A competitive selection process whereby only one bidder submits an offer does not conform with the fourth Altmark condition.
Introduction
Commission decision 2025/2453 that was published in the Official Journal of 30 December 2025 approved State aid totalling EUR 853.6 million in the form of public service compensation [PSC] for Corsica Linea and La Méridionale.[1] The PSC was granted by the Transport Board of Corsica [OTC] in the context of five public service contracts concerning maritime services between different ports of Corsica and the port of Marseille for the period 2023-2030. The State aid measure was notified to the Commission but was granted before approval by the Commission. Although it was unlawful, the Commission still found it to be compatible with the internal market. The Commission reached a positive decision on the compatibility of the aid after a formal investigation and also after it took into account a complaint by Corsica Ferries.
The decision is exceptionally long. It spans more than 170 pages over 1159 paragraphs. Therefore, this article is in two parts. This week, Part I reviews the assessment of the Commission with respect to the presence of State aid. The decision contains interesting analysis of why the aid measure did not satisfy the fourth Altmark condition. Next week, Part II will review the assessment with respect to the conformity of the aid with the SGEI Framework.
[1] The full text of the Commission decision can be accessed at:
https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:L_202502453
Part II
Existence of a genuine service of general economic interest
First, the Commission examined whether the PSO concerned a service that was in the general economic interest, as required by Article 106(2) TFEU.
The Commission recalled at the outset that “(729) Member States cannot attach specific public service obligations to services that are already provided or can be provided satisfactorily and under conditions, such as price, objective quality characteristics, continuity and access to the service, consistent with the public interest, as defined by the state, by undertakings operating under normal market conditions.”
Then, it cited “(732) the two judgments of 1 March 2017 … in Cases T-366/13 (‘SNCM I judgment’) and T-454/13 (‘SNCM II judgment’) clarified the obligations incumbent on the Member States as regards the definition of the scope of a public service and the form which public intervention must take in order to ensure the provision of that service. In particular, the General Court confirmed that the scope of a public service contract must meet a public service need characterised by (i) user demand for all or part of the services (ii) not met by market operators in the absence of an obligation laid down by the public authorities to that end, (iii) the Member State having to give preference, to meet this need, to the approach which is least harmful to the essential freedoms for the proper functioning of the internal market.”
“(734) As the General Court held in SNCM II, the characterisation of a public service need in relation to maritime cabotage can result only from demonstrating user demand for a given service which is not satisfied by the market. … a public service need can be assessed through, inter alia, market research, public consultations or calls for projects.”
“(736) It follows, first of all, that if there is no user demand for all or part of the services, there can be no public service need. … Defining a public service need consists in comparing user demand with the commercial supply that operators would propose in the absence of the public service obligation envisaged by a Member State.”
“(737) Similarly, in the absence of a market failure, there can be no public service need. The analysis of market failure is divided into two stages. First of all, it is necessary to examine the services that the market would offer in the absence of the public service obligation envisaged. … Then, it is necessary to examine whether such supply would be sufficient to meet user demand.”
Next, the Commission verified that the French authorities organised several public consultations to gather information on user demand. In addition, they instructed an independent economic consultant to conduct a complementary study of user demand.
The Commission also confirmed the conclusions of the French authorities from the consultations with respect to (i) the lack of substitutability of maritime transport with air transport from the point of view of passengers, (ii) the similarity of the needs of Corsican resident and non-resident passengers, (iii) the geographic substitutability of the port of Marseille with Toulon but not with Nice, and (iv) the non-geographic substitutability of the port of Propriano with the other Corsican ports.
With regard to the existence of market failure, the Commission agreed with the French findings that the market supply was inadequate to meet user demand. That inadequacy was established on the basis of a consultation of operators.
It is debatable whether consultation of operators is a truly objective means of establishing a supply shortfall, given that operators have a strong incentive to persuade the authorities to grant them subsidies. However, it must also be said that the French authorities carried out quantitative analysis of the possible gap between demand and supply. The Commission also assessed the credibility of that quantitative analysis.
Proportionality of the state intervention
As noted earlier, the case law requires not only that the PSC does not exceed the difference between the extra costs and extra revenue, if any, from the delivery of the service, but also that the intervention itself is the least distortionary. In other words, the intervention has to be proportional to the market failure it seeks to remedy or, to put it differently, the scope of the PSO should not go beyond the scope of the market failure.
With respect to the choice of the means of intervention, the Commission noted that, “(949) according to the French authorities, there was no legal instrument other than a public service contract to guarantee a service capable of meeting the public service needs identified by the French authorities”. And that “(950) The Commission believes that such considerations do not constitute a manifest error of assessment”, especially given that a PSO scheme had already been put in place prior to the present measure. “(951) Therefore, the French authorities had no choice but to strengthen the 2019 PSO scheme”.
With respect to the scope of the PSO, the Commission considered that it was “(956) necessary to conclude a public service contract for the maritime transport of medical passengers, towed freight and accompanying drivers … as well as of non-towed freight between the port of Marseille and each of the Corsican ports” and for passengers on the Marseille-Propriano route”.
The Commission concluded that “(957) these obligations result strictly from the market failure identified by the French authorities. The purpose of the PSCs is therefore limited to the sole public service need identified.” The Commission reached a similar conclusion with respect to the obligations concerning arrival and departure times, annual frequencies and minimum carrying capacity obligations for both freight and passenger transport.
Existence of an entrustment specifying the public service obligations and the methods for calculating compensation
As required by Article 106(2) TFEU and the SGEI rules, public authorities must impose the PSO through a formal act of entrustment. It is for Member States to determine the nature of the act of entrustment which can take different forms such as a contract, administrative decision or an act of parliament.
First, the Commission recalled that “(990) According to paragraphs 15 and 16 of the SGEI Framework, responsibility for the operation of the SGEI must be entrusted to the undertaking concerned by means of one or more acts, the form of which may be determined by each Member State. The act or acts must include, in particular:
- the content and duration of the public service obligations;
- the undertaking and, where applicable, the territory concerned;
- the nature of any exclusive or special rights assigned to the undertaking by the granting authority;
- the description of the compensation mechanism and the parameters for calculating, monitoring and reviewing the compensation; and
- the arrangements for avoiding and recovering any overcompensation.”
The Commission confirmed that the measure in question complied with all of the above requirements. More specifically, it noted, among other things, that:
- The duration of the entrustment was seven years plus one optional year.
- Service providers were required to maintain detailed and separate accounts for each route and for SGEI and non-SGEI.
- The providers were selected in compliance with EU public procurement rules.
Amount of compensation
A critical aspect of public funding of SGEI is the correct calculation of the amount of the PSC. The PSC can be calculated ex ante [expected costs] or ex post [actual costs] or according to a combination of the two. “(1068) In the present case, the amount of compensation for the SGEIs is calculated ex ante, using the cost allocation methodology, as indicated in the concession holders’ provisional operating account for each lot, which forms an integral part of the PSCs. The amount of compensation … cannot be increased ex post, but is subject to efficiency incentives … and an ex post check … which provides for a recovery mechanism in case of overcompensation.”
Moreover, “(1069) in the context of the award of the PSCs, the French authorities verified that the financial bids submitted by Corsica Linea and La Méridionale were based on objective and plausible assumptions and complied with the public service obligations, including the minimum capacity in terms of freight and passenger transport and the obligations relating to fares for the transport of freight and passengers.”
With respect to the methodology for calculating the PSC, Commission explained that it “(1072) regards the net avoided cost methodology as the most accurate method for determining the cost of a public service obligation, [however] according to paragraph 27 of the SGEI Framework, there may be cases where the use of that methodology is not feasible or appropriate. In such cases, where duly justified, the Commission can accept alternative methods for calculating the net cost necessary to discharge the public service obligations, such as the methodology based on cost allocation.” As mentioned earlier, in this case the French authorities used the cost allocation methodology.
The Commission observed that “(1074) in accordance with the SGEI Framework, both methods (i.e. the net avoided cost methodology and the cost allocation methodology), if applied correctly, are valid methods for calculating the appropriate amount of compensation. Both methods are based on assumptions of additional or direct revenues and costs associated with the provision of the SGEI and are therefore subject to comparable methodological constraints”.
This statement is not true. If the SGEI provider offers both SEGI and non-SGEI services, the cost allocation methodology allows the sharing of fixed costs, according to standard accounting methodologies. The net avoided cost methodology excludes fixed costs that would have been incurred anyway in the alternative scenario.
But the Commission added that “(1075) the net avoided cost methodology means establishing the costs and revenues of the undertaking in a hypothetical scenario without an SGEI. However, the activities of Corsica Linea and La Méridionale on the routes between Corsica and the mainland depend on the existence of the SGEI. In the context of the operator consultation, they stated that, in the absence of a public service contract, they would not offer any commercial services between Corsica and the French mainland. … the Commission considers, …, that the French authorities did not commit a manifest error in taking account of the statements by Corsica Linea and La Méridionale during the operator consultation. Therefore, no relevant hypothetical scenario could be applied in which the operators would operate on the routes between Corsica and the mainland on a commercial basis without the SGEI, meaning that the net avoided cost methodology could not be used.”
The claims in the previous paragraph that, without the PSO, the ferry companies would not operate any services at all are difficult to believe. But, even if they are true, still those companies have to bear fixed costs regardless of whether they provide those services. The cost allocation methodology allows them to allocate a share of those fixed costs to the routes under PSO. This means that the PSC is larger than otherwise, also given that the Commission had found earlier that the selection process was not truly competitive.
At any rate, the Commission went on to note that “(1077) with regard to the cost allocation methodology, according to paragraphs 28 and 29 of the SGEI Framework, this method involves calculating the net cost necessary to discharge the public service obligations as the difference between the costs and the revenues for a designated provider of fulfilling the public service obligations, as specified and estimated in the entrustment act. The costs to be taken into consideration include all the costs necessary to operate the SGEI.”
“(1078) Paragraph 31 of the SGEI Framework states that, where the undertaking entrusted with an SGEI also carries out activities falling outside the scope of the SGEI, the costs to be taken into consideration may cover all the direct costs necessary to discharge the SGEI and an appropriate contribution to the indirect costs common to both the SGEI and other activities. The costs linked to any activities outside the scope of the SGEI must include all the direct costs and an appropriate contribution to the common costs. To determine the appropriate contribution to the common costs, market prices for the use of the resources, where available, can be taken as a benchmark. In the absence of such market prices, the appropriate contribution to the common costs can be determined by reference to the level of reasonable profit the undertaking is expected to make on the activities falling outside the scope of the SGEI or by other methodologies where more appropriate.”
“(1079) In the present case, the public service operators also carry out commercial activities. Consequently, in accordance with paragraph 31 of the SGEI Framework, it is necessary to verify that all the direct costs linked to the SGEI as well as an appropriate contribution to the indirect common costs are taken into account when calculating the amount of compensation.”
“(1081) The direct costs of passenger and freight activities are allocated to the SGEI on the basis of the number of passengers or the volume of freight (in LM) that the concession holders are required to guarantee under the capacity obligations provided for by the PSCs, while the common costs, which account for the majority of the concession holders’ operating costs, are allocated to the SGEI in proportion to the capacity (expressed in m3 of volume) reserved on the vessel for the SGEI activities. This approach results in an approximate share of [60-75] % of the total costs being allocated to the SGEI on all routes, with the exception of the public service between Marseille and Propriano, where 100 % of the total costs are allocated to the SGEI.”
In order to prevent excessive allocation of common costs to the SGEI and the PSC, the Commission checked the allocation methodology. More importantly, it also “(1088) verified whether the allocation of common costs could also be considered appropriate by reference to the level of reasonable profit that the undertaking would have to achieve on activities outside the scope of the SGEI, i.e. commercial activities. On the basis of the provisional operating accounts for each lot, the Commission considers that the expected profit on commercial services does not exceed a reasonable profit. In particular, the expected level of profit on commercial services (measured as operating margin) is relatively limited (on average […] %) and does not exceed the market benchmark of 7.8 %, which was established by the French authorities on the basis of an independent study analysing the profitability of a sample of comparable shipping companies”.
Reasonable profit
SGEI providers are allowed to make reasonable profit which is defined as the rate of return on capital that would be required by them in order to provide the SGEI, taking into account the level of risk. The level of risk depends on the sector concerned, the type of service and the characteristics of the compensation mechanism.
In this case the “(1100) reasonable profit corresponds to the ratio of current earnings before tax and interest to turnover on SGEI activities including compensation, … For each route, the reasonable profit must not exceed 2.13% throughout the duration of the contract.”
“(1101) This maximum profit is derived from the financial bids proposed by the PSC contractors and was compared by the French authorities with the average operating margin of other shipping companies in Europe. The contractual provisions relating to reasonable profit also stipulate that the maximum rate of profit must not be revised upwards under any circumstances, except in the event of market disruption and subject to an additional independent study justifying a revision of this rate.”
“(1103) The French authorities explained that, in the present case, it is not possible to calculate the rate of return on capital, which is defined in the SGEI Framework as the internal rate of return that the company makes on its invested capital over the lifetime of the project, for shipping companies that lease or charter vessels, because there is no initial investment for the specific services under the PSCs.”
The Commission found the explanation convincing and the rate of 2.13% sufficiently low.
Efficiency incentives
“(1109) The efficiency mechanism applied to the compensation for operating costs is set out in … the PSCs. In practice, the efficiency mechanism is included in the indexation of the compensation for operating costs, in so far as the amount of compensation increases less than real inflation. In addition, … the PSCs requires that the actual amount of compensation be paid on the basis of the annual report submitted by the public service providers to the OTC. In accordance with … the PSCs, the annual report must include the updated operating account in the same format as the provisional operating account, taking into account the indexation of costs, accompanied by a note comparing and explaining the differences between actual and projected revenue and costs. According to the French authorities, the audit is carried out by an external auditor, selected by the OTC, following a tendering procedure. The actual amount of compensation is therefore based on a transparent ex post assessment carried out by an entity independent of the SGEI provider.”
Overcompensation
Overcompensation is never allowed. Any amount of aid that exceeds the difference between costs and revenue cannot be found to be compatible with the internal market.
“(1119) The French authorities will carry out an annual ex post check of the amount of compensation paid to the contractors to ensure that there is no overcompensation that may result from the actual use of the vessels.”
Conclusions
In the end the Commission found that the measure in question complied with all of the requirements of the SGEI Framework. Consequently, it authorised the aid.
