Opinion of the European Economic and Social Committee on the ‘Draft Commission decision on the application of Article 86 of the Treaty to State aid in the form of public service compensation granted to certain undertakings entrusted with the operation of services of general economic interest’
Date: 2004-12-15
Institutions: European Economic and Social Committee
Subjects: State aid, control of State aid, provision of services, services of general interest

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Opinion of the European Economic and Social Committee on the ‘Draft Commission decision on
the application of Article 86 of the Treaty to State aid in the form of public service compensation
granted to certain undertakings entrusted with the operation of services of general economic
interest’ and the ‘Draft Commission Directive amending Directive 80/723/EEC on the transparency
of financial relations between Member States and public undertakings’

(2005/C 157/06)

On 19 March 2004, the Commission decided to consult the European Economic and Social Committee,
under Article 262 of the Treaty establishing the European Community, on the abovementioned drafts.

The Section for Transport, Energy, Infrastructure and the Information Society, which was responsible for
preparing the Committee's work on the subject, adopted its opinion on 5 October 2004. The rapporteur
was Mr Hernández Bataller and the co-rapporteur was Mr Burani.

At its 413th plenary session of 15 and 16 December 2004 (meeting of 15 December), the European
Economic and Social Committee adopted the following opinion by 140 votes with nine abstentions.

1. Introduction

1.1
Article 3(g) of the EC Treaty stipulates that the activities
of the Community shall include ‘a system ensuring that compe-
tition in the internal market is not distorted’. Maintaining effec-
tive control so as to guarantee that the aid granted by the
Member States does not distort competition is an essential part
of this system.

1.2
Several successive European Councils have confirmed
the need to monitor State aid. In its conclusions of 24 March
2001, the Stockholm European Council indicated that ‘the level
of State aids in the European Union must be reduced and the
system made more transparent … To that effect the Member
States should demonstrate a downward trend in State aid in
relation to GDP by 2003, taking into account the need to
redirect aid towards horizontal objectives of common interest,
including cohesion objectives.’

1.3
The European Commission has presented a proposal for
regulating State aid in the form of public service compensation
granted to certain undertakings entrusted with the operation of
services of general economic interest. This proposal comprises
a decision and an ad hoc Community framework, as outlined
in the amendment to Directive 80/723/EEC concerning the
transparency of financial relations between Member States and
public undertakings (1).

However,

1.4.1
the proposal does distinguish between
several different categories of compensation. This limits its
application. For example, those type of compensation that fulfil
the four criteria set out by the Court of Justice of the European
Communities in its Altmark (2) and Enirisorse (3)
rulings
remain outside the new provisions. These stipulate that: the
company receiving the aid must also be entrusted with dischar-
ging the corresponding, clearly defined public service obliga-
tion; the parameters used to calculate the compensation must
be established in advance in an objective and transparent
manner; the compensation must not exceed the amount needed
to cover all or part of the costs incurred in discharging the
public service obligation, taking account of all relevant receipts
lastly, where the company
and a reasonable profit; and,
entrusted with the fulfilment of
the obligations was not
commissioned according to the best possible procedures for
public procurement contracts, the level of compensation is
calculated on the basis of an analysis of the costs which an
average, well-managed and suitably equipped company would
have incurred in discharging those obligations, plus a reason-
able profit. For the Court of Justice this compensation does not
fall under the Treaty provisions on State aid.

1.4.2
Similarly, the ‘de minimis’ economic aid provided in
accordance with Commission Regulation (EC) No. 69-2001 of
12 January 2001 (4) as well as all State aid provided to certain
public service broadcasters (5), are excluded here.

The aim of this proposal is to apply the rules contained
1.4
in the Treaty, and in particular those governing competition, to
the compensation paid by the Member States for specific
services of general economic interest (SGEI) to cover, in full or
in part, the costs that arise from these public service obliga-
tions.

(1) Draft Directive amending Directive 2000/52/EC (OJ L 193 of

29.7.2000, p. 75).

(2) Ruling of 24 July 2003 in case C-280/00, publication pending in

case reports.

(3) Ruling of 27 November 2003 in cases C-34/01 to C-38/01, publica-

tion pending in case reports.

(4) OJ L 10 of 13.1.2001, p. 30. This is economic aid provided to
companies that does not exceed EUR 100 000 for a period of three
years. It is important to note that this Regulation does not apply to
the transport sectors and activities related to the processing or
marketing of the products listed under Annex I to the Treaty.

(5) Specifically those defined under points 49 to 56 of the Communica-
tion from the Commission published in OJ C 320 of 15.11.2001.

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Furthermore,

1.4.3
in accordance with the provisions of
Article 73 EC Treaty and Council Regulations (EEC) No.
1191/69 (1) and 1107/70 (2), some types of aid granted within
the land transport sector (rail, road and waterway) and in par-
ticular to companies that provide exclusively urban, suburban
and regional transport services, are also excluded from the
scope of the proposal.

1.4.4
Lastly, on the basis of points raised by the European
Commission itself with respect to the specific objectives of the
Common Transport Policy, compensation for public services in
the air and maritime transport sectors are also excluded (3),
with the exception of public service maritime links to islands
on which annual traffic does not exceed 100 000 passengers.

1.4.5
Consequently, the scope of the proposal, in accord-
ance with Article 1 of the decision, covers, in addition to the
aforementioned island connection services, compensation for
public services in the form of State aid granted to undertakings
that work in all the sectors governed by the EC Treaty and
which satisfy the following conditions:

1) An annual turnover before tax, all activities included, of less
than a ‘threshold to be determined’ (4) for the two financial
years preceding that in which the SGEI was assigned and
with annual compensation for the service in question of less
than ‘a threshold to be determined’ (5) and which, for credit
institutions, is replaced by a ‘threshold to be determined’ in
terms of balance-sheet total;

2) Public service compensation granted to hospitals that carry

out activities involving SGEI;

tition on the one hand and State aid of a more modest nature
on the other.

The proposal sets even greater store by the need for
1.4.7
transparency in terms of the financial relations between the
Member States and public undertakings or undertakings that
are entrusted with public service obligations, modifying current
Directive 80/723/EEC by introducing a new definition of
‘undertakings required to maintain separate accounts’ which,
irrespective of the legal classification of public service compen-
sation, covers undertakings that maintain separate accounts
and receive such compensation and which also carry out activ-
ities that are not SGEI.

Lastly,

the provisions of

1.4.8
the proposal will apply
without prejudice to the more stringent and specific provisions
concerning public service obligations contained in sector-
specific Community legislation and in the current Community
provisions governing public procurement contracts.

1.4.9
At all events, the scope of the proposal is limited to
services that constitute services of general economic interest
within the meaning of Article 86(2) of the EC Treaty, although
no definition of that concept is provided.

3) Public service compensation granted to social housing

undertakings that carry out activities involving SGEI.

1.4.10
Some of the other provisions of the proposal, such
as those governing compatibility and exemption from notifica-
tion, the requirements placed on public service missions and
how compensation is calculated, are more concrete.

1.4.6
The application of the decision to these areas does not
alter the compatibility of State aid with Article 86(2) of the EC
Treaty provided specific conditions are met. Thus the Commis-
sion proposes making a distinction between State aid which
involves significant amounts and could severely distort compe-

(1) OJ L 156, of 28.6.1969. Last amended by Regulation (EEC) No.

1893/91 (OJ L 169 of 29.6.1991, p. 1).

(2) OJ L 130, of 15.6.1970. Last amended by Regulation (EC) No.

543/97 (OJ L 84 of 26.3.1997, p. 6).

(3) Rules applicable to these sectors are provided in Council Regulation
(EEC) No. 2408/92 of 23 July 1992 (OJ L 240 of 24.8.1992, p. 8),
on access for Community air carriers to intra-Community air routes,
last amended by Regulation (EC) No. 1882/2003 of the European
Parliament and the Council (OJ L 284 of 31.10.2003, p. 1), and in
Council Regulation (EEC) No. 3577/92 of 7 December 1992 (OJ L
364 of 12.12.1992, p. 7) on maritime cabotage.

(4) The relevant thresholds will be set once the results of the consulta-
tion launched by the Commission in relation to the proposal have
been obtained.

(5) This last threshold will be fixed by taking an annual average repre-
senting the present value of the compensation granted during the
term of the contract or over a period of five years.

1.4.11
Thus Article 2 of the draft decision stipulates that
public service compensation which meets the necessary condi-
tions is compatible with the common market and shall be
exempt from the obligation of prior notification provided for
in Treaty Article 88(3).

1.4.12
the public
Under Article 4 of the draft decision,
service task shall be assigned by way of an official act (legis-
lative or regulatory instrument or contract) specifying the
precise nature of the public service obligations, and the under-
takings and territory concerned.

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1.4.13
This last point is dealt with particularly briefly both
in Article 5 of the decision and points 12 to 23 of the Com-
munity framework. Basically,
the amount of compensation
must not exceed the costs of discharging the public service
obligation,
the relevant receipts and a
reasonable profit for discharging these obligations.

taking into account

application of the rules governing State aid are shrouded in
legal uncertainty, despite the additional
legal criteria for the
discharge of public service obligations set out in the case law
of the Court of Justice, namely in its Altmark and Enirisorse
rulings.

1.4.14
The costs tied to the SGEI may cover all the variable
costs incurred in providing the SGEI, an appropriate contribu-
tion to fixed costs and an adequate return on capital insofar as
it is assigned to the SGEI (1). The costs associated with any
activities outside the scope of the SGEI may under no circum-
stances be imputed to the SGEI. As a general rule, the calcula-
tion of costs must be ‘based on generally accepted cost
accounting principles’.

The receipts to be taken into account must include at
1.4.15
least the entire revenue earned from the SGEI.
‘Reasonable
profit’ meanwhile is taken to mean a rate of return of capital
that takes account of the risk, or absence of risk, incurred by
the undertaking by virtue of the intervention by the Member
State (2).

Finally,

1.4.16
the Member States must conduct regular
checks to ensure that the compensation provided is not exces-
sive, i.e. that it does not go beyond that necessary to allow the
provision of the SGEI, as such State aid would be incompatible
with the common market. Nevertheless, provided the excess
compensation does not amount to any more than 10 % of the
annual
can be deducted the
following year. The costs of some SGEI vary to such an extent
throughout the year that excess compensation of more than
10 % is necessary in order to ensure they can be provided. In
such cases, the Member State must draw up a periodic sector-
specific balance (not exceeding 3 years) following which the
excess compensation is reimbursed.

compensation provided,

it

2. General comments

2.1
This proposal follows on from the undertaking made by
the Commission to the Laeken European Council in December
2001 to improve legal certainty in the field of public service
compensation and, in more concrete terms, to establish a Com-
munity framework for State aid granted to undertakings
entrusted with the management of SGEI (3).

2.2
There is no doubt that the rules applicable to the finan-
cing of services of general interest and, more specifically, the

(1) See the ruling of the Court of Justice of 3 July 2003, CHRONO-
POST, as. ac. C-83/01P, C-93/01P and C-94/01P, publication
pending in case reports.

(2) According to Article 5(4) of the Decision, any exclusive or special
rights granted to an undertaking are of particular importance in
determining its reasonable profit and the Member State concerned
may introduce incentive criteria relating, in particular, to the quality
of the service provided.
(3) COM(2001) 598 final.

2.3
Nevertheless, there is a need to clarify these criteria,
more specifically the methods used to calculate costs (in terms
of transparency and the parameters used) and the nature of
those public service obligations for which compensation is
provided (4).

the proposal

In this respect

2.4
is especially needed for
economic operators in that, until the regulatory framework
enters into force, any State aid received by these operators as
providers of a service of general economic interest which has
not been notified to the Commission,
the
amount involved, may be illegal.

irrespective of

2.5
Hence they would not be protected against any action
which challenged its legality before the courts of the Member
States.

This need for clarification is all the more urgent given
2.6
that
in two particular areas –financing and the award of
contracts — the Member States' discretion to define and design
SGEI missions tends to clash with a series of basic rules of
Community law.

2.7
The Member States enjoy a wide margin of discretion
when deciding whether and in what way to finance the provi-
sion of services of general economic interest. In the absence of
Community harmonisation, the main limit to this discretion is
the requirement
that such financing mechanisms must not
distort competition (5), without prejudice to the discharge of
their social tasks and with full respect for the principle of subsi-
diarity which is a binding legal requirement under the Constitu-
tion that both the Union and the Member States must respect,
and which must not lead to the Community acquis being called
into question.

2.8
The Commission should examine how to explain clearly
why each of its proposals is being presented (legal base, neces-
sity, proportionality) and why — in the interests of good prac-
tice and conformity with the protocol on the application of the
principles of subsidiarity and proportionality — it should be at
Community level (subsidiarity criteria, qualitative and/or quan-
titative indicators).

(4) European Commission staff working paper ‘Report on the Public
Consultation on the Green Paper on Services of General Interest’,
Brussels, 29.3.2004, SEC (2004) 326, pp. 27-28.

(5) Therefore, the Member States can apply various financing mechan-
isms including ‘direct financial support through the State budget,
special or exclusive rights, contributions by market participants,
tariff averaging and solidarity-based financing’, COM (2004) 374, p.
13.

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These

favour

support

and other

2.9
the
reasons
Commission proposal which, in essence, urges the government
authorities of the Member States to comply with some basic
requirements, such as to ensure the procedures used to award
public contracts are transparent and to monitor any potential
damage to free competition caused by companies not fulfilling
their SGEI mission effectively (1).

for

2.10
The EESC welcomes a legislative proposal which serves
to extend the criteria advanced by the Court of Justice in order
to remove public service compensation from the Treaty provi-
sions governing State aid.

3. Specific comments

Having analysed the proposal, it is worth raising some

3.1
questions as to its content and layout.

The three main objectives of

3.2
the proposal can be
summed up as follows: (i) to ensure that State aid of a relatively
limited amount granted to undertakings entrusted with dischar-
ging an SGEI is compatible with the common market; (ii) to
enhance legal certainty regarding compensation for provision
of SGEI exceeding that amount by means of a Community
framework establishing criteria for evaluating the compensa-
tion;
to establish the criteria according to which such
compensation can be considered to be State aid.

(iii)

3.5 Moreover, some of the legal concepts referred to in the
proposal provisions are imprecise. For example,
it stipulates
that the costs attributed to SGEI must be calculated ‘based on
generally accepted cost accounting principles’. Again, the scope
of the decision is said to apply ‘only to services that constitute
services of general economic interest within the meaning of
Article 86(2) of the Treaty’. And yet, as mentioned above, this
notion is defined neither in the Treaties nor in secondary Com-
munity legislation.

In the Committee's view, all island cabotage should, like
3.6
other modes of transport, be excluded from the scope of the
proposal unless the Commission can adequately justify its
inclusion.

3.7
Consequently, and in view of the markedly technical
and instrumental nature of the objectives of the proposal, it
would seem reasonable to ask the Commission to clarify the
notion of SGEI so as to distinguish it
from other similar
concepts, such as public services and services of general
interest, which prevail
in the constitutional traditions of the
Member States (2). Indeed, the general terms currently used by
the Commission to describe SGEI fail to cover some activities
that are of utmost social
including the funding of
interest,
research into improving health and consumer protection (3).

3.8
In this respect it should be stressed that, faced with the
need for legal clarification at supranational level of the concepts
of services of general interest and services of general economic
interest, there is not such a compelling need to define social
services at the same level for at least two reasons:
(i) such
services would only fall within the Community remit if they
involved economic profit for the supplier and (ii) if this were
the case they would automatically fall under one or other of
the abovementioned concepts.

The EESC considers

3.3
the proposal's provisions
that
should be extended to cover all public service compensation
which is clearly defined and regular and corresponds to, but
does not exceed, the additional costs incurred and where the
beneficiary undertaking keeps separate accounts; all subject to a
posteriori control and sanction by the Commission and Court
of Justice.

Furthermore, the proposal does not address the classifi-
3.9
cation of certain methods of financing of SGEI, such as soli-
darity-based financing, given the problems of access to certain
national markets (insurance is one example), or lay down
criteria for assessing best practice at Community level, which
would offer the particular advantage of clarifying the legality of
the practice known as ‘cream-skimming’ (4).

However, the scope of application of the proposal is not
3.4
clear. In the case of the decision especially,
it is determined
according to disparate criteria which either exclude specific
situations or sectors (see 1.4.2-1.4.4 above) or delimit these in
a general manner using quantitative rather than qualitative
criteria (see 1.4.5 above).

(1) See European Parliament report on the Green Paper on services of
interest, 17.12.2003, doc. A5-0484/2003 Final, EP
general
323.188, pp. 11-13, and the Committee of the Regions ‘Opinion on
the Green Paper on services of general
interest’, DOC 73 of
23.3.2004, p. 7 and in particular pp. 10-11.

3.10
The proposal applies the same criteria for compliance
with the basic framework of rules governing the internal
market to all sectors without distinction and without consid-
ering the different responses of the operators.

(2) This issue has been raised on several occasions by the European
Economic and Social Committee and most recently in its opinion
on the Green Paper on Services of General Interest of 11 December
2003, OJ C 80 of 30.3.2004, p. 66.

(3) See Annex 1 (‘Definition of Terms’) to the White Paper on services

of general interest, COM(2004) 374, cit. p. 23.

(4) The averaging of tariffs and cross-financing between profit- and
loss-making services could be called into question above all in the
liberalised sectors.

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3.11
Hence it applies the principle of equality of treatment
wrongly to very different situations. The supply of drinking
water, urban drainage and waste recycling are treated in the
same way as the supply of electricity or gas. And yet these
sectors neither operate according to the same conditions (in
terms of environment protection,
infrastructures and so on),
nor on comparable markets: some are restricted to the local
and regional
level, whilst others are based at the national,
trans-national and even international level. Applying the same
supranational financing rules to all of these sectors is inap-
propriate.

Similarly, the appeal of SGEI for operators is not the
3.12
same across the different sectors. Some services require specific
infrastructures and equipment which,
logically, results in an
increase in the costs incurred and in some cases failure to
attract private investment due to a poor return in the short and
medium terms.

3.13
In addition, the proposal, the legal basis of which is
Article 86(3) EC Treaty, perpetuates the current asymmetry in
the Treaties between the regulation of competition law, which
interprets SGEI as derogations from Article 86(2) EC Treaty,
and the positive recognition of SGEI in Article 16 EC Treaty
and Article 36 of the Charter of Fundamental Rights. This
approach diminishes somewhat
the essential value of SGEI
both in EU policymaking — social and territorial cohesion —
and as a guarantee for the citizens of the Union of basic rights
such as freedom of movement.

The problems raised by the proposal relate to the very
3.14
basis of the legislative strategy employed by the Commission,
at the very least in terms of its instrumental aims and regula-
tory effectiveness. With respect to the former, the approach on
which the proposal
is based calls to mind the well-known
typology of exemption by category which is widely used in the
Community legal
system for competition on the internal
market. By lumping together diverse situations in this way,

Brussels, 15 December 2004.

there is a risk of a hidden form of harmonisation which seeks,
through regulation, a one-size-fits-all solution to the complex
realities of SGEI, when what is really needed is a more detailed
and further-reaching legal approach.

3.15
This remark leads us to consider the issue of regulatory
effectiveness. In the absence of a prior proposal for a frame-
work directive, as recommended by the Committee (1), which
would consolidate the basic regulatory objectives and principles
of SGEI as well as clarifying (a) the concepts used by the Trea-
ties and sector-specific directives and (b)
the conditions
governing the different operators (2), this proposal does not
guarantee the level of legal certainty necessary for this sector of
the internal market.

3.16 Without any such aforementioned legal infrastructure,
a number of conflicts will undoubtedly arise in terms of appli-
cation and interpretation, leading potentially to a breakdown of
the competent legal bodies. This in turn could result in infrin-
gements of the subsidiarity principle which,
in the current
context of the integration process, has achieved a new level of
protection as demonstrated in Article I-9 of
the ad-hoc
protocol appended to the Draft Treaty establishing a Constitu-
tion for Europe, drawn up by the European Convention.

The EESC is keen to ensure that

3.17
the process of
strengthening economic, social and territorial cohesion is not
hampered by the introduction of the planned framework. State
those
aid which promotes the economic development of
regions in which the standard of living is abnormally low or
the unemployment rate is seriously high, as well as aid which
promotes the development of specific activities or of specific
reoriented
economic regions, must be maintained, albeit
towards the objectives of cohesion, as established in the Treaty.

3.18
It may indeed be necessary to adopt a new approach
to State aid policy at Community level, in particular given that
the relationship between the Commission and regional and/or
local authorities, with whom the Commission is required to
deal directly for all matters relating to the aid they dispense,
may well become increasingly complex.

The President

of the European Economic and Social Committee

Anne-Marie SIGMUND

(1) OJ C 241 of 7.10.2002, point 4.4.
(2) See points 3.1 to 3.5 of the opinion of the European Economic and

Social Committee of 11 December 2003; cit. supra.