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Brussels, 15th July 2005

State aid: Commission provides greater legal certainty for financing services of general economic interest - frequently asked questions

(see also IP/05/937)

Why have new EU provisions for public service funding become necessary?

According to the Altmark judgement of the European Court of Justice (C-280/00, 24.7.03), compensation for the provision of services of general interest does not amount to state aid – and is therefore not subject to prior notification and approval by the European Commission – only if four conditions are met:

  • the beneficiary must be entrusted with a clearly defined public service mission;
  • the parameters for calculating the compensation payments must be established in advance in an objective and transparent manner;
  • compensation must not exceed the cost incurred in the discharge of the public service minus the revenues earned with providing the service (the compensation may, however, include a reasonable profit);
  • the beneficiary is chosen in a public tender or compensation does not exceed the costs of a well-run undertaking that is adequately equipped with the means to provide the public service.

Where these criteria are met, the compensation does not amount to state aid. On this basis, compensation for public service provision is not a notifiable form of state aid if the beneficiary is chosen by virtue of an open and transparent tender procedure. There is also no aid involved if the state can show that the beneficiary of public compensation receives no more than the net extra cost – after subtracting revenue – that any well-managed and reasonably equipped company would incur in providing the service.

According to this Court judgement, all other forms of compensation remain state aid and are thus subject to the rule of prior notification. The Commission Decision aims at exempting smaller public service companies from this notification obligation.

What exactly does the package consist of?

The package comprises three elements:

  • A Commission Decision (based on Article 86 of the EC Treaty, which provides for the application of EC Treaty rules, and in particular the competition rules to inter alia services of general economic interest) specifies the conditions under which compensation to companies for the provision of public services is compatible with state aid rules (a clearly defined public service mandate and no over-compensation) and does not have to be notified to the Commission in advance.

The Decision is applicable to compensation of less than €30 million per year provided its beneficiaries have an annual turnover of less than €100 million. Compensation granted to hospitals and social housing for services of general economic interest also benefits from the Decision irrespective of the amounts involved, as does compensation for air and sea transport to islands as well as airports and ports below specific thresholds defined in passenger volumes (see below).

  • A Commission Framework specifying the conditions under which compensation not covered by the Decision is compatible with state aid rules. Such compensation will have to be notified to the Commission due to the higher risk of distortion of competition. Compensation that exceeds the costs of the public service, or is used by companies on other markets open to competition, is not justified, and is incompatible with the Treaty’s state aid rules.
  • An amendment to the Commission Transparency Directive (80/723/EEC) clarifying that companies receiving compensation (whether in accordance with Altmark it is state aid or not) and operating on both public service and other markets must have separate accounts for their different activities, so that the absence of over-compensation can be checked.

Why exempt small scale funding from prior notification?

With respect to small-scale public services, such as e.g. home care services, local radio stations, local public childcare facilities), that receive no more than €30 million in annual subsidies and with respect to hospitals and social housing – independent of the amount of compensation received – the Commission does not think that prior notification of compensation is necessary because there is little risk of serious distortions of competition within the Single Market. The exemption also covers compensation payments for air and maritime transport to islands where the annual traffic does not exceed 300 000 passengers, as well as compensations for ports and airports where annual traffic does not exceed 1 000 000 passengers as regards airports, and 300 000 passengers as regards ports. The relatively small scale of this funding does not require prior notification, provided all conditions of the Decision are fulfilled. Therefore, the Decision on small scale funding seeks to exempt public authorities that wish to compensate such mostly locally active undertakings from the obligation of prior notification.

Why not exempt other social services than hospitals and social housing?

Most social services are likely in practice fall below the thresholds for notification in the Decision. This means that the notification obligation is not nearly as heavy for social services as would be the case for hospitals and social housing, which are well-established and stable sectors where it is known that investment and operating costs would exceed the general thresholds.

The draft framework sets forth the criteria for the Commission’s assessment of the compatibility of compensation which, according to the amount of compensation and the turnover of the beneficiary, remains subject to the principle of prior notification.

Why does the framework not address social services in more detail?

In its May 2004 White Paper on Services of General Interest (see IP/04/638), the Commission announced that it will submit a Communication on social and health services of general interest in the course of 2005. This Communication will set out a systematic approach in order to identify and recognise the specific characteristics of social and health services of general interest and to clarify the framework in which they operate and can be modernised. It will, amongst others, take stock of the Community policies related to the provision of social and health services of general interest, and describe the ways these services are organised and function in the Member States.

Why does the Decision cover air and sea transport but not land transport?

Because public service compensation for land transport is due to be covered by specific rules due to be adopted by the Commission very shortly.

Does the package harmonise the definition of what constitutes a public service?

Not at all. In line with the principle of subsidiarity, it is for Member States to define precisely how they want to define public service obligations, including the quality and scope of public services, and not the Commission. The Commission only intervenes in very rare cases where there is a flagrant abuse of the concept of public service. The present package respects national, regional and local authorities’ responsibilities whilst requiring that the definition of public service obligations is clear and transparent, so that it is possible to assess whether the compensation paid is in accordance with the defined public service obligations or may go beyond these defined obligations (and so allow cross-subsidy of activities where a company may be competing with other service providers).

What will be the main consequences of these new provisions?

The package both increases legal certainty and reduces the administrative burden for small and local services dramatically. Most small-scale public services, plus compensation for hospitals, social housing, air and sea transport to islands and smaller airports and ports will be exempt from the notification requirement, provided that the compensation for the public service only covers the real cost of providing the service (plus a reasonable profit margin).

What rules do the new draft provisions set forth?

If a compensation scheme does not comply with the above-mentioned “Altmark” criteria, the payments must not over-compensate the cost of providing public interest services. In this respect the draft texts set forth the rules on how the cost attributable to the discharge of public services are to be determined. The aim of this is that none of the public funds should be employed in a way which distorts competition in the competitive activities. But of course all the financing necessary for the functioning of the public service is compatible with the Treaty.

Is the Commission attempting to modify the criteria laid down in the Altmark?

No - the Altmark criteria were laid down by the European Court of Justice, and it is primarily therefore the Court alone which is competent to give definitive interpretations of the criteria. The measures the Commission has put in place address the situation where the Altmark criteria are not met in full and so the compensation is state aid. What we are doing is to clarify, in the light of the first three Altmark principles, how the Commission it intends to apply the state aid rules to public service compensation which is state aid.

Are non-economic public services included in the scope of this package?

EC competition law only applies to economic activities. Consequently public funds granted to an entity which does not pursue an economic activity does not constitute state aid (e.g. obligatory contribution-based social security systems). The Commission Decision adopted on the basis of Article 86 only applies to public service compensation given to undertakings exercising an economic activity.

What happens after the Commission adoption of the package?

The Framework will take effect following publication in the EU’s Official Journal. The Decision shall normally enter into force 20 days after the publication in the Official Journal. Nevertheless, to grant Member States sufficient time to adopt their existing legislation, certain conditions will only enter into force after one year. The amendment of the Transparency Directive cannot take effect following the publication in the OJ, because Member States have to adopt measures to comply with the new Directive (some Member States will need to modify their legislation). Member States will have up to one year to put the measures in place in national legislation.

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