Public services funding – more legal certainty?

On 15 July 2005, the European Commission announced that it has adopted a number of measures designed to clarify the application of the state aid rules to the financing of services of general economic interest. In the 2003 Altmark [1] case, the European Court of Justice (“ECJ”) set out conditions for establishing when state compensation for fulfilling public service obligations did not constitute state aid.

The Commission has now adopted three measures concerning the application of the rules to public service compensation falling outside the Altmark conditions:

• a Decision which will exempt small-scale public funding from the obligation of prior notification
• a Framework explaining criteria for the assessment of compensation payments which fall outside both the Altmark conditions and the small-scale-funding exemption
• an amendment to the directive on transparency in financial relation between Member States and public bodies (80/723/EEC) (“Transparency Directive”).

The Altmark conditions

In the Altmark case, the ECJ found that compensation for fulfilling public service obligations does not involve aid and does not therefore require notification, provided that all of four conditions are satisfied:

• the undertaking benefiting from the compensation must have a real and clearly defined public service obligation
• the parameters for calculating compensation must be established in advance and must also be objective and transparent
• the compensation cannot exceed what is necessary to cover all or part of the costs of discharging the public service obligations, although a reasonable level of profit is allowed
• the beneficiary is chosen in a public tender or compensation does not exceed the costs which would be incurred by a well-run undertaking adequately equipped with the means to provide the public service.

The Commission Decision – small-scale funding

The Decision states that public service compensation of less than €30m per year is acceptable and therefore is not notifiable aid where the undertaking receiving the aid has annual turnover below €100m during the two financial years preceding the year in which the service of general economic interest was assigned to it.

The Decision also states that no notification is required for compensation to hospitals and social housing undertakings for services of general economic interest, whatever the level of aid. Compensation for air and sea transport to islands and compensation for airports and ports will equally fall within the scope of the Decision, but these air and maritime transport exemptions will be dependent on a number of thresholds.

Finally, the Decision lays down in relation to all categories of exemption certain requirements regarding the nature of the public service obligation, the parameters for controlling and reviewing compensation arrangements and the permitted cost and profit basis of the compensation.

The Commission Framework – public service funding not exempt from notification

The Framework clarifies how public service funding should be assessed when it (i) does not satisfy the Altmark conditions and (ii) is not covered by the small-scale funding exemption due to the amount of the compensation or the size of the beneficiary.

Compensation in such cases must be notified as aid, but may be deemed acceptable where:

• there is a genuine public service obligation specified in an official act (e.g. legislation)
• the level of compensation does not exceed what is necessary to cover all variable and some fixed costs involved in providing the service(s) of general economic interest and to cover also an appropriate return on capital and a reasonable level of profit.

More detail on how to interpret these concepts is provided in the Framework.

The Transparency Directive

The final part of the Commission’s 15 July 2005 package consists of an amendment to its Transparency Directive. The amendment clarifies that companies receiving public service compensation (whether in accordance with Altmark or not) must have separate accounts for their public service and other activities, so that the absence of over-compensation can be checked.

Impact

The Commission has heralded these new rules as “the first implementing measures of the State Aid Action Plan” announced on 7 June 2005. The Commission believes these rules will increase dramatically legal certainty for small and local services, while also reducing the associated administrative burden. The Framework will take effect after it has been published in the EU’s Official Journal (OJ). The Decision enters into force 20 days after its publication in the OJ, although some points will take one year to enter into force to give Member States time to adapt their rules. The amendments to the Transparency Directive must be implemented into national legislation by Member States and this may require some changes to national rules.

[1] Case C-280/00 Altmark Trans GmbH and Regierungspräsidium Magdeburg v Nahverkehrsgesellschaft Altmark GmbH, judgment of 24 July 2003