Vice President of the European Commission responsible for Competition Policy
Public services for a better Europe
CEEP (The European Centre of Employers and Enterprises providing Public services)
Budapest, 16 June 2011
Ladies and Gentlemen:
It’s a pleasure to meet you again after our first encounter at your Madrid congress last year.
In that occasion I told you that we would soon conduct an evaluation of the application of the State aid Package on the Services of General Economic Interest.
Well, we did.
My message to you a year later is that we are approaching the final stage of the reform process. As a matter of fact, our meeting today concludes a series of public debates on our proposed reform that I have had over the past few weeks.
I’ve been meeting representatives of Europe’s regional and local authorities, of the business community, and of civil society. But this round of consultation would not have been complete without hearing from the representatives of those who actually carry out activities of general economic interest across Europe.
Let me anticipate from the outset the broad objectives I have in mind with this reform.
First, I would like the new rules that we will use as of next year to assess aid to SGEI to be clearer and simpler. It emerged from the review process that there is some room for improvement here in the existing package.
Second, I believe that our new rules should be more diversified and better focussed on the financing of the services that have a significant impact on the internal market; which, after all, is the main point of our assessment.
Third, the new rules should help make the provision of public services more efficient; a goal that is becoming more important as public budgets come under increased pressure in the wake of the crisis.
In other words, I would like the new package to help public authorities and service providers give the citizens better value for money.
I attach a great deal of importance to this reform because public services lie at the core of my vision of Europe’s social market economy.
As an economist by training, I believe that an efficient, well regulated, and free market is the best model for our economic behaviour and relations – at least, the best model we have managed to find yet.
But, as a politician and as a citizen, I know that this does not mean that the market can be elevated to the rank of a universal model. In our model of society principles and values rank higher than economic interests.
There are certain services and public goods that cannot be left to market forces alone, because we have evidence that, when they are, the goods are not provided to the many but only to a few – and in some cases they are not provided at all.
As citizens of the Union, we want a fair provision of such services. In spite of our rich historical and cultural diversity, the vast majority of Europeans trust their governments to run schools, hospitals, and the mail – to give you just some examples.
And we all expect our services to be affordable, accessible to all, and of the highest possible standards of quality.
These widespread expectations are reflected in the Lisbon Treaty, which has given greater emphasis to public services in the EU.
Protocol 26 stresses the need for high-quality and affordable services for all, while Article 14 provides a new legal basis for the European Parliament and the Council to establish the principles and conditions required for Europe’s public services to fulfil their mission.
But, as you know, the reform we are discussing today is not based on Article 14 of the Treaty. It is based on Article 106, which provides that the European Commission has exclusive power to assess the compensation for the provision of public services.
In other words, the reform we are discussing today is about the rules that the European Commission uses to make sure that our governments do not distort competition as they finance certain public services.
This reform is about the Commission’s responsibility to make sure that the compensation for their provision is compatible with the internal market.
Moreover, let me recall that our control does not cover all public services, but only the services that are economic in nature; and the distinction is made on the basis of the jurisprudence of the Court of Justice.
The rules that we currently use to carry out our control are included in the so-called the Monti-Kroes package. The package needs to be reviewed by the end of the year and will be replaced by the instruments we are discussing today.
We have been working hard at this reform, trying to engage all interested parties – including you – in a broad-ranging dialogue.
We have examined the reports sent to us by the Member States and we have studied the views of the associations, non-governmental organisations, and public authorities that responded to the public consultation we conducted last year.
That stage of the process culminated in the Communication that the Commission issued last March. As I said, I’ve been discussing the content of this policy document in a round of public meetings which comes to an end today.
So, this is my last opportunity to seek ideas for the next stage in the process – the publication of draft proposals in early September – and I would like to make the best of it. I count on your cooperation.
Ladies and Gentlemen:
Now I would like to briefly describe were we are in our reform process.
Our experience in the implementation of the Monti-Kroes package has taught us that our scrutiny is too uniform across the spectrum.
We have to apply more or less the same rules to large companies that operate on an international scale and to activities organised by small local authorities, such sports and recreation for the young and other social activities.
I believe we should change this. Among other reasons, because the activities organised by a small town and run by a local operator have little or no impact on competition and the internal market.
In contrast, you will agree with me that the large companies that provide services such as waste management, energy and the mail clearly compete with other companies in the internal market.
For this reason, the new rules should be better adapted to the size and to the nature of the different services.
This would have two positive effects; it would cut the red tape for small operations and it would allow us to focus our scrutiny on the cases that have a clear impact on the Single Market.
This is one conclusion that we have drawn from our implementation of the current package. But the best feedback on how the rules work in practice came from our stakeholders as a result of the public consultation we conducted in 2010.
The main finding of the consultation was that the existing rules are sometimes difficult to understand – including some of their core notions.
For instance, many respondents told us that it’s not always clear which activities are to be regarded as economic, and which are not. This is pretty crucial, because only economic activities are subject to our scrutiny.
Also, there is a degree of uncertainty around the notion of an effect on competition and trade between Member States.
In sum, both our direct experience and the feedback we received from our stakeholders indicate that the new package should be clearer and more diversified.
In the rest of my presentation I will submit to you a few ideas as to how we can make both things happen.
The first task is clarifying the portions of our package that our stakeholders find difficult to interpret.
From the point of view of our work, this task is of primary importance, because if we want public authorities and service providers to abide by the law, the rules must be clear and straightforward.
But the task will be as difficult as it is important, and for a variety of reasons.
One challenge is that the various levels of government are organised differently in the different Member States. Another challenge is that the services themselves are not uniform and reflect the different traditions throughout the Union.
As a consequence, there is little uniformity in the EU as to how public services are designed, organised, and financed.
Thus, it won’t be easy for us to clarify once and for all whether a given activity constitutes an economic activity, because this changes across national boundaries.
Let us take the health sector, for example. Hospitals in countries such as Belgium have been found to carry out an economic activity. I know the Belgian system well, since I’ve been using it as a Brussels’ resident for more than seven years now, and I find this conclusion perfectly logical.
In contrast, the Court of First Instance ruled that the Spanish national health system can not be regarded as an economic activity. Because I also know well how the health system is organised in my native country, I find this second conclusion equally logical.
The two systems offer similar services to the citizens, but their respective relations with market mechanisms are very different with the result that one is an economic activity and the other is not.
Another point that can be made clearer in the new package is the interaction between State aid and public procurement rules.
In many cases, the two regimes work in different ways and it is not easy to reconcile them. But I think that we should make an effort. I will be in favour of reaching as much convergence as possible in this regard.
Finally, I believe that we should clarify the notion of reasonable profit, which is one of the aspects that we need to check when assessing the so-called 4th Altmark condition. This notion is not always straightforward because it depends on who shoulders the commercial risk.
For example, the reasonable profit of a local-transport operator depends on who is going to pay in case fuel becomes more expensive.
The contract that the operator signed with the public authority may specify that, if the price of petrol rises, both parties will share the additional cost. This arrangement would give the operator a certain commercial risk.
Otherwise, the public authority may decide to compensate all the costs sustained by the operator. In this second case, commercial risk would not be an issue.
In sum, it is clear that we will never be able to find ex ante a single benchmark to cover every case across the different sectors.
One idea to circumvent this problem would be to introduce a safe-harbour threshold for cases where the commercial risk is very low. Below this threshold, the profit would always be treated as reasonable.
I would like to hear what you think of this idea.
Ladies and Gentlemen:
These are some of the ideas that can make our new package easier to apply.
Now I want to turn to the other task; that is, finding the best way to adapt our scrutiny to the nature and to the size of the services.
I think that we can approach this problem from two sides:
On the one hand, we can introduce simpler and lighter rules for small-scale public services and for certain types of social services;
On the other, we can devise more robust instruments to assess the cases with clear potential implications for the internal market.
The main question for the first part of the strategy is as follows: “when will the simpler rules apply?” Which criteria should we use?
We could look at the size of the compensation, which is the criterion we use today. At present, you do not need to inform the Commission if you grant up to €30 million to providers with an annual turnover of €100 million or less.
Also, we could look at the size of the local authorities. A small town will hardly have an impact on the internal market when it asks local providers to run a child-care service; to open a swimming pool in the summer; or to set up an exhibition in its cultural centre.
We can set a population threshold under which a public authority is deemed to be too small to raise competition concerns. But – again – where do we draw the line? How small should a town be to qualify for the simplified rules? And how should we define a “local” provider?
A third idea would be to extend the scope of application of these simpler rules to certain types of social services. At present, as you know, this is the case for hospitals and social housing. Perhaps we could add more categories.
But this is not as straightforward as it seems, either. Take a service such as care for the elderly, for instance. In some parts of Europe this is a service basically provided on a purely commercial basis.
Finally, there is the issue of what exactly these simplified rules will look like. Let us look at a few alternatives.
Looking for overcompensation is a central part of our assessment. However, at present we ask public authorities – including very small ones – to check-up on the compensation every year, even when the contracts covers longer periods.
On the basis of our experience since 2005, we have observed that in some cases large profits in one year are offset by heavy losses in the next. Would it not be simpler if the new rules asked to check only once at the end of the contract?
Another idea concerns the notification exemptions. At present, the thresholds are almost the same across the board.
What if we introduced different block-exemption requirements for different types of service? This option could save the providers of certain social services a lot of unnecessary red tape.
These are some of the ideas we have in mind to make life easier for those who are involved in small-scale services.
Now, I will move to the opposite end of the spectrum; that is, how to carry out our assessment of large-scale commercial services. Once again, let me put some questions to you.
What if the contract between a large service provider and the public authority included incentives for the provider to make efficiency gains over the life of the contract? The system is not new, for instance it is already in use for certain transport services, on the basis of their sectoral regulation.
Another possibility is to mandate the use of tenders or of benchmarks to calculate the amount of the support, as long as these do not obstruct the performance of the service.
I understand that your organisation is critical of both the introduction of incentives to boost efficiency and of a wider use of the tender procedure.
I am aware that tendering can be a burden for public authorities and I know that it would not work in all cases. But in all the remaining cases tenders are the best means I know to select the most efficient provider and to get the best value for money.
I also understand that there are different views on the application of State aid rules to in-house relations.
In fact, one idea that I have been presenting in this round of consultation is that to select the best final provider in-house providers can be compared to independent competitors. We will need to find a balanced way to do this comparison in practice, but the idea has a certain appeal.
I look forward to listening to your views; I am sure we are going to have a lively debate on these and other points and I hope to take many interesting suggestions back to Brussels.
Let me just point out that, at present, the aid can cover all the costs incurred by the service provider plus a reasonable profit margin, regardless of how efficient is the service it renders.
In times of budget consolidation across the EU and on all levels of government, this arrangement clashes with the need to make a more efficient use of public spending.
It seems clear to me that we need to take efficiency into account. The question is not ‘whether’, but ‘how’ and ‘to what extent’.
Ladies and Gentlemen:
Good and accessible public services are essential for our economy, for our wellbeing, and for the social and civic development of Europe.
Public services help us build a more equal Europe. They give underprivileged Europeans a chance to close their social and economic gaps. They are an asset we must leverage to build a fairer and more just society.
At the same time, public services require financing from government budgets; and not every demand can be afforded, especially in these difficult times.
The overall objective of the ideas that I have been submitting to you is that we need to find more efficient ways to design, finance and provide our public services.
This is absolutely necessary if we are serious about preserving them for future generations of Europeans.
I invite you to help us design new rules that will promote the best level of public services at the least cost for the community and for many years to come.