public service compensation granted to certain undertakings entrusted with the operation of services of general economic interest. The Decision specifies the conditions under which compensation to companies for the provision of public service obligations is considered compatible with State aid rules and is exempted from notification to the Commission.

• Community Framework for State aid in the form of public service compensation which defines the conditions under which compensation not covered by the Decision may be declared compatible by the Commission. The SGEI Framework expires in November 2011. 

• Commission Directive on the transparency of financial relations between Member States and public undertakings as well as on financial transparency within certain undertakings. The

Review of the SGEI State Aid rules

National and local authorities enjoy a large discretion in providing and organising SGEI. However, an efficient allocation of public resources for SGEI is important to ensure the competitiveness of the EU and economic cohesion between the Member States. The reform will aim at ensuring a clear, simple and effective legal framework so as to make compliance easier for national, regional and local authorities, and at promoting the efficient delivery of SGEI. 

The SGEI Framework expires in November 2011, and both the Framework and the Decision

prescribe an evaluation of the rules based on a wide consultation conducted by the Commission in order to  obtain input from Member States and other stakeholders on the practical application of the State aid rules.

The reports provided by Member States on the application of the Package show that they welcome the Package and the legal certainty it has brought. Instead of advocating a complete overhaul of the Package, most Member States consider that some of the provisions of the Package should be revised to facilitate compliance with the State aid rules at different levels of the national administration.

The public consultation on the application of the Package launched in 2010 generated different opinions from the organisations, but the general tone of the submissions was in line with that of the above Member State reports. However, the consultation also showed that there is scope for improvement like clearer, simpler and more proportionate instruments to ensure an easier application of the rules.

To achieve these goals, the Commission is considering basing the SGEI Package reform on two principles:

1. Clarification

The aim is to provide additional clarity on some concepts relevant for the application of the State aid rules to SGEI, including the scope of those rules and the conditions for the approval of SGEI aid by the Commission. 

The Commission will discuss with Member States how to provide further practical clarification on the ground to the benefit of local actors and stakeholders.

The public consultation has highlighted that uncertainties and misunderstandings, in particular about the key concepts underlying the State aid rules for SGEI, may be among the reasons why the rules are sometimes applied incorrectly. Issues on which stakeholders have asked for clarity include, among others: the distinction between economic and non-economic activities, the limits Member States have under State aid rules when defining an economic activity as an SGEI, and the requirements which public authorities have to follow under State aid rules when they entrust an undertaking with the performance of an SGEI.

2. Diversified and proportionate approach to the different types of SGEI

The current SGEI Package applies in a more or less uniform way to a very wide range of economic sectors and actors. The Commission intends, in the context of the upcoming reform, to distinguish more clearly between different types of services depending on the extent to which State aid in these economic sectors poses a serious risk of creating distortions of competition in the internal market.

The reform will be in line with the overall objective of EU State aid control, which is to ensure that Member States only implement State aid that contributes to an objective of  common interest , is well designed and proportionate and does not distort competition and trade between Member States.

Simplification 

One element of this strategy could be to simplify the application of the rules for certain types of small-scale public services of a local nature with a limited impact on trade between Member States and for certain types of social services.

The administrative burden put on the public authorities concerned should be proportionate to the impact that the measure has on competition in the internal market. The Commission will assess under which conditions and circumstances certain aides can be regarded as de minimis, for which types of services and under what conditions an individual State aid notification is required, and whether the thresholds which determine the application of the current SGEI Decision should be modified.

Efficiency of Large-Scale Commercial Services entrusted with public Service Obligations
Distortions of competition in the internal market should be avoided by ensuring high quality public services and efficient allocation of State resources.

The risk of distortions of competition is particularly high in sectors characterised by large scale commercial activity with an EU wide dimension where operators may be entrusted with public service obligations. In some of the relevant sectors, such as transport, telecoms, energy supply and post, this risk is also addressed in sector specific rules which either apply instead of the general SGEI Decision and SGEI Framework or in conjunction with it.

Under the current Package, compensation granted for the provision of SGEI can cover the costs incurred by the provider and a reasonable profit margin. However, the Package does not take into account how the costs incurred by the provider of SGEI compare to those of a well-run undertaking. Some of the costs compensated by Member States to providers may thus be generated by low efficiency levels. Such a situation tends to distort the functioning of markets and may ultimately harm service quality and efficient delivery.

The Commission is therefore considering to what extent greater account of both efficiency and quality should be taken when deciding on the approval of State aid measures in relation to SGEI. This could also include measures aimed at achieving appropriate transparency in relation to public expenditure for SGEI or to the identification and definition of SGEI obligations (while respecting the Member States' wide discretion in this respect), as well as measures aimed at taking into account efficiency over the life of an entrustment with the provision of an SGEI.

Accompanying Report

In parallel with the Communication, the Commission are published a Report describing the Commission's practice under the current rules and the main issues arising out of the consultation.

The report details the application of the SGEI rules sector by sector, namely transport, energy, waste and water services, postal services, financial services, public service broadcasting, broadband, health care and social services. Some, like the postal services sector, have been the subject of many decisions (15 for postal sector) and others, such as waste and water services, less which may be due to the fact that the services provided are often local in nature and may fall within the thresholds below which there is no need for a notification.

Next steps

Consultation of the European Parliament, the Council, Member States as well as stakeholders on drafts of the new SGEI Decision and SGEI Framework is currently envisaged by July 2011.

The presentation of the proposal of the revised SGEI Package is scheduled by the Commission for late 2011.