Assignment of Public Service Obligations

The compensation for public service obligations may include reasonable profit and incentives for cost reduction.

Introduction

Member States have discretion to define services they consider to be in the general economic interest [SGEI]. However, they need to justify that definition. The Court of Justice has ruled on numerous occasions that an SGEI has “special characteristics” that set it apart from services provided by the market. In other words, an SGEI is a service that fills a gap in the market. The identification of a gap is a more or less objective exercise. By contrast, it is by deciding how to fill that gap that Member States exercise that discretion. For example, if the market does not provide for child-care facilities in some remote region, it is for the state to determine whether that gap can be filled with one facility per 5 or 10 sq.km., or whether the facility should operate from 8:00 to 17:00 or 7:00 to 19:00. But, despite the discretion they enjoy, on this issue too Member State must be careful, as recent case law has indicated that the scope of the SGEI must correspond to the real needs of citizens.

Once Member States decide to impose a public service obligation, they must also determine the duration of that obligation. The duration must not extend beyond the period that is necessary for the amortisation of the most significant asset that is used in the delivery of the SGEI. Commission Decision 2012/21, that exempts Member States from the obligation to notify SGEI aid, lays down a 10-year limit, but allows for longer periods if necessary.

Then the most difficult task is the calculation of the amount of compensation that enables the provider to offer the service without making excessive profit. This normally requires a comparison between the costs and revenue with the obligation and the costs and revenue without the obligation. The art and science of assigning a public service obligation is to establish a credible “counterfactual” which describes the service [in terms of quality, price, area, frequency, etc] that the provider would choose to offer in the absence of the obligation.

The recent Commission assessment, in case SA.62486, of Belgium’s prolongation of the 6th Management Contract between the Belgian authorities and “bpost” – the universal postal service provider – in which the Belgian state owns a majority stake in bpost [51.04%].

The decision in case SA.62486 offers useful guidance on the assignment of public services obligations, the duration of the assignment and the calculation of the compensation.[1] [The extension of the postal concession for the period 2021-2022 was assessed in a separate decision, SA.56448, which is not yet in the public domain.]

The “6th Management Contract” refers to the contract concluded between the Belgian authorities and bpost regarding the entrustment of several SGEIs for the period 2016 to 2020. The object of the Commission decision was the prolongation of the Contract by one year to 31 December 2021. Afterwards, the Belgian authorities would negotiate and conclude a new management contract with bpost in 2021, so that it can enter into force on 1 January 2022. The Management Contract itself was approved by the Commission in its decision of 3 June 2016 in case SA.42663 [“the 2016 Decision”], under the EU Framework for State aid in the form of public service compensation.

What is most interesting in this decision is that it shows that Member States may include in the public service obligation items for which they offer no compensation. Naturally, the provider must cover their costs. It does it with profit from other services or by keeping their costs as low as possible.

Scope of the SGEIs

bpost was entrusted with so-called “compensated” and “non-compensated” SGEIs.

SGEIs for which bpost was compensated:

Maintenance of the Retail Network: bpost is required to maintain a retail network which is denser and more widespread geographically than what would be commercially viable. In addition, post offices run by bpost must provide a complete range of services to the customer such as cash at counter services.

Day to day SGEIs: These include home payment (delivery) of retirement and survivors’ pensions and disabled persons’ allowances.

The public service obligation also referred to ad hoc SGEIs establishing a social role for the postman, delivery of addressed or unaddressed election printed items, delivery at a special price of postal items sent by associations, delivery of letter post items that fall within the freepost system, and the printing, sale, reimbursement, replacement and exchange of fishing permits.

SGEIs for which bpost was not compensated:

Universal Service Obligations [USO]: The USO were entrusted to bpost in 2010 for a period of eight years ending on 31 December 2018. In 2019, bpost was entrusted the same USO for another five years.

Ad hoc SGEIs: Certain ad hoc SGEIs do not fall within the compensation system established in the 6thManagement Contract such as certain types of postal services for the benefit of the elderly, dissemination of information to the public, financial and administrative processing of fines and the sale of stamps and other postal items.

Compensation

bpost received advanced payments for the SGEIs calculated on the basis of the Net Avoided Cost Methodology [NAC]. At the end of each calendar year, there was an ex post verification of bpost’s financial accounts in order to ensure that there was no overcompensation. Furthermore, the exact compensation amounts were subject to a cap.

Advance payments: These payments were made in advance, in two instalments, so as to guarantee the continuity of services.

Calculation of the compensation for the SGEIs

Retail Network and day-to-day SGEIs: The compensation was equal to:

  • bpost’s NAC, including a reasonable profit;
  • plus a 67% share of efficiency gains [efficiency gains are the actual reduction of bpost’s total costs compared to the costs incurred in the previous year];
  • or minus a 67% share of efficiency losses [efficiency losses are the actual increase of bpost’s total costs compared to the costs incurred in the previous year];
  • minus any penalties for poor performance.

Ad hoc SGEIs: The compensation was calculated on the basis of the NAC methodology.



Assessment of the compatibility of the aid with the internal market

The Commission assessed the compensation on the basis of the SGEI Framework according to the following criteria.

  1. Genuine service of general economic interest referred to in Article 106 TFEU and public consultation

The Commission, first, recalled that Member States have discretion to define what they consider as an SGEI and that the Commission’s competence is limited to checking that Member States do not commit a manifest error in defining a service as an SGEI. [paragraph 64 of the decision]

“(65) In that regard, the Union Courts have ruled that there are certain minimum criteria common to every SGEI and that the inability of a Member State to demonstrate that a particular service fulfils those criteria constitutes a manifest error in defining this mission as an SGEI. According to the Union Courts, those criteria are the presence of an act of the public authority entrusting the operators in question with an SGEI and the universal and compulsory nature of that service.”

At this and several other points in the decision the Commission cited T-289/03, BUPA v Commission so it is worth recalling what exactly the General Court said: “(172) Even though the Member State has a wide discretion when determining what it regards as an SGEI, that does not mean that it is not required, when it relies on the existence of and the need to protect an SGEI mission, to ensure that that mission satisfies certain minimum criteria common to every SGEI mission within the meaning of the EC Treaty, as explained in the case-law, and to demonstrate that those criteria are indeed satisfied in the particular case. These are, notably, the presence of an act of the public authority entrusting the operators in question with an SGEI mission and the universal and compulsory nature of that mission. Conversely, the lack of proof by the Member State that those criteria are satisfied, or failure on its part to observe them, may constitute a manifest error of assessment, in which case the Commission is required to make a finding to that effect, failing which the Commission itself makes a manifest error. Furthermore, it follows from the case-law on Article [106(2) TFEU] that the Member State must indicate the reasons why it considers that the service in question, because of its specific nature, deserves to be characterised as an SGEI and to be distinguished from other economic activities”.

In other words, the minimum requirements that must be met by Member States are the following:

  1. Reasons for designating a service as an SGEI [e.g. needs of citizens].
  2. Characteristics that distinguish that SGEI from other, even similar, services [i.e. qualitative and quantitative indicators, affordability, geographic coverage, etc].
  3. An act of entrustment that identifies the providers of the SGEI.
  4. Terms of entrustment that establish a universal and compulsory mission.

However, the Commission has added certain other criteria that elaborate the above minimum requirements. The first is evidence that the market cannot provide the SGEI at all or as defined by the state. It is in this sense that the “special characteristics” of the SGEI set it apart from other services provided by the market.

“(66) The Commission has further explained in its 2012 SGEI Communication that it considers it inappropriate to attach specific public service obligations to an activity which is already provided or can be provided for 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 conditions28. The Commission’s assessment in this regard is also limited to checking that the Member State has not made a manifest error.”

Furthermore, “(67) paragraph 14 of the 2012 SGEI Framework provides that ‘Member States should show that they have given proper consideration to the public service needs supported by way of a public consultation or other appropriate instruments to take the interests of users and providers into account.’”

In the case of bpost, the Commission found that the SGEI was correctly defined.

  1. Need for an entrustment act specifying the public service obligations and the methods for calculating compensation

The Commission found that there was a public act of entrustment assigning a well-defined mission to bpost and laying down the calculation methodology.

  1. Duration of the period of entrustment

The Commission considered that “(86) to deliver these SGEIs, bpost possesses several important groups of assets. The most important ones are the retail network buildings … and sorting centres … The depreciation period for these assets ranges between 4 to 30 years. As the notification concerns a prolongation of the existing measure for one year, the Commission therefore considers that no concerns are raised in relation to the duration, as the prolongation does not exceed the period required for the depreciation of the most significant assets needed to provide the SGEIs.”

  1. Compliance with Directive 2006/111/EC

The financial relationships between state-owned SGEI providers and public authorities must be transparent. The Commission found that that was the case with bpost.

  1. Compliance with EU Public Procurement Rules

The Commission first noted that “(93) the Belgian State considers that the sole provider exemption should be applicable in the present case. They argue that the same factors that led the Commission to consider that the abovementioned SGEIs entrusted to bpost were covered by the “sole provider exemption” in the 2016 Decision are still valid today.”

Under EU public procurement rules, Member States are allowed to award a contract without competitive selection when there is only one provider possessing the necessary infrastructure for the delivery of a service.

The Commission went on to point out that “(94) in recital (289) of its 2016 Decision, the Commission considered, based on its analysis in recitals (286) to (288), that all compensated SGEIs delivered through the postal distribution and retail networks … can be covered by the sole provider exemption and be entrusted through a negotiated procedure without prior publication according to Article 32(2)(b) of Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on Public Procurement.”

  1. Absence of discrimination

According to paragraph 20 of the 2012 SGEI Framework, “[w]here an authority assigns the provision of the same SGEI to several undertakings, the compensation should be calculated on the basis of the same method in respect of each undertaking.” Since the obligation was assigned only to bpost, the Belgian measure was compliant.

  1. Calculation of the net cost

According to paragraph 21 of the 2012 SGEI Framework, “[t]he amount of compensation must not exceed what is necessary to cover the net cost of discharging the public service obligations, including a reasonable profit.” In this respect, paragraph 24 of the 2012 SGEI Framework states that “[t]he net cost necessary, or expected to be necessary, to discharge the public service obligations should be calculated using the net avoided cost methodology where this is required by Union or national legislation and in other cases where this is possible.”

Moreover, according to paragraph 25 of the 2012 SGEI Framework, “under the net avoided cost methodology, the net cost necessary, or expected to be necessary, to discharge the public service obligations is calculated as the difference between the net cost for the provider of operating with the public service obligation and the net cost or profit for the same provider of operating without that obligation”.

In paragraphs 100-115 of its decision, the Commission found that “the adopted methodology ensured that the counterfactual scenario corresponded to the optimal commercial strategy that bpost would have followed had the SGEI constraints been lifted. In addition, it ensured that there would not be double counting”, that “quality incentives and efficiency incentives were set out in a transparent manner”, that “the fact that efficiency gains are shared between the State and bpost as well as the fact that efficiency gains will not be achieved at the detriment of quality to be in line with the 2012 SGEI Framework” and that, because of the compensation cap, “the ex post calculated compensable amounts significantly exceeded the compensation granted by the Belgian authorities”.

For all of the above reasons, the Commission considered that the compensation did not exceed the next extra costs of the public service obligation.

  1. Transparency

The arrangements between the state and bpost were found to be transparent.

Conclusions

On the basis of the above analysis, the Commission concluded that the State aid granted to bpost as compensation for its public service obligations was compatible with the 2012 SGEI Framework.


[1] The full text of the Commission decision can be accessed at:

https://ec.europa.eu/competition/state_aid/cases1/202132/295147_2306041_55_2.pdf


Photo by Yannik Mika on Unsplash

Tags

About

Phedon Nicolaides

Dr. Nicolaides was educated in the United States, the Netherlands and the United Kingdom. He has a PhD in Economics and a PhD in Law. He presently holds positions at the College of Europe and the University of Maastricht. He has published extensively on European integration, competition policy and State aid. He is also on the editorial boards of several journals. Dr. Nicolaides has organised seminars and workshops in many different Member States, and has acted as consultant to several public authorities.

Related Posts

27. Jul 2021
State Aid Uncovered by Phedon Nicolaides

A Rare Commission Decision on an SGEI Measure that Could Have Been Exempted from Notification

A public service obligation must be imposed by an act of entrustment that describes in detail the terms of the obligation, identifies the undertaking that offers the service and lays down procedures for preventing over-compensation. Introduction The purpose of Commission Decision 2012/21 on services of general economic interest [SGEI] is, like the GBER, to exempt certain aid measures from prior […]
25. May 2021
State Aid Uncovered by Phedon Nicolaides

Compensation for Universal Service Provision

As long as the compensation does not exceed the net extra costs of the universal service activities, it may be used to offset other costs. Introduction The rules on State aid for services of general economic interest [SGEI] are very generous because they allow both investment and operating aid. Yet, it is not easy to comply with those rules because […]
23. Mar 2021
State Aid Uncovered by Phedon Nicolaides

Exclusive Rights and State Aid

Exclusive rights may constitute State aid if they mandate payments with resources over which the state can exercise control. Compensation for the cost of public service obligations may be granted only if the obligations are clear and define a service that is different from market services. Introduction Article 106(1) TFEU requires Member States not to distort competition when they grant […]
20. Oct 2020
State Aid Uncovered by Phedon Nicolaides

Employees’ Social Security Contributions and Compensation for Damage

Fiscal benefits to employees do not constitute State aid as long as they do not confer a direct or indirect advantage to their employers. Update on Temporary Framework: Number of approved and published Covid-19 measures, as of 16 October 2020: 302* Legal basis: Article 107(2)(b): 32; Article 107(3)(b): 255; Article 107(3)(c): 23 Average number of measures per Member State: 11 […]
13. Oct 2020
State Aid Uncovered by Phedon Nicolaides

Market Economy Operator Principle: The Case of FIH

Negotiated transactions are not necessarily market conform. Update on Temporary Framework: Number of approved and published covid-19 measures, as of 9 October 2020: 295* Legal basis: Article 107(2)(b): 32; Article 107(3)(b): 248; Article 107(3)(c): 23 – Average number of measures per Member State: 10.5 – Median number of measures per Member State: 12 – Mode number of measures per Member […]
15. Sep 2020
State Aid Uncovered by Phedon Nicolaides

Non-economic Activities and Services of General Economic Interest

Non-economic tasks and economic activities which are inseparable from those non-economic tasks are together, as a bundle, non-economic in nature. Public compensation for the extra costs of services of general economic interest [SGEI] may not cross-subsidise activities that fall outside the scope of the SGEI. Update on Temporary Framework: Number of approved and published covid-19 measures, as of 11 September […]
30. Jun 2020
State Aid Uncovered by Phedon Nicolaides
insurance protected

Health Insurance Based on Social Solidarity Is Non-economic

I am grateful to Peter Staviczky for comments on an earlier version of this article. I am, of course, solely responsible for the views expressed here. Public funding of health insurance systems based on social solidarity does not constitute State aid. Limited competition for the purpose of increasing efficiency does not affect the non-economic nature of such systems. Update on […]
05. May 2020
State Aid Uncovered by Phedon Nicolaides
corona virus poster

Non-recovery of Incompatible State aid Is Costly

Legal and practical difficulties in the recovery of incompatible State aid do not constitute justifiable “absolute impossibility”. Temporary Framework On 1 May, the total number of State aid measures to combat covid-19 approved by the European Commission reached 102. Their legal basis was: Article 107(2)(b): 9; Article 107(3)(b): 86; Article 107(3)(c): 7   Introduction The 2020 Temporary Framework for State […]
27. Apr 2020
State Aid Uncovered by Phedon Nicolaides
corona virus poster

Identification of Undertakings in Difficulty

A company is in difficulty if, in practice, its accumulated net losses exceed 50% of its subscribed capital, regardless of whether the subscribed capital is formally written down. The classification of a company as being in difficulty is independent of the sector in which it operates and of whether a private investor would be willing to invest in it. Temporary […]
09. Apr 2020
Guest State Aid Blog by Lexxion Publisher
Woman sitting by the computer

Follow Up Webinar with Phedon Nicolaides on ‚COVID-19 and State Aid Law‘ on 20 April

The European Commission is working on quickly adapting the existing State aid legal framework to address the current Covid-19 pandemic. Join us on 20th April from the comfort and safety of your (home) office to get an insider update on the Covid-19 response by State aid experts from the European Commission and national governments. ✓ Join from wherever you are – […]