Community framework for State aid in the form of public service compensation
Date: 2005-11-29
Institutions: European Commission
Subjects: State aid, control of State aid, provision of services, services of general interest

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Official Journal of the European Union

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Community framework for State aid in the form of public service compensation

(2005/C 297/04)

1. PURPOSE AND SCOPE

2. CONDITIONS GOVERNING THE COMPATIBILITY OF
PUBLIC SERVICE COMPENSATION THAT CONSTITUTES
STATE AID

1. It is apparent from the case-law of the Court of Justice of
the European Communities (1), that public service compen-
sation does not constitute State aid within the meaning of
Article 87(1) of the EC Treaty if it fulfils certain conditions.
However,
if public service compensation does not meet
these conditions and if the general criteria for the applic-
ability of Article 87(1) are satisfied, such compensation
constitutes State aid.

2. Commission Decision 2005/842/EC of 28 November 2005
on the application of Article 86(2) of the EC 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 (2) lays down the conditions
under which certain types of public service compensation
constitute State aid compatible with Article 86(2) of the EC
Treaty and exempts compensation satisfying those condi-
tions from the prior notification requirement. Public service
compensation which constitutes State aid and does not fall
within the scope of Decision 2005/842/EC on the application
of Article 86(2) of the EC Treaty to State aid in the form of
public
compensation granted to certain undertakings
entrusted with the operation of services of general economic interest
will still be subject to the prior notification requirement.
The purpose of this framework is to spell out the conditions
under which such State aid can be found compatible with
the common market pursuant to Article 86(2).

service

3. This framework is applicable to public service compensation
granted to undertakings in connexion with activities subject
to the rules of the EC Treaty, with the exception of the
transport sector, and the public service broadcasting sector
covered by the Communication from the Commission on
the application of State aid rules to public service broad-
casting (3).

4. The provisions of this framework apply without prejudice
to the stricter specific provisions relating to public service
obligations contained in sectoral Community legislation and
measures.

5. This framework applies without prejudice to the Com-
munity provisions in force in the field of public procure-
ment and competition (in particular Articles 81 and 82 of
the EC Treaty).

(1) Judgments in Case C-280/00 Altmark Trans GmbH and Regierungsprä-
sidium Magdeburg v Nahverkehrsgesellschaft Altmark GmbH (‘Altmark’)
[2003] ECR I-7747 and Joined Cases C-34/01 to C-38/01 Enirisorse
SpA v Ministero delle Finanze [2003] ECR I-14243.

(2) OJ L 312, 29.11.2005, p. 67.
(3) OJ C 320, 15.11.2001, p. 5.

2.1. General provisions

6. In its judgment in Altmark, the Court laid down the condi-
tions under which public service compensation does not
constitute State aid as follows:

‘[…] First, the recipient undertaking must actually have
public service obligations to discharge, and the obliga-
tions must be clearly defined. […].

[…] Second, the parameters on the basis of which the
compensation is calculated must be established in
advance in an objective and transparent manner,
to
avoid it conferring an economic advantage which may
favour the recipient undertaking over competing under-
takings. […] Payment by a Member State of compensa-
tion for the loss incurred by an undertaking without the
parameters of such compensation having been estab-
lished beforehand, where it turns out after the event
that the operation of certain services in connection with
the discharge of public service obligations was not
economically viable,
therefore constitutes a financial
measure which falls within the concept of State aid
within the meaning of Article 87(1) of the Treaty.

[…] Third, 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
[…].

the undertaking which is

to
[…] Fourth, where
discharge public service obligations, in a specific case, is
not chosen pursuant to a public procurement procedure
which would allow for the selection of the tenderer
capable of providing those services at the least cost to
the community, the level of compensation needed must
be determined on the basis of an analysis of the costs
which a typical undertaking, well run and adequately
provided with means of transport so as to be able to
meet the necessary public service requirements, would
have incurred in discharging those obligations, taking
into account
the relevant receipts and a reasonable
profit for discharging the obligations.’

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7. Where these four criteria are met, public service compensa-
tion does not constitute State aid, and Articles 87 and 88 of
the EC Treaty do not apply. If the Member States do not
the general criteria for the
respect
applicability of Article 87(1) of the EC Treaty are met,
public service compensation constitutes State aid.

these criteria and if

8. The Commission considers that at the current stage of devel-
opment of the common market, such State aid may be
declared compatible with the Treaty under Article 86(2) of
the EC Treaty if it is necessary to the operation of the
services of general economic interest and does not affect the
trade to such an extent as would be
development of
contrary to the interests of the Community. The following
conditions should be met in order to achieve such balance.

2.2. Genuine service of general economic interest within

the meaning of Article 86 of the EC Treaty

9.

It is apparent from the case-law of the Court of Justice that
with the exception of the sectors in which there are Com-
munity rules governing the matter, Member States have a
wide margin of discretion regarding the nature of services
that could be classified as being services of general
the Commission's task is to
economic interest. Thus,
ensure that this margin of discretion is applied without
manifest error as regards the definition of services of
general economic interest.

10. It

transpires

that undertakings (1)
from Article 86(2)
entrusted with the operation of
services of general
economic interest are undertakings entrusted with ‘a par-
ticular task’. When defining public service obligations and
in assessing whether those obligations are met by the
undertakings concerned, the Member States are encouraged
to consult widely, with a particular emphasis on users.

basis of free competition. Accordingly, a public service
assignment is necessary in order to define the obligations
of the undertakings in question and of the State. The term
‘State’ covers the central, regional and local authorities.

12. Responsibility for operation of

the service of general
economic interest must be entrusted to the undertaking
concerned by way of one or more official acts, the form of
which may be determined by each Member State. The act
or acts must specify, in particular:

(a) the precise nature and the duration of

the public

service obligations;

(b) the undertakings and territory concerned;

(c) the nature of any exclusive or special rights assigned to

the undertaking;

(d) the parameters

for

calculating,

controlling

and

reviewing the compensation;

(e) the arrangements for avoiding and repaying any over-

compensation.

13. When defining public service obligations and in assessing
whether those obligations are met by the undertakings
concerned, Member States are invited to consult widely,
with particular emphasis on users.

2.3. Need for an instrument specifying the public service
obligations and the methods of calculating compensa-
tion

11. The concept of service of general economic interest within
the meaning of Article 86 of the EC Treaty means that the
undertakings in question have been entrusted with a
task by the State (2). Public authorities remain
special
responsible — with the exception of the sectors in which
there are Community rules governing the matter — for
setting the framework of criteria and conditions for the
provision of services, regardless of the legal status of the
provider and of whether the service is provided on the

(1) ‘Undertaking’

is to be understood as any entity engaged in an
economic activity, regardless of the legal status of the entity and the
way in which it is financed. ‘Public undertaking’ is to be understood
as any undertaking over which the public authorities may exercise
directly or indirectly a dominant influence by virtue of their owner-
ship of it, their financial participation therein, or the rules which
govern it, as defined in Article 2(1)(b) of Commission Directive
80/723/EEC of 25 June 1980 on the transparency of financial rela-
tions between Member States and public undertakings as well as on
financial
transparency within certain undertakings (OJ L 195,
29.7.1980, p. 35. Directive as last amended by Directive 2000/52/
EC, OJ L 193, 29.7.2000, p. 75).

(2) See, in particular, the judgment in Case C-127/73 BRT v SABAM

[1974] ECR-313.

2.4. Amount of compensation

14. The amount of compensation may not exceed what is
necessary to cover the costs incurred in discharging the
public service obligations, taking into account the relevant
receipts and reasonable profit for discharging those obliga-
tions. The amount of compensation includes all the advan-
tages granted by the State or through State resources in
any form whatsoever. The reasonable profit may include
all or some of the productivity gains achieved by the
undertakings concerned during an agreed limited period
the services
without
entrusted to the undertaking by the State.

reducing the level of quality of

15. In any event, compensation must be actually used for the
operation of
the service of general economic interest
concerned. Public service compensation granted for the
operation of a service of general economic interest, but
actually used to operate on other markets is not justified,
and consequently constitutes incompatible State aid. The
undertaking receiving public service compensation may,
however, enjoy a reasonable profit.

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16. The costs to be taken into consideration include all the
costs incurred in the operation of the service of general
economic interest. Where the activities of the undertaking
in question are confined to the service of general economic
interest, all
its costs may be taken into consideration.
Where the undertaking also carries out activities falling
outside the scope of
the service of general economic
interest, only the costs associated with the service of
general economic interest may be taken into consideration.
The costs allocated to the service of general economic
interest may cover all
the variable costs incurred in
providing the service of general economic interest, an
appropriate contribution to fixed costs common to both
the service of general economic interest and other activities
and an adequate return on the own capital assigned to the
service of general economic interest (1). The costs linked
with investments, notably concerning infrastructure, may
be taken into account when necessary for the functioning
of
the service of general economic interest. The costs
linked to any activities outside the scope of the service of
general economic interest must cover all the variable costs,
an appropriate contribution to fixed common costs and an
adequate return on capital. These costs may, under no
circumstances, be imputed to the service of general
economic interest. The calculation of costs must follow
criteria which have previously been defined and be based
on generally accepted cost accounting principles which
must be brought to the knowledge of the Commission in
the context of the notification pursuant to Article 88(3) of
the EC Treaty.

17. The revenue to be taken into account must include at
least the entire revenue earned from the service of general
economic interest.
If the undertaking in question holds
special or exclusive rights linked to a service of general
economic interest that generates profit in excess of the
reasonable profit, or benefits
from other advantages
granted by the State, these must be taken into considera-
tion, irrespective of their classification for the purposes of
Article 87 of the EC Treaty, and are added to its revenue.
The Member State may also decide that
the profits
accruing from other activities outside the scope of the
service of general economic interest must be allocated in
whole or in part to the financing of the service of general
economic interest.

18.

‘Reasonable profit’ should be taken to mean a rate of
return on own capital that takes account of the risk, or
absence of risk, incurred by the undertaking by virtue of
the intervention by the Member State, particularly if the
latter grants exclusive or special rights. This rate must
normally not exceed the average rate for
the sector
concerned in recent years. In sectors where there is no
undertaking comparable to the undertaking entrusted with
the operation of the service of general economic interest, a
comparison may be made with undertakings situated in
other Member States, or if necessary,
in other sectors,
provided that the particular characteristics of each sector

(1) See Joined Cases C-83/01P, C-93/01P and C-94/01P Chronopost SA

[2003] ECR I - 6993.

are taken into account. In determining what amounts to a
reasonable profit, the Member State may introduce incen-
tive criteria relating, among other things, to the quality of
service provided and gains in productive efficiency.

19. When a company carries out activities falling both inside
and outside the scope of the service of general economic
interest, the internal accounts must show separately the
costs and receipts associated with the service of general
economic interest and those associated with other services,
as well as the parameters for allocating costs and revenues.
Where an undertaking is entrusted with the operation of
several services of general economic interest either because
the authority assigning the service of general economic
interest is different or because the nature of the service of
general economic interest is different, the undertaking's
internal accounts must make it possible to ensure that
there is no over-compensation at the level of each service
of general economic interest. These principles are without
prejudice to the provisions of Directive 80/723/EEC in
cases where that Directive applies.

3. OVER-COMPENSATION

to ensure that

20. Member States must check regularly, or arrange for checks
to be made,
there has been no over-
compensation. Since over-compensation is not necessary
for the operation of
the service of general economic
interest, it constitutes incompatible State aid that must be
repaid to the State, and for the future, the parameters for
the calculation of the compensation must be updated.

21. Where the amount of over-compensation does not exceed
10 % of the amount of annual compensation, such over-
compensation may be carried forward to the next year.
Some services of general economic interest may have costs
that vary significantly each year, notably as regards specific
investments. In such cases, exceptionally, over-compensa-
tion in excess of 10 % in certain years may prove necessary
for the operation of
the service of general economic
interest. The specific situation which may justify over-
compensation in excess of 10 % should be explained in the
notification to the Commission. However,
the situation
should be reviewed at intervals determined on the basis of
the situation in each sector which,
in any event, should
not exceed four years. All over-compensation discovered at
the end of that period should be repaid.

22. Any over-compensation may be used to finance another
service of general economic interest operated by the same
undertaking, but such a transfer must be shown in the
undertaking's accounts and be carried out in accordance
with the rules and principles set out in this framework,
notably as regards prior notification The Member States
must ensure that such transfers are subjected to proper
control. The transparency rules laid down in Directive
80/723/EEC apply .

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this framework,

common market. Four years after the date of publication
of
the Commission will undertake an
impact assessment based on factual information and the
results of wide consultations conducted by the Commis-
sion on the basis, notably, of data provided by the Member
States. The results of the impact assessment will be made
available to the European Parliament, the Committee of
Regions and the Economic and Social Committee and to
the Member States.

26. The Commission will apply the provisions of this frame-
work to all aid projects notified to it and will take a deci-
sion on those projects after the framework is published in
the Official Journal, even if the projects were notified prior
to such publication. In the case of non-notified aid, the
Commission will apply:

(a) the provisions of

the aid was
this framework,
granted after publication of the framework in the Offi-
cial Journal;

if

(b) the provisions in force at the time the aid was granted,

in all other cases.

6. APPROPRIATE MEASURES

27. The Commission proposes as appropriate measures for the
purposes of Article 88(1) of the EC Treaty that Member
States bring their existing schemes regarding public service
compensation into line with this framework, within 18
months following its publication in the Official Journal.
Member States should confirm to the Commission within
one month of publication of the framework in the Official
Journal
they agree to the appropriate measures
proposed. In the absence of any reply, the Commission
will take it that the Member State concerned does not
agree.

that

23. The amount of over-compensation cannot remain available
to an undertaking on the ground that it would rank as aid
compatible with the Treaty (for example, environmental
aid, employment aid and aid for small and medium-sized
enterprises). If a Member State wishes to grant such aid,
the prior notification procedure laid down in Article 88(3)
of the EC Treaty should be complied with. Aid may be
disbursed only if it has been authorised by the Commis-
sion. If such aid is compatible with a block exemption
Regulation, the conditions of the relevant block exemption
Regulation must be fulfilled.

4. CONDITIONS AND OBLIGATIONS ATTACHED TO COM-

MISSION DECISIONS

24. According to Article 7(4) of Council Regulation (EC) No
659/1999 of 22 March 1999 laying down detailed rules
for the application of Article 93 of the EC Treaty (1), the
Commission may attach to a positive decision conditions
subject to which an aid may be considered compatible
with the common market, and lay down obligations to
enable compliance with the decision to be monitored. In
the field of services of general economic interest, condi-
tions and obligations may be necessary notably to ensure
that aid granted to the undertakings concerned does not
actually lead to over-compensations. In this context, peri-
odical reports or other obligations may be necessary,
in
the light of the specific situation of each service of general
economic interest.

5. APPLICATION OF THE FRAMEWORK

25. This framework will apply for a period of six years from
the date of its publication in the Official Journal of the Euro-
pean Union. The Commission may, after consulting the
Member States, amend the framework before it expires, for
the
important

linked to the development of

reasons

(1) OJ L 83, 27.3.1999, p. 1. Regulation as amended by the 2003 Act

of Accession.