Report from the Commission on the status of work on the guidelines for state aid and services of general economic interest
Date: 2002-06-05
Institutions: European Commission
Subjects: State aid, aid to undertakings, collective interest, economic development, private sector, provision of services, public service

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 5.6.2002
COM(2002) 280 final

REPORT FROM THE COMMISSION

on the status of work on the guidelines for state aid and services of general economic
interest

REPORT FROM THE COMMISSION

on the status of work on the guidelines for state aid and services of general economic
interest

A. INTRODUCTION

1. 

As requested by the Nice European Council held on 7, 8 and 9 December 2000, the
Commission presented the Laeken European Council of 14 and 15 December 2001
with  a  Report  on  services  of  general  interest  (COM(2001) 598 final).  The
Commission pointed out in its report that, in order to improve legal certainty in the
field  of  public  service  compensation,  "as  a  first  step,  the  Commission  intends  to
establish  during  2002,  in  close  consultation  with  the  Member  States,  a  Community
framework  for  state  aid  granted  to  undertakings  entrusted  with  the  provision  of
services of general economic interest. Such a framework will inform Member States
and undertakings  of the  conditions  under  which  state  aid  granted  as  compensation
for the imposition of public service obligations can be authorised by the Commission
... thus alleviating the notification obligation for individual aid. As a second step, the
Commission  will  evaluate  the  experience  gained  with  the  application  of  this
framework,  and,  if  and  to  the  extent  justified,  the  Commission  intends  to  adopt  a
regulation exempting certain aids in the area of services of general interest from the
obligation of prior notification."

2. 

The Barcelona European Council of 15 and 16 March 2002 asked the Commission
in  particular  to  "report  to  the  Seville  European  Council  on  the  progress  of  work
concerning the guidelines on state aid and to present if appropriate a proposal for a
regulation on block exemption in this field".

This report has been prepared in response to the request of the Barcelona European
Council.

B. LEGAL NATURE OF PUBLIC SERVICE COMPENSATION

3. 

4. 

1 

2 
3 

The Commission for a long time  took the  view that financial assistance  granted by
Member States  to  firms  entrusted  with  the  task  of  operating  general  economic
interest services did not constitute state aid within the meaning of Article 87(1) of the
Treaty  where  such  assistance  was  intended  only  to  offset  the  additional  charges
imposed by the state for public service reasons.1

In  its  judgments  in  FFSA  of  27  February  1997  2  and  SIC  of  10  May  2000,3  the
Court of First Instance held that "the fact that a financial advantage is granted to an

As  the  Commission  stated  in  its  1996  and  2000  communications  on  services  of  general  interest  in
Europe  (OJ C 281,  26.9.1996  and  OJ C 17,  19.1.2001),  only  public  support  for  services  which
constitute economic activities and are liable to affect trade between Member States may be deemed to
be state aid within the meaning of Article 87 of the Treaty.
Case T-106/95, [1997] ECR II-0229.
Case T-46/97, [2000] ECR II-2125.

2

                                                
undertaking  by  the  public  authorities  in  order  to  offset  the  cost  of  public  service
obligations which that undertaking is claimed to have assumed has no bearing on the
classification  of  that  measure  as  aid  within  the  meaning  of  Article 87(1)  of  the
Treaty,  although  that  aspect  may  be  taken  into  account  when  considering  whether
the aid in question is compatible with the common market under Article 86(2) of the
Treaty (now Article 86(2) EC)."

The CFI points out, however, that Article 86(2) of the Treaty contains a derogation
for firms entrusted with the operation of services of general economic interest, " so
that the grant of state aid may escape the prohibition laid down in Article 87 of that
Treaty provided that the sole purpose of the aid in question is to offset the additional
costs  incurred  in  performing  the  particular  task  assigned  to  the  undertaking
entrusted with  the  operation  of  a  service  of  general  economic  interest  and  that  the
grant of the aid is necessary in order for that undertaking to be able to perform its
public service obligations under conditions of economic equilibrium".

By Order of 25 March 1998, the Court of Justice rejected the appeal against the CFI
judgment  in  FFSA.  Furthermore,  in  its  judgment  of  22 June 2000  in  CELF,4  the
Court  stressed  that  Article 86(2)  of  the  Treaty  does  not  allow  derogation  from
Article 88(3), which provides for prior notification and the suspension of aid.

On  22 November 2001,  the  Court  of  Justice  handed  down  its  judgment  in
Ferring,5  which  concerned  the  wholesale  distribution  of  medicinal  products  in
France.  In  its  judgment,  the  Court  stated  that,  where  tax  exemption  granted  to  an
undertaking  entrusted  with  the  operation  of  a  public  service  simply  offsets  the
additional costs of the public service, the recipients do not enjoy an advantage within
the  meaning  of  Article 87(1)  and  the  measure  in  question  does  not  therefore
constitute state aid.

Public service obligations can entail additional costs that competitors do not have to
bear and the compensation enables the recipient to be placed in the same position as
its competitors. On the other hand, the amount of the exemption that exceeds what is
necessary to discharge the public service tasks constitutes state aid. The Commission
altered  its  decision-making  practice  in  accordance  with  this  new  case  law  of  the
Court of Justice.

On  19 March 2002,  Mr  Advocate-General  Leger  delivered  his  opinion  in  the
Altmark Trans case.6 This  concerns the conditions  in  which  a Member State may
grant  aid  to  firms  operating  a  local  public  passenger  transport  service.  In  his
conclusions,  Mr Leger  suggests 
judgment  of
22 November 2001 in Ferring and return to the CFI rulings in FFSA and SIC which
characterise public service compensation as state aid.

the  Court 

reverse 

that 

its 

On  30 April 2002,  Mr Advocate-General  Jacobs  delivered  his  opinion  in  the
GEMO SA case,7 which concerns a public service for the collection and disposal of
animal carcasses and slaughterhouse waste. Mr Jacobs proposes that a distinction be
established between two categories of case, based on the nature of the link between

Case C-332/98.
Case C-53/00.
Case C-280/00.
Case C-126/01.

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5. 

6. 

7. 

8. 

9. 

4 
5 
6 
7 

                                                
the  financing  granted  and  the  general  interest  duties  imposed,  and  on  how  clearly
those duties are defined. The cases where the link between, on the one hand, the state
financing  granted  and,  on  the  other,  clearly  defined  general  interest  obligations
imposed  is  direct  and  manifest  should  be  analysed  according  to  the  compensation
approach,  as  taken  in  the  Ferring  judgment.  Such  would  be  the  case  where  the
obligations  and  the  compensation  are  allocated  following  an  open,  transparent  and
non-discriminatory procedure for the award of a public service contract. On the other
hand, cases in which it is not clear that the state  financing is  granted  as  a  quid  pro
quo  for  clearly  defined  general  interest  obligations  must  be  regarded  as  involving
state aid.

10. 

The Commission report to the Laeken European Council was drafted in the light of
the case law that regards compensation  as state  aid.  The latest  developments  show,
however,  that  the  case  law  is  evolving  and  that  it  would  advisable  to  await  the
Court's judgments in Altmark and GEMO before finalising a Community position.

C. EFFECT OF EVOLVING CASE LAW ON FURTHER COMMISSION WORK ON COMPENSATION

11. 

12. 

13. 

14. 

15. 

If,  in  its  forthcoming  judgments,  the  Court  of  Justice  does  not  uphold  Ferring  but
considers  that  compensation  for  public  service  constitutes  state  aid,  the  two-stage
procedure proposed by the Commission in its report to the Laeken European Council
may be continued, i.e. in a first stage, preparation of a Community framework then,
in a second stage, in the light of experience acquired in applying that framework and,
if necessary and guided by experience, preparation  of a  regulation  exempting some
forms  of  aid  for  general  economic  interest  services  from  the  prior  notification
obligation.

If  in  its  forthcoming  rulings  the  Court  of  Justice  upholds  Ferring,  public  service
compensation  will  have  to  be  regarded  as  not  constituting  state  aid  under
Article 87(1)  of  the  Treaty,  provided  it  does  not  exceed  the  amount  necessary  to
allow the public interest services to operate. In that case, compensation would not be
subject to the prior notification obligation provided for in Article 88(3) of the Treaty.

It  must,  however,  be  stressed  that,  in  Ferring,  the  Court  of  Justice  held  that  the
amount of compensation in excess of that required to carry out the public service task
constitutes state aid that may not be authorised under the provisions of Article 86(2)
of the Treaty. The possible compatibility of such aid would have to be examined by
the Commission in accordance with the general Community provisions on state aid.

The Commission therefore considers that, if Ferring is upheld, a text, the legal form
of which would be defined at the appropriate time, would still help to increase legal
certainty, in particular as regards the methods for calculating compensation and the
arrangements  for  selecting  the  firms  to  be  entrusted  with  the  operation  of  general
economic interest services.

As regards substance, it should be noted  that, in any  event, the  legal  debate  on  the
definition of public service compensation in relation to Article 87 of the Treaty does
not  affect  the  smooth  operation  of  services  of  general  economic  interest  since,  if
Ferring is upheld, correctly calculated compensation does not constitute state aid. If
Ferring is not upheld, correctly calculated compensation will constitute state aid, but
it will be compatible with the Treaty under Article 86(2) of the Treaty provided that

4

the development of trade is not affected to an extent contrary to the interests of the
Community.  It  should  be  borne  in  mind  that  if  compensation  constitutes  state  aid
within the meaning of Article 87(1) of the Treaty, it must be notified in advance to
the  Commission  pursuant  to  Article 88(3).  If,  however,  the  compensation  does  not
constitute  state  aid,  the  notification  requirement  imposed  by  Article 88(3)  does  not
apply.

D. CURRENT AND PROJECTED ACTIVITIES WITHIN THE COMMISSION

16. 

17. 

The Commission is working on a draft text based on the lines and options set out in
points 11  to 15  above.  The  Commission  must  thus  take  account  of  the  evolving
nature  of  the  case  law  in  this  field.  It  considers  it  would  be  prudent  to  await  the
forthcoming  Court  of  Justice  judgments  on  public  service  compensation  before
finalising its position on these matters in a Community context.

As announced in the Commission's report to the Laeken European Council, this work
should be carried out in close cooperation with the Member States. To that end, the
Commission  departments  will  be  holding  a  first  meeting  with  experts  from  the
Member States in the autumn of 2002, on the basis of a departmental working paper.
This document will have to be finalised in the light of the evolving case law with a
view to the adoption of a text by the Commission if possible by the end of 2002.

The text will in particular take stock of the relevant case law, in particular as regards
the  concepts of  economic  activity and  effects  on  trade,  and  clarify  the  methods  for
calculating  compensation,  notably  in  connection  with  public  contracts,  in  order  to
avoid excess compensation.

The  text will naturally be without prejudice to the specific provisions applicable  to
the rail, road and inland waterway transport sector.

18. 

As  for  the  question  of  an  exemption  regulation,  the  Commission  will  examine  the
extent to which it is necessary and feasible in accordance with the guidelines set out
in its report to the Laeken European Council.

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