The funding of public service obligations under State aid

Under EU law, services of general interest (SGI) are services that public authorities of the Member States at national, regional, or local level classify as being of general interest and, therefore, subject to specific public service obligations (PSO).

When the services concerned are of economic nature, they may be qualified as services of general economic interest (SGEI) and their public funding may fall into the scope of 107(1) of the Treaty on the functioning of the EU (TFEU). Due to their specificities compared to other economic activities, SGEI are subject to a specific regime under State aid rules. Thus, the legal framework applying to SGEI is based on a balance between Member States' prerogatives in the design of public services and the protection of the level playing field in the EU. 

SGEI is an evolving notion that depends, among other things, on the needs of citizens, technological and market developments and social and political preferences in the Member State concerned.

The concept of SGEI appears in Articles 14 and 106  (2) TFEU and in Protocol No 26 TFEU, but it is not defined in the TFEU or in secondary legislation. 

The Commission has clarified this concept in its Framework for Services of General Interest in Europe. According to the Commission's general definition, services of general economic interest are economic activities that deliver outcomes in the general interest that would not be supplied (or would be supplied under different conditions in terms of quality, safety, affordability, equal treatment or universal access) by the market without public intervention. A PSO is imposed on the provider by way of an act of entrustment and on the basis of a general interest criterion which ensures that the service is provided under conditions allowing it to fulfil its obligation.  

The SGEI concept may apply to different situations and conditions in different Member States. Moreover, EU law does not impose any obligation to formally designate a task or service as being of general economic interest, except where such an obligation is laid down in EU legislation. 

In the absence of specific EU rules, Member States have a wide margin of discretion in defining a given service as an SGEI and in granting compensation to the service provider. However, Member States' freedom to define SGEIs is subject to review by the Commission and the Court of Justice of the EU to check for manifest errors of assessment.

For example, the Commission may identify a manifest error:

• if the PSO is already provided or can be provided satisfactorily and under conditions, such as price, objective quality characteristics, continuity and access to the service, which are consistent with the public interest, as defined by the Member State, by undertakings operating under normal market conditions; or
• where a sector is harmonised at EU level and Member States' discretion runs counter to the rules governing such harmonisation.

Consequently, the existence of an SGEI is assessed on a case-by-case basis, taking into account the Commission's decision-making practice and the caselaw of the Court of Justice of the EU. The correct definition of an SGEI also depends on the sector and the degree of harmonisation in that field (e.g. telecommunications, postal services and energy). For example, specific guidance published by the Commission must be taken into account when defining SGEIs in sectors such as broadband networks and public service broadcasting.

In its Altmark judgment, the Court of Justice of the EU held that public service compensation did not constitute State aid within the meaning of Article 107 (1) TFEU provided that four cumulative criteria are met 1 :

• First, the recipient undertaking must actually be required to discharge PSOs, and the obligations must be clearly defined.
• Second, the parameters on the basis of which the compensation is calculated must have  isc established in advance in an objective and transparent manner to avoid giving the recipient undertaking an economic advantage over its competitors.
• Third, the compensation cannot exceed what is necessary to cover all or part of the costs incurred in discharging the PSOs, taking into account the relevant receipts and a reasonable profit.
• Fourth, where the undertaking which is to discharge PSOs is not chosen pursuant to a public procurement procedure (which would allow for the selection of the bidder capable of providing those services at the least cost to the community), the level of compensation needed must be determined on the basis of an analysis of the costs that a typical undertaking (if well-run and adequately equipped) would have incurred to perform those obligations, taking into account related revenues and a reasonable profit.

The ”least cost to the community” requirement (see fourth criterion) is the most difficult to meet when a tender has not been organized. Compensation that does not fulfil the Altmark criteria and therefore constitutes State aid may still be compatible with the common market and exempted from notification under the SGEI exemption rules or approved by the Commission on notification (see below). 

In 2012, the Commission adopted the Almunia package to provide the Member States with the adequate European framework ensuring legal certainty of the public of SGEI while preserving the key aspects of State aid control. This package consists of four instruments:

• The SGEI Communication, which sets out key principles for the application of State aid rules to SGEIs, such as the notions of aid, SGEI, economic activity, the relation between public procurement and State aid rules, etc.. In particular, the SGEI Communication addresses the different requirements established in the Altmark case law.
• The SGEI Decision, which sets out the conditions under which State aid in the form of public service compensation granted to certain undertakings entrusted with the operation of SGEIs are compatible with the internal market and exempt from the notification obligation laid down in Article 108 (3) TFEU.
• The SGEI Framework sets out the conditions for assessing compensation for SGEIs not covered by the SGEI Decision. Such compensation must be notified to the Commission and may be declared compatible with Article 106 (2) TFEU if it meets the criteria of the SGEI Framework. The conditions for compatibility under the Framework are stricter than under the Decision. 
• The SGEI de minimis Regulation, which provides that Member States may grant support of up to EUR 750,000 per SGEI provider per country over a period of three years without prior notification to the Commission for approval. This amount is deemed not to have an impact on competition and trade in the EU Single Market and is therefore not considered State aid. The current rules are set to expire on 31 December 2023. 

In this context, the Commission is considering increasing the SGEI de minimis threshold, taking into account past and estimated inflation for the 2012-2030 period. The adoption of the new SGEI de minimis Regulation is planned for the end of 2023.

Public authorities and SGEI providers must conduct a self-assessment to demonstrate compliance with State aid rules related to the funding of public service obligations.

CMS lawyers represent both public authorities and SGEI providers on all aspects of State aid rules. This includes:

• Legally assessing whether a service could be considered an SGEI, based on the Commission's decision-making practice and the caselaw of the Court of Justice of the EU;
• Analysing  the conditions and methodology to be used under the SGEI rules (Altmark criteria, Decision, Framework and de minimis Regulation);
• Drafting of SGEI mandates, assisting our clients in all relevant formalities and providing advice on the best options to calculate the cost of PSOs and avoid any overcompensation;
• Assisting public authorities or undertakings entrusted with the provision of SGEIs with the implementation of the SGEI package rules (e.g. audit of the existing situation, participation in negotiations, etc.);
• Assisting public authorities in notifying SGEI compensations to the European Commission;
• Assisting public authorities or beneficiaries in State aid investigations by the European Commission; 
• Drafting and lodging complaints with the European Commission; 
• Litigation before national and EU courts.
• Assisting undertakings facing recovery measures for illegal State aid due to infringement to the SGEI rules.

The CMS State Aid Practice Area Group comprises 40 State aid law specialists practising State aid law in 17 jurisdictions located in 20 cities in Europe and beyond – all committed to assist you. 

Find your local contact person in our brochure CMS State Aid Group.