Compliance with public service obligations imposed on a provider of services of general economic interest should not be left to the discretion of that provider.
Last week’s article examined a public service obligation for providing maritime links to Corsica (view it here: http://stateaidhub.eu/blogs/stateaiduncovered/post/8370). This week’s article reviews a similar obligation for maritime links to the neighbouring island of Sardinia.
On 6 April 2017, the General Court rendered its judgment in case T‑219/14, Regione autonoma della Sardegna [RAS] v European Commission. On the same date the General Court ruled in the related case T‑220/14, Saremar v Commission. Since the judgments are similar, this article reviews only the first case.
The Autonomous Region of Sardinia [RAS] appealed against a Commission decision that found aid to the maritime company Saremar to be incompatible with the internal market. The aid had been granted in the form of compensation for public services and a capital increase. That Commission decision was reviewed here on 30 May 2014: View http://stateaidhub.eu/blogs/stateaiduncovered/post/19.
Saremar provided maritime transport between Sardinia and other small Sardinian islands and Corsica. Subsequently, it encountered financial difficulties and eventually it was entered into liquidation.
The judgment on Saremar is important because it clarifies a number of questions concerning the definition of public service obligations and the applicability of the 2011 Commission decision on services of general economic interest [SGEI] [Decision 2012/21] which is like a block exemption regulation. It allows Member States under certain conditions to grant aid to providers of SGEI without prior notification to the Commission.
Rights of defence
Judgments always start by considering procedural issues such as the admissibility of the claims made by applicants. The General Court rejected several procedural pleas put forth by RAS. One of them concerned the rights of the defence.
The rights of interested parties differ depending on whether the Commission opens or not the formal investigation procedure. The Court restated that “86 […] according to settled case-law, interested parties within the meaning of Article 108(2) TFEU have, in the procedure for reviewing State aid, only the opportunity to send to the Commission all information intended for the guidance of the latter with regard to its future action and they cannot themselves seek to engage in an adversarial debate with the Commission in the same way as is offered to that Member State. Interested parties within the meaning of Article 108(2) TFEU include not only the recipients of the aid or, as the case may be, their competitors, but also territorial infra-State bodies which granted the aid, such as the RAS in the present case […] Consequently, in the present case, the fact that no adversarial debate took place between the RAS and the Commission during the formal investigation procedure concerning the question whether Saremar had to be classified as a firm in difficulty cannot constitute infringement of the applicant’s rights of defence.”
Application of the Altmark conditions
One of the questions examined by the General Court was whether the compensation received by Saremar was State aid. Compensation that is granted in conformity with the Altmark conditions is not State aid. The General Court clarified at the outset that “89 […] The sole purpose of the Altmark is the classification of the measure in question as State aid within the meaning of Article 107(1) TFEU for the purpose of establishing the existence of an obligation to notify the measure to the Commission in the case of new aid or to cooperate with the Commission in the case of existing aid […] However, those conditions do not relate to the determination of the compatibility of that aid in the light of Article 106(2) TFEU, which determination implies, by definition, that the measure was classified beforehand as State aid.”
“93 […] a State measure which does not comply with one or more of the Altmark conditions must be regarded as State aid within the meaning of Article 107(1) TFEU, provided that the other conditions required for classification as aid referred in that article are fulfilled”.
“94 […] the Altmark conditions, which must be met in order for a State measure in the form of public service compensation to avoid being classified as State aid, are cumulative. Those conditions are, moreover, distinct from one another, with each pursuing its own objective […] Thus, in its review of State aid, the Commission is not required to examine all of those conditions if it finds that one or more of them is or are not met … Similarly, should the Commission make an error in finding that one of those conditions is not met, that cannot lead to annulment of the contested decision if the Commission otherwise makes a similar, correct finding concerning one of the other conditions.” [In paragraph 119 of the judgment, the General Court concedes that the four conditions may be interlinked but stresses that they must still be assessed separately.]
The Court began its analysis by examining the second Altmark condition. It recalled that the Commission had found that the parameters for calculating the compensation had not been established beforehand in an objective and transparent manner. The act imposing a public service mission on Saremar had not foreseen any compensation. Compensation was offered only after Saremar incurred losses.
“100 [… ]the second Altmark condition relates to the need to establish beforehand, in an objective and transparent manner, the parameters on the basis of which the compensation is calculated, in order to prevent that compensation from conferring an economic advantage favouring the recipient undertaking over competing undertakings.”
“101 As the Court of Justice has observed on a number of occasions, Member States enjoy a broad discretion not only for defining what they regard as services of general economic interest, to which the first Altmark condition relates, but also for determining the compensation for the costs of providing that public service. Thus, in the absence of EU rules on services of general economic interest (SGEI), the Commission is not entitled to rule on the scope of the public service tasks assigned to the public operator, in particular the level of costs linked to that service, or the expediency of the political choices made in that regard by the national authorities, or on the economic efficiency of the public operator.”
“102 It is, moreover, precisely because the determination of the compensation is subject to only restricted control by the EU institutions that the second Altmark condition requires that those institutions must be in a position to verify the existence of previously defined objective and transparent parameters, which must be defined in such a way as to preclude any abusive recourse to the concept of an SGEI on the part of the Member State having the effect of conferring on the public operator an economic advantage in the form of compensation”.
The General Court found that “105 […] none of the regional decisions […], by which the RAS mandated Saremar to operate routes to and from the mainland and specified the associated public service obligations, makes any express or even implicit provision for the payment of public service compensation corresponding to the costs incurred in fulfilling the aforementioned obligations […] those decisions were based on the postulate that the performance of the aforementioned public service obligations had to be done in accordance with market conditions and thus in a manner that safeguarded the activity’s viability without recourse to public service compensation paid by the RAS.”
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“106 […] under the second Altmark condition, the case-law allows the national authorities broad discretion in determining the methods for calculating the public service compensation in question. However, […] the prior determination of the methods for calculating that compensation is necessary in order for the second Altmark condition to be fulfilled and presupposes, by definition, that it was also decided beforehand to grant such compensation.”
Then the General Court made a significant observation. “107 […] national authorities are free, if they see fit, to provide for a public service task, the financial balance of which is ensured through operating revenues, without recourse to public service compensation. The imposition of public service obligations generally implies, in return, the grant of compensation to the operator concerned. However, in the absence of EU rules governing SGEI, EU law does not preclude there being no provision made for such public service compensation. In the present case, […] the discretion the RAS granted to Saremar […] to adjust its fares was aimed precisely at allowing Saremar to maintain financial and economic balance in its activities under market conditions, without recourse to public financing.”
But this statement raises an important question. If a service can be provided under market conditions and at prices that can be afforded by users, where is the need for state intervention to impose a public service obligation? The only realistic possibility is for public authorities to define a wide enough public service mission that contains both profitable and unprofitable market segments so that the profits from viable segments cross-subsidise losses on unviable segments. However, this solution creates a different problem. It may lead to misspecification of the public service obligation, if it covers parts of the market that can be adequately provided by other operators. Hence, it is necessary for the public authority that imposes the public mission to justify the wide scope of the mission. Later on in the judgment the General Court recalled that “194 […] it is settled case-law that, in order for the conditions for the application of Article 106(2) TFEU to be fulfilled, it is sufficient that, in the absence of the rights or subsidies at issue, it would not be possible for the undertaking to perform the particular tasks entrusted to it or that the maintenance of those rights or subsidies is necessary to enable the holder of them to perform tasks of general economic interest which have been assigned to it under economically acceptable conditions”. It follows that the definition of a mission with a wide scope may be justified if it is the means by which the provider is enabled to perform its tasks under “economically acceptable conditions”.
The General Court also rejected an argument put forth by the RAS that the absence of explicit reference to public service compensation in the public service mandate of Saremar was not contrary to the second Altmark condition. The second condition is satisfied when explicit and objective parameters are defined in advance. Such an advance definition must be contained in the act of imposing the public mission.
With respect to the application of the first Altmark condition, the Commission considered, without being contradicted by the General Court, that the public service obligations imposed on Saremar were not necessary, in particular because they were not effective in guaranteeing the affordability of the fares charged by Saremar [paragraph 129]. The RAS had requested Saremar to charge affordable fares but did not define the precise level of fares. It was up to Saremar to determine fares. This was a misspecification of the public service obligation. Compliance with such an obligation should not be left to the discretion of the provider.
The application of the 2005 SGEI Decision and the 2011 SGEI Decision
The General Court first reiterated that State aid in the form of public service compensation can be compatible with the internal market under Article 106(2) TFEU. Then it recalled that “136 […] the Commission, where there are no relevant harmonised Union rules, has no authority to rule on the scope of the public service tasks assigned to the public operator, in particular the level of costs associated with the service, the appropriateness of political choices taken in that regard by the national authorities, or the public operator’s economic efficiency.” “137 However, […] the broad discretion [of] national authorities […] is not unlimited. In particular, in the application of Article 106(2) TFEU, that broad discretion must not prevent the Commission from verifying that the derogation from the prohibition on State aid provided for therein may be granted.” “139 […] in the application of Article 106(2) TFEU, the discretion of the Member States and the Commission may be limited by the directives and decisions that the Commission is competent to adopt on the basis of Article 106(3) TFEU. Thus, the Commission adopted successively the 2005 SGEI Decision and the 2011 SGEI Decision with a view to defining the conditions in which public service compensation may be held to comply with Article 106(2) TFEU and may, consequently, be exempt from the obligation of notification new aid provided for in Article 108(3) TFEU.”
The RAS questioned the validity of the application of the 2011 Decision rather than the 2005 Decision. The General Court replied that “142 […] aid must be considered to be granted at the time that the competent national authorities adopt a legally binding act by which they undertake to pay the aid in question or when the right to receive it is conferred on the beneficiary under the applicable national rules”. The General Court found that since the aid was granted in 2012, the relevant compatibility rules were those contained in the 2011 Decision.
Then the General Court pointed out that the RAS failed to define the public mission in accordance with the requirements of the 2011 Decision and to describe in the act imposing that mission the compensation mechanism and its parameters. It also made the following interesting observation. “154 […] although the 2011 SGEI Decision does not expressly require that the public service in question serve a general economic interest presenting specific characteristics as compared with that served by other economic activities, it is, in any event, a precondition for the application of Article 106(2) TFEU arising from, inter alia, the not unlimited discretion the national authorities have in defining what constitutes public service”.
Indeed, it is true that the 2011 Decision does not oblige Member States to define the need for the public service mission in the same way as the SGEI Framework. However, the General Court could have also pointed out that the points 7 and 8 of the preamble to the Decision refer to SGEI in the meaning of Article 106(2) and that the case law has made it clear that an SGEI is different from other, market-provided, services.
There is also an important lesson for public authorities to be drawn from this part of the judgment. State aid rules require as a matter of fact that national measures cite the relevant document that lays down the conditions for the compatibility of the aid. In this case, the RAS consider this to be purely formalistic. The General Court, however, reiterated the need for full compliance with all of the requirements of EU rules, both substantive and procedural, including whatever may appear as formalistic. In this connection the General Court stressed that “165 […] the obligation to refer expressly to [the 2011] decision in public service mandates, laid down in Article 4(f) of that decision, pursues an objective of transparency that carries a particular importance where there is no obligation for Member States to notify public service compensation measures fulfilling the conditions of the decision in question […] Moreover, the fact, relied on in the reply, that non-compliance with that condition does not prevent the disputed compensation measure from being authorised under Article 106(2) TFEU, is irrelevant. […] the Commission merely inferred from its examination of the disputed compensation measure in the light of the 2011 SGEI Decision that that compensation could not be deemed compliant with Article 106(2) TFEU if it did not meet the conditions of that decision and that, consequently, it could not be held to be exempt from the obligation of notification. That conclusion did not, therefore, relieve the Commission of having to conduct an examination of the compatibility of that measure in the light of that provision of the TFEU, in the light of, in particular, the 2011 SGEI Framework, which examination was, moreover, carried out in paragraphs 282 to 296 of the contested decision.”
Firms in difficulty
Since the aid granted to Saremar could not be assessed under Article 106(2) [because the services provided by Saremar were not genuine SGEI], the Commission also examined whether it complied with the requirements of the rescue and restructuring guidelines. Indeed the 2011 SGEI Framework stipulates that aid to firms in difficulty is assessed under the R&R guidelines. The General Court confirmed the approach of the Commission and did not consider it, as argued by the RAS, as a restriction on the application of Article 106(2). [paragraph 189] “195 […] a firm in difficulty … is threatened imminently at the level of its very existence, so that it cannot be considered capable of performing in an appropriate manner the public service tasks entrusted to it as long as its viability is not ensured. In those circumstances, the subsidy granted to such a firm in difficulty in order to compensate for the losses resulting from the performance of those public service tasks cannot come within the derogation laid down in Article 106(2) TFEU but only, where applicable, the one laid down in Article 107(3)(c) TFEU.”
The RAS made several other pleas, less important for our purposes, which were all rejected by the General Court. Consequently, the General Court dismissed the application for annulment of the Commission decision ordering recovery of the incompatible State aid.
 The full text of the judgment can be accessed at: