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An SGEI provider does not have to be efficient by industry standards in order to receive compensation for its next extra costs. Although the conditions for compatibility of public service compensation under Article 106(2) TFEU appear to be similar to the Altmark criteria, they have very different objectives.

 

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Introduction

Even since the Altmark judgment of July 2003, public authorities and undertakings providing services of general economic interest [SGEI] have agonised about how to comply with it. The success rate is very, very low. It is indeed puzzling why public authorities and SGEI providers want to comply with the Altmark criteria given that they can grant and receive, respectively, exactly the same amount of aid if they conform with the relevant rules on State aid for SGEI. New case law, such as the two judgments which are reviewed in this article, expands our understanding of the Altmark criteria and their relationship with Article 106(2) TFEU, but it does not resolve the puzzle. One cannot grant or receive more public money by having it classified as Altmark compliant.

The two judgments reviewed here concern broadcasting in Denmark. Although broadcasting is subject to rules which are different from those laid down in the 2012 SGEI package, the issues that the two cases raised are in fact relevant to all SGEI. In view of the length of the two judgments, I identify only the relevant issues and I ignore procedural matters or well-known general principles.

In both cases the main disputes concerned, first, how the various Altmark criteria related to each other and, second, how the Altmark criteria differed from the conditions for the compatibility of State aid under Article 106(2) TFEU.

The judgments clarify certain aspects of how to apply Altmark but at least the judgment in TV2 represents an unwelcome setback for the Commission. The setback is unwelcome because it may enable Member States to support SGEI providers that become less efficient after they win public tenders.

 T‑674/11, TV2/Danmark v European Commission[1]

The Commission, in decision 2011/839, found that the Danish broadcaster TV2 had received State aid. Although the aid was assessed to be compatible with the internal market, TV2 and the Danish government lodged an appeal on the grounds that the Commission committed several errors in law.

I start at the point where the General Court confirmed that public broadcasting is an economic activity subject to competition, despite its public mission [paragraph 70]. Then it proceeded to consider the methods for calculating the compensation granted to TV2 in relation to the second Altmark condition. In this connection, it recalled that the second Altmark criterion required that the parameters on the basis of which the compensation is calculated had to be established beforehand in an objective and transparent manner [paragraph 76].

The Commission argued that although the amount of compensation was determined by the Danish Parliament in a procedure that conferred some “transparency and objectivity”, it was not enough to make the method of calculation compliant with the second Altmark criterion. Furthermore, according to the Commission, the compensation took into account expenditure that was actually incurred by TV2. The General Court inferred that the Commission interpreted the second Altmark criterion to be a measure of the efficiency of the beneficiary. [Paragraphs 95-98]

The General Court disagreed with this interpretation [paragraph 99]. Although all four Altmark criteria are linked in the common objective of determining whether the SGEI provider derives an advantage, each criterion plays a different role [paragraphs 100-101]. The second Altmark criterion requires that the parameters for calculating the compensation are established in advance in an objective and transparent manner. According to the General Court, the second Altmark criterion poses three requirements: i) objective parameters, ii) established in advance, iii) through a transparent procedure. The Court found no indication in the Altmark judgment that the parameters had to control the amount of expenses incurred by the beneficiary [paragraph 103].

This is a very important interpretation. It is true that the Commission has always interpreted the second Altmark criterion to imply the imposition of limits on what cost increases could be compensated. Otherwise, the third Altmark criterion is not enough even if the SGEI provider is selected competitively. This is because, after it wins the contract, the SGEI provider can become inefficient, allow its costs to rise and still be compensated.

The General Court went on to observe that the Commission appeared to consider that the parameters had to be not only objective and established in advance but, in addition, they had to ensure effective management of the public service. The Court disagreed with this interpretation as being incompatible with the wording of the second Altmark criterion and for confusing the second with the fourth criterion which is the only criterion referring to efficiency. [Paragraphs 105-106]

This represents a major setback for the Commission and taxpayers. Consumers may be protected by inefficient SGEI providers through price regulation. But as costs accumulate, taxpayers will eventually foot the bill of rising inefficiency in the provision of an SGEI.

It is true that in the Altmark judgment it is not specified how the second criterion is to be interpreted and applied in practice. But the General Court should have inferred its purpose from the overall objective of the four criteria, which is to ensure that the SGEI provider derives no undue advantage. The fourth criterion ensures efficiency at the point the contract is awarded. But it cannot force the winner of the contract to remain efficient for the duration of the contract. This can be achieved only by the second criterion.

Then the Court turned its attention to the calculation of the compensation granted to TV2 in relation to the fourth Altmark criterion. The Court first noted that if the company responsible for running a public service mission is not selected competitively, the application of the fourth Altmark condition is likely to present practical difficulties. Also, the concept of an undertaking which is well run and adequately equipped necessarily implies a wide margin of discretion. Moreover, a comparison between two companies, one public, discharging a public service mission and the other private, free of such a mission is not easy, given, in particular, the fact that the company responsible for running a public service mission is subject to specific quality requirements. [Paragraph 113]

If the SGEI provider is not selected competitively, the compensation must be determined by referring to a typical undertaking, well run and adequately equipped, in order to avoid that the high costs of an inefficient undertaking are taken as the reference for calculating the amount of compensation. [Paragraph 116]

The General Court rejected the argument of the Danish government that it was not possible to identify a reference company and compare costs because the public mission was specific to the chosen SGEI provider. Accepting that argument would render the fourth Altmark criterion ineffective. And in any event, in the field of broadcasting, much of the expenditure of private and public broadcasters are similar in substance and can be compared, even taking into account the public service obligations imposed on public operators. The Court also added that the comparison had to be made between broadcasters either in the Danish market or in a similar one [paragraphs 117-119]. The last point lends support to the practice of the Commission that the typical undertaking that serves as a comparator does not have to be in the same market as the SGEI provider.

From this part of the judgment we can safely conclude that it is the responsibility of the Member State that imposes the public service obligation to identify the appropriate comparator in order to ensure that the SGEI provider is efficient by industry standards. Although the General Court has not said this explicitly, I think it can also be inferred that if an appropriate comparator cannot be identified, then the only option left for Member States is to organise a competitive selection procedure.

Then the General Court examined whether the revenue from the license fee paid back by TV2 to regional stations constituted State aid for TV2. The Court first observed that when one party is required to transfer a sum in full to a third party, there cannot in principle be no question of an advantage granted to the first party which is acting solely as paying agency or channel of payment. A contrary conclusion cannot be accepted unless it can be shown that the transit of money confers an advantage such as interest for the period in which that party keeps the money. [Paragraph 159]

The Court went on to examine the conditions and the reasons for which TV2 had to make payments to regional stations. It found that TV2 was obliged as part of its PSO to use services of regional stations, for which it had to pay. In this regard, TV2 was not acting as a mere “transit channel” but was carrying out its public service mission. On these grounds, the Court rejected the plea that the licensing fee did not confer an advantage to TV2. [Paragraphs 171-175]

Lastly, the General Court considered the plea that the Commission erred in law when it classified advertising revenue paid to TV2 as State aid. The Court began its analysis by recalling the principle laid down in the PreussenElektra and Pearle cases. Obligations imposed on undertakings by a public authority that do not involve transfer of state resources are not state aid. In addition, the Court referred to the judgment in C-222/07, UTECA where the Court of Justice concluded that compulsory contributions to fund the production of European films were not State aid because no state resources were used for that purpose. The General Court reiterated that an advantage granted through state resources is an advantage that has a negative effect on resources of the state. Such resources include revenue raised from taxes, any other resources which come under public control and are available to public authorities and any resources which are voluntarily made available to public authorities or agencies by their owners. With the use of this principle, the General Court found that the TV2 situation was analogous to that of PreussenElektra and that advertising was not funded by state resources. Rather the advertising costs were fully offset by charges levied on companies. The state lost no resources, nor was advertising put at the disposal of the state. [Paragraph 193-220]

On the basis of the findings above, the General Court annulled the relevant parts of the Commission decision.

T‑125/12, Viasat Broadcasting v Commission[2]

This case too was an appeal against Commission decision 2011/839. In this case too the General Court examined compliance with the Altmark criteria. As is well known, certain of the Altmark criteria and the conditions for application of Article 106(2) TFEU coincide. Viasat argued that the Commission had found that the 2nd and 4th Altmark criteria were not satisfied in the case of TV2/Danmark and therefore it should have taken that into account in its assessment of the compatibility of the aid.

The General Court acknowledged that under the 2012 SGEI package aid is compatible when it satisfies conditions which are largely equivalent to the first three Altmark criteria. However, the Court noted that in this case the Commission assessed the compatibility of the aid under the 2001 broadcasting guidelines which did not have conditions resembling the first three Altmark criteria.

Nonetheless, the General Court went on to make a number of important observations on the difference between the Altmark criteria and the conditions of compatibility in Article 106(2).

The General Court first explained that “57 it is precisely the question as to whether a service of general economic interest is provided under normal market conditions that the Altmark conditions seek to answer.” “60 By contrast, the classification of a measure as aid compatible with the internal market under Article 106(2) TFEU is based on the premise that the measure in question constitutes aid. In other words, […] the undertaking in question obtains, […] an advantage which it would not have obtained under normal market conditions.”

“62 In several cases in which the Court has delivered judgment, the parties have noted a certain similarity between the conditions for the application of Article 106(2) TFEU and some of the conditions set out by the Court of Justice in the judgment in Altmark”. “63 However, it cannot be forgotten that, even if the conditions for classifying a measure as aid compatible with the internal market are somewhat similar to the conditions set out in Altmark […] account must be taken of the fact that, in the case of the application of Article 106(2) TFEU, what is involved is providing a response to a fundamentally different question, which already presupposes an affirmative answer to the question concerned by the judgment in Altmark […] which is distinct and is upstream of the question of the compatibility of the aid at issue with the internal market.”

“76 […] It is clear from the case-law that the fact that the measures concerned do not satisfy the second and fourth Altmark conditions does not prevent such measures, while classified as State aid, from being regarded as compatible with the internal market under Article 106(2) TFEU.”

It is worth recalling at this stage that Article 106(2) lays down three conditions: i) The service must be a genuine SGEI; ii) there must be an official act of entrustment; and iii) the aid must be proportional. The first two conditions correspond to the first Altmark criterion. The third condition corresponds to the third Altmark criterion. Indeed it is well understood that the fourth Altmark criterion is not required by Article 106(2). However, I am not aware of a judgment in which there is an explicit analysis of the second Altmark criterion in the context of Article 106(2). The requirement for proportionality could somehow encompass the second Altmark criterion, but so far this has not been explicitly analysed in the case law. This is exactly what the General Court sought to clarify by noting the inter-relationship between the various Altmark criteria.

“81 The establishment of objective and transparent parameters for calculating compensation, as required by the second Altmark condition, is a necessary prerequisite for the purpose of answering the question as to whether or not that compensation exceeds what is necessary to cover all or part of the costs incurred in discharging the public-service obligations, as required by the third Altmark condition. In order to answer the question as to whether the compensation exceeds what is necessary, it must first be determined what is necessary. In order to monitor compliance with the third Altmark condition, objective and transparent parameters must be used, as required by the second Altmark condition.”

“82 As regards the fourth Altmark condition, this supplements the second Altmark condition. It is not enough that the parameters established for calculating the compensation to be paid to an undertaking entrusted with discharging public-service obligations are objective and transparent, as required by the second Altmark condition. Except where the choice of the undertaking in question is made in the context of a public procurement procedure which would allow for the selection of the tenderer which is capable of providing those services at the lowest cost to the community, the fourth Altmark condition requires that those parameters should be based on the example of a typical undertaking, well run and adequately equipped so as to be able to meet the necessary public-service requirements.”

This is a very interesting link between the second and fourth Altmark criteria. The parameters that should be included in the second Altmark criterion, the Court says, should come from the relevant comparator in the context of the fourth Altmark criterion. So, the Court is in fact saying that the aim of the parameters is to establish what is the necessary compensation [paragraph 81] not only in relation to the net costs actually incurred [3rd Altmark] but also in relation to the costs that an efficient undertaking would have incurred [4th Altmark]. This makes a lot of sense and binds in a consistent way all Altmark criteria but it contradicts the spirit and letter of the judgment in TV2 where the Court faulted the Commission for linking the second criterion to efficiency.

“83 Regard must also be had to the purpose of the test which forms the context for the analysis of compliance with the four Altmark conditions, which is to prevent compensation from conferring an economic advantage which may favour the recipient undertaking over competing undertakings ... Thus, what has to be determined is whether a service of general economic interest is provided under normal market conditions, in which case the financial compensation paid to the undertaking which provides that service does not constitute an advantage which that undertaking would not have obtained under such conditions and, consequently, does not amount to State aid.”

The second part of paragraph 83 of the judgment can be confusing. It is hard to reconcile “normal market conditions” with the fact that public service compensation necessarily implies government intervention in the economy. “Normal market conditions” mean absence of government intervention. We need to speculate what the Court of Justice meant in the original Altmark judgment. Normal market conditions prevail when, first, only efficient firms get to supply consumers and, second, the pressure of competition prevents them from overcharging consumers. Therefore, I think the Court of Justice meant that an efficient undertaking or an undertaking that wins a tender and is not overcompensated, would have been able to supply the market in the first place and, second, it would not have been able to make excess profits. Therefore, government intervention does not bring about an outcome that would not have naturally emerged from the normal functioning of the market. The decisive element is not whether the compensation is offered under normal market conditions without government intervention – it is not – but whether the SGEI provider obtains an undue advantage from the intervention.

The General Court also explained how the principle of proportionality should be applied. “84 So far as concerns the application of Article 106(2) TFEU, it is, admittedly, true that […] the Court noted that the third Altmark condition broadly coincides with the criterion of proportionality as established by the case-law in the context of the application of that provision.” “85 It must, however, be stated that although, in both cases, it is essentially the same criterion which is being applied, the context and the purpose of its application are, in each case, different.” “86 In the case of the application of Article 106(2) TFEU, it is no longer a question of determining whether a service of general economic interest is provided under normal market conditions. The application of that provision presupposes the existence of State aid, which means, by definition, that the service in question is not provided under such conditions.” “87 What Article 106(2) TFEU seeks to prevent, through the assessment of the proportionality of the aid, is that the operator responsible for the service of general economic interest benefits from funding which exceeds the net costs of the public service. It follows that the question as to whether an undertaking responsible for a broadcasting service of general economic interest may fulfil its public-service obligations at a lower cost is irrelevant for the purpose of assessing the compatibility of the State funding of that service in the light of the EU State aid rules.” “88 In other words, the costs of a service of general economic interest to be taken into account when applying Article 106(2) TFEU are the actual costs of the service such that they are, and not as they could have been or ought to be, on the basis of objective and transparent calculation criteria, founded on the example of a typical undertaking which is well run and adequately equipped.”

“99 Finally, with regard to the argument that Articles 49 TFEU and 56 TFEU and the principles of equal treatment and transparency preclude a public authority from assigning a public-service concession to a company without a competitive process, it must be pointed out that the judgment in Altmark […] does not itself preclude a public-service mission from being entrusted to an undertaking without a competitive process. That judgment establishes a method for determining the level of compensation applicable when the choice of the undertaking responsible for the discharge of public-service obligations was, in a specific case, not made in the context of a public procurement procedure. In any event, according to the case-law, Article 106(2) TFEU does not include, among the conditions for its application, a requirement to the effect that the Member State must have followed a competitive tendering procedure for the award of the services of general economic interest”.

On the basis of the above reasoning, the General Court dismissed the appeal.

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[1] The text of the judgment can be accessed at [it does not yet exist in English]:

http://curia.europa.eu/juris/liste.jsf?pro=&nat=or&oqp=&dates=&lg=&language=en&jur=C%2CT%2CF&cit=none%252CC%252CCJ%252CR%252C2008E%252C%252C%252C%252C%252C%252C%252C%252C%252C%252Ctrue%252Cfalse%252Cfalse&num=T-674%252F11&td=%3BALL&pcs=Oor&avg=&page=1&mat=or&jge=&for=&cid=376247.

[2] The text of the judgment can be accessed at:

http://curia.europa.eu/juris/document/document.jsf?text=&docid=168562&pageIndex=0&doclang=en&mode=lst&dir=&occ=first&part=1&cid=76435.

 

[Photo by pbkwee from flickr.com]



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