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 2020: 278*

Legal basis: Article 107(2)(b): 29; Article 107(3)(b): 236; Article 107(3)(c): 21

Five Member States have implemented 16 or more covid-19 measures each: Belgium, Czech Republic, Denmark, Italy & Poland.

– Average number of measures per Member State: 10

– Median number of measures per Member State: 12

– Mode number of measures per Member State: 7

* Excludes about 200 amendments of previously notified measures

Introduction

Services of general economic interest [SGEIs] are socially important services of economic nature. However, their importance to citizens is not sufficient to remove them from the realm of market activities. At the same time, Member States may not treat as an SGEI a service that is provided by the market, despite the fact that they have discretion to designate the services they regard as SGEI.

This immediately creates the following puzzle in the eyes of policy makers. If a non-economic activity is something for which a market does not exist and if an SGEI is, by definition, not provided by the market or only partially provided by the market, then why is an SGEI economic in nature?

The answer is that in principle the market could provide the service in question if its price could cover all costs. By contrast, a non-economic activity is not carried out for a price that covers its costs.

We may visualise SGEIs as lying between non-economic activities on one side and the market on the other. When an entity is entrusted with both non-economic tasks and an SGEI, the proper definition of the SGEI is very important because a poorly defined SGEI may encroach on both the non-economic tasks and market-provided services.

On 3 September 2020, the Court of Justice assessed precisely such a situation in its judgment in case C-817/18 P, Commission, Vereniging tot Behoud van Natuurmonumenten in Nederland and Others v Vereniging Gelijkberechtiging Grondbezitters.[1]

The applicants [the Commission and 13 nature conservation organisations in the Netherlands] appealed against the judgment of the General Court of 15 October 2018, T-79/16, Vereniging Gelijkberechtiging Grondbezitters and Others v Commission, which annulled Commission decision SA.27301 that authorised subsidies for the acquisition and management of land of environmental significance. The appellants before the General Court were 20 Dutch organisations involved in the management of land.

The Netherlands implemented a policy for the protection of the environment and management of landscapes and areas of natural beauty. For this purpose it granted subsidies to 13 nature protection organisations [NPOs] to acquire and manage land.

The eligible costs for the subsidies were the purchase price of the land, other acquisition costs and the costs of terminating any farm leases. When the revenues of the NPOs exceeded their management costs, they had to reinvest them in nature conservation or pay them to the relevant ministry. The NPOs were not authorised to change the designation of acquired land, use it contrary to the purpose of nature conservation, or rent or resell it without the express permission of the Dutch authorities.

After receiving a complaint, the Commission examined the Dutch measure and concluded that it was compatible with the internal market by virtue of Article 106(2) TFEU. Although the main task of the NPOs was not of an economic nature, certain of their secondary activities such as sale of wood, hunting and fishing permits, camping and other tourist activities were economic in nature and, as a result, the NPOs were considered to be undertakings. The Commission in its decision relied on case T-347/09, Germany v Commission, according to which similar organisations in Germany were undertakings because the secondary activities of economic nature were not inexctricably linked to the primary activities of non-economic nature.

Since, however, the NPOs were under a public service obligation [PSO], the Commission considered that the aid complied with the requirements of the Framework on public service compensation [PSC] and concluded that the aid was compatible with the internal market.

The main points of the judgment in case T-347/09, Germany v Commission[2]

In this case, the General Court clarified at the outset that the activity of environmental protection was of an exclusively non-economic nature. The issue at hand was whether the subsidiary or secondary activities [such as sale of wood, camping, hunting and fishing permits] of the nature conservation organisations were economic or not.

The main points of the judgment of the General Court are as follows:

  1. The concept of an undertaking includes any entity carrying out an economic activity, regardless of the legal status of that entity and the method of its financing [Höfner and Elser, C-41/90; Poucet and Pistre, C-159/91; FFEA, C‑244/94]. [para 25]
  2. Any activity consisting in offering goods or services on a market constitutes an economic activity [Aéroports de Paris v Commission, C-82/01; MOTOE, C-49/07, AG2R Prévoyance, C-437/09]. [para 26]
  3. Activities which are connected with the exercise of public authority are not of an economic nature [Commission v Germany, C-107/84; SAT Fluggesellschaft, C-364/92; MOTOE, C-49/07]. [para 27]
  4. If a public entity carries out an economic activity which can be dissociated from the exercise of its prerogatives as a public authority, that entity, as regards this activity, acts as an undertaking. However, if the economic activity is inseparable from the exercise of its prerogatives of official powers, all the activities carried out by that entity remain activities connected with the exercise of these prerogatives [SELEX Sistemi Integrati v Commission, C‑113/07 P]. [para 29]
  5. The fact that a product or a service provided by a public entity is related to the exercise of its prerogatives and offered for remuneration stipulated by law, and not directly determined by that entity, is not in itself sufficient to qualify that activity as economic and that entity as an undertaking [SAT Fluggesellschaft, C-364/92; Diego Calì & Figli, C-343/95]. [para 30]
  6. From the perspective of EU law, it is irrelevant that environmental protection organisations in Germany are considered to be carrying out a non-economic activity of public welfare under German law. [para 38]
  7. In addition to their main task, the environmental organisations in question provided certain goods and services for remuneration and freely determined their prices. It was irrelevant for the classification of those activities as economic that the environmental protection organisations carried out those activities in order to fulfil their mission by generating sufficient revenue to cover the costs linked to the management of land. [para 39]
  8. The secondary activities were not compulsory by the primary activity. They were dissociable from the exclusively social objective of environmental protection. The exercise of secondary activities could not be assimilated into the exercise of public prerogatives by a public authority. [para 41]
  9. Environmental protection organisations were undertakings, in that they carry out economic activities, notwithstanding the fact that the offer of goods or services was made without profit-making purposes, since that offer competed with that of operators pursuing such a goal. [para 43]

Should the Commission have opened the formal investigation procedure?

After finding that the applicants had legal standing as “interested parties” because they were competitors of the recipients of the aid, the Court of Justice turned its attention to the question whether the Commission should have opened the formal investigation procedure before finding the aid compatible with the internal market.

In this connection, it reiterated the established principle that the procedure laid down in Article 108(2) TFEU is essential when the Commission experiences serious difficulties in assessing whether aid is compatible with the internal market. The Commission can therefore rely on the preliminary examination phase referred to in Article 108(3) TFEU [first stage] only if it is able to determine that the aid is compatible with the internal market. [para 75]

On the other hand, if this preliminary examination leads the Commission to believe that the aid is incompatible or encounters serious difficulty in assessing the compatibility of the aid, the Commission is required to initiate the formal investigation [second stage]. [para 76]

The criterion of “serious difficulty” is objective. [para 79]

It follows that the legality of a decision not to raise objections depends on whether the information available to the Commission, during the preliminary examination phase, should objectively have given rise to doubts as to the compatibility of this measure with the internal market. Such doubts must lead to the opening ta formal investigation. [para 80]

When an applicant requests the annulment of a decision not to raise objections, it essentially calls into question the fact that the decision of the Commission was adopted without any prior formal investigation, thereby violating its procedural rights. The applicant has to demonstrate that on the basis of the available information, the Commission should have had doubts as to the compatibility of the measure with the internal market. [para 81]

A creative definition of SGEI is an indication of serious difficulties

Then the Court of Justice examined the evidence for the existence of serious doubts that had been taken into account by the General Court. In particular, the General Court questioned the characterisation of the SGEI in this case as “wider” or “atypical” and the nature of the links between the secondary economic activities of NPOs and their main task of nature conservation.

The Court of Justice noted that the Commission had considered that the secondary activities of the NPOs were not compulsory by their main activity. It concurred with the General Court that found that the Commission had not examined whether the secondary economic activities of the NPOs could have been carried out under market conditions or whether they were of general economic interest. It also found that the secondary activities were not accounted separately. For these reasons, the General Court concluded that the Commission had encountered serious difficulties. [paras 85-88]

It is obvious what the problem is in this case. If the secondary activities were necessary for the primary activities, they should have been included in the definition of the PSO. If they were distinct from the public service mission of the NPOs, they should have been accounted separately to prevent either overcompensation of the SGEI or cross-subsidisation of the non-SGEI activities.

The Court of Justice noted that, in concluding that the secondary activities fell within the “wider SGEI”, the Commission relied solely on the fact that the costs and revenues from those economic activities were charged to the costs of the main activity of nature conservation. [para 92]

The Court of Justice also concurred with the observation of the General Court that there was a contradiction in the Commission’s reasoning. On the one hand, the Commission asserted that the secondary activities were closely linked to the main activity of nature conservation, in that they helped to finance it. On the other hand, it considered that even though those activities were not necessary to achieve the objectives of nature conservation, they could still form part of an SGEI of nature protection. [para 93]

Then the Court of Justice recalled that, according to paragraphs 12 & 13 of the SGEI Framework, aid may only be granted to a genuine SGEI which excludes services which are already provided or can be provided in a satisfactory manner and under conditions compatible with the general interest by undertakings operating under normal market conditions. [para 104]

The Court of Justice went on to declare that the Commission rightly considered, according to paragraphs 12 & 13 of the Framework, that the wide discretion of the Member States in defining SGEIs does not allow them to designate as SGEI services which can be provided by companies operating under normal market conditions. [para 105]

Then the Court made a strange statement. It said that the amount of compensation must not exceed what is necessary to cover the net cost of the PSO, otherwise overcompensation, which is not necessary for the operation of the SGEI, constitutes State aid. [para 106] In fact, unless the compensation satisfies the four Altmark conditions, the whole of public funding is State aid, not only the excess part. Any excess compensation is incompatible State aid.

The Court clarified that, although a Member State may ask an SGEI provider to take into account profits from non-SGEI activities, secondary activities which do not themselves fall within the scope of the SGEI cannot be considered necessary for the SGEI simply because their profits co-finance the SGEI. Only secondary activities which are necessary for the SGEI can be included in its scope. Compensation granted to secondary activities which are not necessary for the operation of the SGEI is overcompensation. [paras 107-108]

I suppose that, by excluding revenue-generating secondary activities, the Court meant to stress that necessity here is limited to physical or technical links.

The Court of Justice concluded that the General Court did not err in law in finding that the Commission should have shown that the secondary economic activities of the NPOs were necessary for the operation of the SGEI or that those activities themselves fell within the scope of the SGEI. [para 109]

The Court of Justice also agreed with the assessment of the General Court that the fact that the secondary activities stemmed from the primary activity of the NPOs did not prove that they were inseparable from their primary activity, given that they did not constitute an indivisible whole. [para 110]

On the basis of the above analysis, the Court of Justice dismissed the appeal.

In essence the Commission’s creative but eventually mistaken classification of the activities of the NPOs as “wider” or “atypical” was an indication the serious difficulties it encountered.


[1] The full text of the judgment, not in English, can be accessed at:

http://curia.europa.eu/juris/liste.jsf?oqp=&for=&mat=CONC.AIDE%252Cor&lgrec=en&jge=&td=%3BALL&jur=C%2CT%2CF&etat=clot&page=1&dates=%2524type%253Dpro%2524mode%253D8D%2524from%253D2020.08.26%2524to%253D2020.09.03&pcs=Oor&lg=&pro=&nat=or&cit=none%252CC%252CCJ%252CR%252C2008E%252C%252C%252C%252C%252C%252C%252C%252C%252C%252Ctrue%252Cfalse%252Cfalse&language=en&avg=&cid=18020004

[2] The full text of the judgment, not in English, can be accessed at:

http://curia.europa.eu/juris/fiche.jsf?id=T%3B347%3B9%3BRD%3B1%3BP%3B1%3BT2009%2F0347%2FJ&oqp=&for=&mat=or&lgrec=en&jge=&td=%3BALL&jur=C%2CT%2CF&num=t-347%252F09&dates=&pcs=Oor&lg=&pro=&nat=or&cit=none%252CC%252CCJ%252CR%252C2008E%252C%252C%252C%252C%252C%252C%252C%252C%252C%252Ctrue%252Cfalse%252Cfalse&language=en&avg=&cid=18668745


Photo by Bela Geletneky on Pixabay.

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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.

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