Chapter
- What is State aid?
- State aid and procedure
- State aid and the market economy operator principle (MEOP)
- Rescue and restructuring aid for undertakings in difficulty
- State aid and de minimis aid
- The funding of public service obligations under State aid
- State aid and taxation
- State aid in the energy sector
- State aid for research and development and innovation
- Important Projects of Common European Interest (IPCEIs)
- State aid for undertakings impacted by Russia's invasion of Ukraine
- UK Subsidy System
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State aid and SGEI
The term ‘services of general economic interest’ (SGEI) is not defined in the EU Treaties nor in the secondary legislation. Its concept is laid down in Article 14 TFEU and (especially) Article 106(2) TFEU, which states that undertakings being entrusted with the operation of a SGEI shall be subject to the rules of the TFEU unless these rules would obstruct the performance of the particular assigned task. Moreover, that intra-community trade development must not be effected in a way that is contrary to the EU’s interest.
Additionally, Protocol No 26 to the TFEU mentions the importance of SGEI and especially stipulates the Member States’ discretion when it comes to defining SGEI. This Protocol also explains why SGEI are not defined by the EU: SGEI are not the same in every Member State because of the different needs, which result from the different history, geographical, cultural and social situation. Moreover, the role of SGEI is evolving with technological progress and societal change. Therefore, the Member States are obliged to ensure the quality of SGEIs, their safety and affordability, as well as equal treatment and universal access and of user rights.
The Commission states that SGEI are those activities which—according to public authorities—are of particular importance to the public and would not be supplied (at least not under the same conditions) if the state did not intervene. SGEIs include a broad range of activities, eg energy, postal services, telecommunications and transport. According to the case law of the EU Courts, such services demonstrate special characteristics which differ from other economic activities.
Commission, Services of general economic interest (public services)
Commission, Green Paper on SGEI, para 50
Case C-179/90 Merci convenzionali porto di Genova, para 27
Case C-242/95 GT-Link A/S, para 53
Case C-266/96 Corsica Ferries France SA, para 45
However, one aspect is clear: Article 106(2) TFEU and the rules on competition and state aid only apply to economic activities. Therefore, it is advisable to assess whether an activity is an economic one before starting complex assessments about the existence state aid and possible compatibility. Thus, the starting point of each assessment should the question whether the recipient is an ‘undertaking’ under EU law.
Leeway of Member States
As mentioned above, there is no strict definition of SGEIs. Therefore, Member States do have a discretion about defining them. However, the discretion varies: in absence of EU rules in a specific sector, Member States may determine quite freely how their SGEIs are organised and financed. In sectors where EU law is in force, the Member States’ leeway is limited. With regard to this distinction, the Court of Justice focuses on the principle of proportionality. Its proportionality test for state measures is more or less applies as follows:
- Pre-Emption—Where there is pre-emption, Member States have to implement measures with the least restrictive means, meaning where the authority may choose one of many options, it has to take the least onerous one.
- No secondary legislation—Where no secondary legislation is in place, the Member States measures should not be manifestly disproportionate and the authorities in question should not manifestly exceed their limit of discretion. In these cases, the Commission has to prove how—in the absence of a common policy—the development of trade between networks has been possible. In the absence of solid evidence, the Court of Justice will not judge on feasible alternative regulatory solutions.
Examples of SGEI based on the Court of Justice’s case law
- Water
Opinion of AG Colomer in Case C- 265/08 Federutility
- Gas
Case C-159/94 Commission v France
- Electricity
Case C-393/92 Municipality of Almelo and Others
- Distribution, countrywide collection and delivery of mail
- Operation of unprofitable airlines
Case C-66/86 Ahmed Saeed Flugreisen
- Ambulance transport
Case C-475/99 Firma Ambulanz Glöckner
Whether health care services shall be regarded as economic activity and thus, shall be considered as SGEI varies between Member States.
Examples of a manifest error of assessment
The Commissions Guide to the application of the EU rules on state aid, public procurement and the internal market to services of general economic interest, and in particular to social services of general interest mentions some (case law) examples, where Member States made a manifest error, eg certain port operations, activities in advertising, e-commerce, sponsoring and merchandising, disposal of animal corps, where only one undertaking benefits, broadband where not the large population, but rather business parks, benefit from.
Case C-179/90, Merci convenzionali porto di Genova, para 27
Case C-242/95 GT-Link, para 53
Joined Cases C-34/01 to C38/01 Enirisorse, paras 33–34
Case C-126/01 Ministère de l'Economie, des Finances et de l'Industrie v GEMO
Commission decisions concerning State aid No N 890/2006—France—SICOVAL
The Altmark test
The four conditions
As mentioned above, the application of Article 106(2) TFEU does not prevent a measure from being qualified as State aid. A major breakthrough and clarification regarding this interface was the Court of Justice’s judgment in Altmark.
Case C-280/00, Altmark Trans GmbH
In this case, the Court of Justice stated the conditions under which public subsidies for the discharge of public service obligations does not amount to State aid:
- The recipient undertaking must actually discharge a clearly defined public services obligation.
Case C-280/00, Altmark Trans GmbH, para 89
Communication from the Commission on the application of the European Union State aid rules to compensation granted for the provision of services of general economic interest [2012] OJ C 8/4, para 48, 49
Communication from the Commission on the application of the European Union State aid rules to compensation granted for the provision of services of general economic interest [2012] OJ C 8/4, para 52
According to the Commission, a Member State can only assign a task, which is not already provided or at least not under satisfactorily conditions with regard to price, quality, continuity and access. A good example is the broadband sector, where an SGEI can probably only be assigned in rural areas where private investors did not invest and where not competitive conditions are established. The way an authority entrusts an undertaking with an SGEI depends on the Member states legislation. It can either be a regulatory instrument (such as a notice) or a contract based on civil law. - The parameters for the calculation of the compensation must be established in advance in an objective and transparent manner.
Case C-280/00, Altmark Trans GmbH, para 90
Communication from the Commission on the application of the European Union State aid rules to compensation granted for the provision of services of general economic interest [2012] OJ C 8/4, para 55
This does not mean that a specific formula (eg price per day, passenger or user) has to be laid down. For the Commission the clear outset, how the compensation shall be determined is relevant. - The compensation cannot exceed what is necessary to cover all or part of the costs incurred in the discharge of public service obligations, taking into account the relevant receipts and a reasonable profit for discharging those obligations.
Case C-280/00, Altmark Trans GmbH, para 92
Communication from the Commission on the application of the European Union State aid rules to compensation granted for the provision of services of general economic interest [2012] OJ C 8/4, para 61
The reasonable profit shall be calculated based on the rate on return on capital which—pursuant to the Commission—means the Internal Rate of Return (IRR) over the cash flows of the contract. - The undertaking must either be selected on the basis of a public procurement procedure or the level of compensation needed must be determined on the basis of an analysis of the costs which a typical undertaking, which is well run would have incurred in discharging those obligations, taking into account the relevant receipts and a reasonable profit for discharging the obligations.
Case C-280/00, Altmark Trans GmbH, para 94
Since the last years demonstrated that especially the fourth criterion raised some questions, this Practice Note pays special attention to it.
Not every public procurement procedure fulfils the fourth condition
Generally, there is the presumption that no State aid is involved if a contract is awarded within a public procurement procedure, which was carried out in line with the EU public procurement directives. This stems from the idea that a public procurement procedure enhances competition, thus a normal market price results and an advantage for the undertaking can be excluded.
However, this does not mean that every kind of public procurement procedure fulfils the fourth condition. Although procuring entities generally have discretion in choosing the kind of procedure, some suggest that the open and restricted procedure shall be preferred, because both of them can be considered as transparent. Especially, the Commission prefers the open and (also) the restricted procedure, as laid down in the SGEI Communication.
Phedon Nicolaides and Ioana Eleonora Rusu, ‘Competitive Selection of Undertakings and State Aid: Why and When Does it Not Eliminate Advantage?’ (2012) 1 EPPPL, 19
Commission, ‘Communication from the Commission on the application of the European Union State aid rules to compensation granted for the provision of services of general economic interest’ COM 2012/C 8/02 [2012] OJ C8/4, para 66
The competitive procedure with negotiation does not allow as much competition as the above mentioned tender procedures. However, if the contracting authority invites a sufficient number of potential bidders to submit a bid, satisfactory competition may be enabled.
However, the Commission pointed out in its SGEI Communication that the competitive procedure with negotiation and the competitive dialogue may only be applied in exceptional circumstances because both procedures confer wide discretion to contracting authorities. What is considered being an exceptional circumstance was not further specified. Generally, the same rules apply for the competitive dialogue.
Article 29 of Public Procurement Directive 2014/24/EU
Adinda Sinnaeve ‘What’s New in SGEI 2012?—An Overview of the Commission’s SGEI Package’ (2012) 2 EStAl 347
Article 30 of Public Procurement Directive 2014/24/EU
With regard to the negotiated procedure without prior publication, the Commission stated in the SGEI Communication that this type of procedure cannot satisfy the fourth Altmark criterion.
How the Commission will deal with the innovation partnership is not clear yet.
Typical, well-run undertaking
In case of absence of a tender procedure and a market remuneration for a specific SGEI, one has to take the costs of a well-run undertaking as a benchmark. This term is neither officially defined in the Altmark judgment nor anywhere else. According to the Commission, contracting authorities shall take into account EU and national accounting standards and ratios regarding productivity, supply, quality and efficient management. Moreover, an appropriate number of entities shall be assessed.
Adinda Sinnaeve ‘What’s New in SGEI 2012?—An Overview of the Commission’s SGEI Package’ (2012) 2 EStAl 352
Furthermore, the Commission also provides negative guidance, defining when a benchmark cannot be established. Pursuant to the Communication undertakings having a monopoly position or receiving compensation for discharging SGEI that does not comply with EU law, cannot be regarded as typical undertakings.
The case law on this term is very fact specific.
Reasonable Profit
According to the Commission’s view, a reasonable profit, ‘should be taken to mean the rate of return on capital that would be required by a typical company considering whether or not to provide the service of general economic interest for the whole duration of the period of entrustment, taking into account the level of risk’.
The Commission interprets this criterion in a rather strict way and the case law is very fact specific. However, the Commission has not expressed a clear maximum profit. In general, it appears to be a balancing exercise between risk and profit. Additionally, the sector concerned is also a relevant factor for establishing the reasonable profit.
Article 106(2) TFEU is still a distinct provision
The General Court has already stated, that although Article 106(2) TFEU importance decreased after the Altmark decision, it still remains an independent provision with its own content. Therefore, it shall be applied where the Altmark conditions are not complied with and the compensation therefore has to be considered as state aid. However, the compensation can be declared compatible with the market under Article 106(2) TFEU.
SGEI Package
In April 2012, the Commission adopted the SGEI package which is currently in force. It consists of four (plus one) documents:
- Communication from the Commission on the application of the EU State aid rules to compensation granted for the provision of services of general economic interest
Commission communication on the application of the EU State aid rules to compensation granted for the provision of services of general economic interest - Commission Decision of 20 December on the application of Article 106(2) TFEU to State aid in the form of public service compensation granted to certain undertakings entrusted with the operation of services of general economic interest
Commission decision on the application of Article 106(2) TFEU to State aid in the form of public service compensation granted to certain undertakings entrusted with the operation of services of general economic interest - Communication from the Commission on the EU framework for State aid in the form of public service compensation (2011)
Communication from the Commission on the EU framework for State aid in the form of public service compensation - Commission Regulation on the application of Articles 107 and 108 TFEU to de minimis aid granted to undertakings providing services of general economic interest
Commission Regulation (EU) 2023/2832 on the application of Articles 107 and 108 TFEU to de minimis aid granted to undertakings providing services of general economic interest - And the ‘plus 1’ document: Commission Staff Working Document—Guide to the application of the EU rules on State aid, public procurement and the internal market to services of general economic interest, and in particular to social services of general interest.
Commission Staff Working Document—Guide to the application of the EU rules on State aid, public procurement and the internal market to services of general economic interest, and in particular to social services of general interest
Communication
The purpose of the Communication is to explain key concepts of state aid in relation to the public service compensation.
Decision
Article 1 of the Decision sets out the conditions under which state aid for the discharge of services of general economic interest is compatible and exempted from the notification requirement.
This Decision only applies to the following categories:
- The compensation does not exceed €15m per year (in areas other than transport and transport infrastructure)
- Compensation for SGEIs in hospitals concerning medical care and emergency services, but not for ancillary services
- Compensation for SGEIs, meeting social needs as regards health and long term care, childcare, access to and reintegration into the labour market, social housing and the care and social inclusion of vulnerable groups
- Compensation for SGEIs as regards air or maritime links to islands on which the average annual traffic during the 2 financial years preceding that in which the service of general economic interest was assigned does not exceed 300 000 passengers
- Compensation for SGEI as regards airports and ports for which the average annual traffic during the 2 financial years preceding that in which the service of general economic interest was assigned does not exceed 200 000 passengers, in the case of airports, and 300 000 passengers, in the case of ports.
Moreover, the Decision only applies to the provision of SGEI which does not exceed a ten-year duration (with exceptions). Additionally, the Decision sets out rules for the entrustment, compensation, control of overcompensation, transparency, availability of information and reports.
Framework
One of the main differences between the Decision and the Framework is that measures falling under the scope of the Decision do not need to be not/ified to the Commission while the Framework stipulates rules for measures which amount to state aid but might be declared compatible according to Art 106(2) TFEU if the conditions of the Framework are met. However, such measures need to be notified to the Commission.
The Framework sets out rules under which the measure can be declared compatible, eg:
- Need for an entrustment act that defines the SGEI and the methods for calculating the compensation
- Duration of the entrustment period
- Compliance with Public Procurement rules
- Non-discrimination
- Amount of compensation
- Reasonable profit
- Efficiency incentives
- Rules for overcompensation
- Transparency
- Reporting and evaluation.
De Minimis Regulation
Basically, the De Minimis Regulation works like other block exemptions. Thus, compensation not exceeding €750 000 over three fiscal years is considered not to meet the criteria stipulated in Article 107(1) TFEU and therefore, the notification requirement is not applicable. However, the De Minimis Regulation also stipulates further conditions with regard to transparency, cumulating of aid, eligible costs and monitoring.
Commission Regulation (EU) 2023/2832 on the application of Articles 107 and 108 TFEU to de minimis aid granted to undertakings providing services of general economic interest
Commission Staff Working Document—Guide to the application of the European Union rules on state aid, public procurement and the internal market to services of general economic interest, and in particular to social services of general interest
This document is not legislation, but is a very helpful guide for practitioners with explanations and Q&A.
