Department of Law Spring Term 2020 Master’s Thesis in Competition Law 30 ECTS

The Altmark-criteria and the SGEI-Decision

A comparison of the different criteria Author: Axel Olofsson Supervisor: Associate Professor Vladimir Bastidas

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Abstract In EU State aid law special rules apply to Services of General Economic Interest

(SGEI). Firstly, public service compensation to SGEI-operators may avoid the

scope of the State aid prohibition in article 107(1) TFEU if it fulfils the four

Altmark-criteria. Secondly, if that compensation constitutes aid it can be exempted

from the prohibition under article 106(2) TFEU.

After the Altmark-case was decided the Commission adopted the so-called

Altmark package. As part of this Altmark-package the Commission adopted

secondary legislation under article 106(3) TFEU that exempts some categories of

aid from the prohibition on State aid. However, the aid measure has to fulfil a set

of criteria in order to be exempted under the secondary legislation. Those criteria

bear close resemblance to the Altmark-criteria. There are, however, one Altmark-

criterion that does not have any equivalent in the secondary legislation. The

missing piece is the fourth Altmark-criterion regarding the requirement of

selecting the most efficient operator. The Altmark doctrine and article 106(2)

TFEU serves different purposes which can explain why this last criterion did not

find its way into the legal act concerning article 106(2) TFEU. However, one may

also ask what the rationale is for making the secondary legislation so similar to the

three first Altmark-criteria, apart from the fact that this legislation was adopted in

reaction to the Altmark-case.

In this thesis the different purposes behind the Altmark-doctrine and article

106(2) TFEU and related secondary legislation is examined in order to find the

reason for the similarities and differences between the Altmark-criteria and the

criteria used by the Commission in its legal acts regarding article 106(2) TFEU.

Moreover, the consequences of the fact that the criteria differ is explained. Some

critique is also presented against the lack of a requirement corresponding to the

fourth Altmark-criterion in the secondary legislation.

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TableofcontentsAbstract ................................................................................................................................... 2

1 Introduction ................................................................................................................... 6 1.1 Purpose and delimitations .......................................................................................... 7 1.2 Methodology and materials ........................................................................................ 8

1.2.1 The dogmatic legal method ............................................................................... 8 1.2.2 EU legal method ................................................................................................ 8 1.2.3 Economic analysis of law ..................................................................................10 1.2.4 Materials ..........................................................................................................11

1.3 Outline ......................................................................................................................12

2 Services of General Economic Interest ..........................................................................12 2.1 Defining SGEI .............................................................................................................12

2.1.1 The use of SGEI in EU-law .................................................................................12 2.1.2 Designation and control ...................................................................................13 2.1.3 Economic activity .............................................................................................15

2.2 Summary ...................................................................................................................17

3 State aid ........................................................................................................................18 3.1 The purpose of EU State aid control ...........................................................................18 3.2 Outline of the EU-State aid rules ................................................................................19

3.2.1 Article 107(1) TFEU – the concept of “State aid” ...............................................19 3.2.2 Article 107(2) and 107(3) TFEU – exemptions ...................................................21 3.2.3 Other exemptions.............................................................................................24 3.2.4 Article 106(2) TFEU and related documents ......................................................25 3.2.5 The finding of aid and its influence on the notification- and standstill requirements .................................................................................................................30

3.3 The problem arising from SGEI in a State aid context .................................................32 3.4 Summary ...................................................................................................................33

3.4.1 Overview ..........................................................................................................33 3.4.2 A brief guide to the application of the State aid rules to SGEI............................34

4 The Altmark-case ...........................................................................................................35 4.1 Factual background and questions referred ...............................................................35 4.2 Case law before the Altmark judgment ......................................................................36 4.3 Judgment of the CJEU ................................................................................................37 4.4 Compensation or State aid approach? .......................................................................38 4.5 The Altmark-criteria...................................................................................................39

4.5.1 The requirement of a public service obligation .................................................39 4.5.2 The requirement that the parameters of compensation are established beforehand ....................................................................................................................40 4.5.3 Prohibition on overcompensation.....................................................................41 4.5.4 The selection of provider ..................................................................................41

4.6 Summary ...................................................................................................................45

5 The Decision ..................................................................................................................46 5.1 General remarks ........................................................................................................46 5.2 Procedural aspects ....................................................................................................49

6 Comparing case-law, decisions and secondary law .......................................................50 6.1 The BUPA-case ..........................................................................................................50

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6.2 The Framework and the Decision ...............................................................................54 6.3 Commission practice ..................................................................................................61

7 Conclusion .....................................................................................................................64 7.1 General remarks ........................................................................................................64 7.2 The difference between the criteria used ...................................................................65 7.3 Comparing Commission practice and the EU-courts case-law .....................................68 7.4 Need for change? ......................................................................................................69

References ..............................................................................................................................71 Literature ...........................................................................................................................71 Table of cases .....................................................................................................................72

Court of Justice ..............................................................................................................72 General court .................................................................................................................74

Commission decisions .........................................................................................................74 Internet sources ..................................................................................................................74

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1 Introduction The basic idea behind EU State aid law is that aid given by states distorts

competition and should therefore be prevented.1 Preventing competition

distortions is also the purpose of having rules on State aid in the first place and this

idea is put into action through, inter alia, the general prohibition on State aid in

article 107(1) of the Treaty on the Functioning of the European Union (TFEU).

However, in the EU there were, from the very outset, differences between the

Member States regarding the amount of State intervention in the economy that

existed and how much state intervention was desirable.2 This is the background of

the special regulation of services of general economic interest (SGEI) that has been

developed by the EU institutions over the years. The special rules regarding SGEI

is relevant both for finding if there has been any State aid and, if that is the case, if

the state aid is legal. In order to determine if there has been any aid it is necessary

to determine whether any advantage has been conferred on the receiving

undertaking. In the context of SGEI the existence of an advantage may be more

difficult to assess than otherwise. The reason for this is that the Member State may

have received a service from the SGEI-operator and the compensation thus fall

outside of the scope of the State aid prohibition. In order to assess whether this is

the case, the Court of Justice of the European Union (CJEU) has developed a test

known as the Altmark-test. The Altmark-test sets up four criteria for when aid to

SGEI in fact is compensation for a service and not State aid.3 The European

Commission has adopted measures of its own after the Altmark-decision known

as the Altmark-package I and II. They concern the Commission’s own conduct in

its role as regulator of State aid. Among other acts the Commission adopted

Commission decision (2012/21/EU) on the application of article 106(2) (“the

1 Piernas Lopez, The Concept of State Aid under EU law From Internal Market to Competition and

beyond, p. 42. 2 Hofmann & Micheau, State Aid Law of the European Union, p. 88 3 Case C-280/00 Altmark Trans v Nahverkersgesselschaft Altmark GmbH (ECLI:EU:C:2003:415)

para. 95.

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Decision”)4 which lays down provisions for when aid is compatible with the

internal market. However, the requirements in the Decision are very similar to the

requirements laid down in the Altmark-case. The Altmark-case, however, does not

concern the compatibility of aid with the internal market. Instead, the Altmark-test

is used to establish the existence of aid in the first place. This difference is

interesting both from a theoretical point of view since it illuminates the problem

of defining State aid. It is also interesting from a practical perspective since the

finding of aid has certain consequences regarding procedure. This gives rise to the

question of how similar the Decision and the Altmark-test are and why these

similarities or differences exist. These similarities and differences are the topic of

this thesis.

1.1 Purpose and delimitations The Decision lays down the requirements for aid, that does not meet the Altmark-

criteria, to be compatible with the internal market under article 106(2) TFEU and

exempts the aid from the notification requirement. Nevertheless, the substantive

content of the Altmark-criteria is to some degree echoed in the Decision. The

purpose of this thesis is to examine the difference and similarities between the

courts Altmark case-law regarding article 107(1) TFEU and the Decision.

In order to achieve the purpose of this thesis the following research questions

will be answered. First of all, the question of what a SGEI is has to be answered.

Moreover, the purpose of treating compensation to SGEI differently from other

forms of State interventions will have to be examined. Secondly, the different

Altmark-criteria have to be analysed with the view of answering what falls within

their scope and what falls outside. Thirdly, a comparison between the approach

4 Commission Decision (2012/21/EU) of 20 December 2011 on the application of Article 106(2) of

the Treaty on the Functioning of the European Union to State aid in the form of public service compensation granted to certain undertakings entrusted with the operation of services of general economic interest

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taken by the Commission, both regarding the acts adopted by it and subsequent

practice, should be compared with that of the courts. Finally, the last question has

to be answered in a way that the view of the courts and the view of the Commission

is presented separately in order for them to be compared.

A couple of delimitations has been necessary in order to achieve the purpose.

Firstly, the thesis will only be concerned with EU-law. In order to answer the above

questions, the interpretation by national courts and public administrations is not

required and will not be dealt with. Secondly, since the Altmark case concerns

SGEI, the wider concept of services of general interest (SGI) will not be dealt with

in depth.

1.2 Methodology and materials 1.2.1 The dogmatic legal method In order to examine and analyse the law as it stands today, the legal dogmatic

method will be used. Applying the dogmatic legal method means analysing the

sources of law of a particular legal system in order to find out the solution to a

legal problem in a particular situation.5 These sources are for example legal acts

adopted by the legislator, preparatory documents, case-law and legal writings.6

Those sources may vary depending on the legal system and the significance of a

particular source may differ between legal systems. Since this thesis concern EU-

law it is the sources of law in the EU legal system that must be examined. The

legal dogmatic method will be used in this thesis in order to find out the content of

particular legal rules. Moreover, it will be used in order to examine which

arguments are valid de lege lata.7

1.2.2 EU legal method The EU legal method has a couple of distinct features. The EU legal method entails

a highly teleological approach which means that the answer to a legal issue is

5 Kleineman, J, in Juridisk metodlära, p. 21. 6 Ibid. 7 See ibid. 36

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decided according to the purpose of the legal rule in question.8 In EU law, general

principles of law is also of great importance since other provisions of EU law have

to be consistent with these principles.9

Furthermore, the content of EU-law is decided to a high degree by the CJEU in

its case-law.10 Thus, the precedents set by the CJEU is of importance. The case-

law of the General court is sometimes also used. However, one has to bear in mind

that the CJEU may decide differently if a similar case is presented to it.

Another feature of EU law is that many areas of EU law contains “soft law” i.e.,

documents that have no binding force but nevertheless are of great importance.

Firstly, they may provide guidance on how to apply a certain rule.11 Secondly, the

CJEU has held that an institution may be bound by its own “soft law” even though

it cannot bind others.12 The Commission’s soft law is of great importance and can

have a normative function.13 The CJEU may refer to it in its judgments.14 In this

respect it is important to distinguish between legal acts that are binding (such as

decisions) and communications and guidelines that are not (apart from binding the

issuing institution in accordance with the case-law of the CJEU). Moreover, the

individual decisions of the Commission are only binding on the addressees.

However, they may be used to find patterns in the Commission’s decision-making.

Since this thesis concerns EU law, the EU legal method will be used in order to

find out the state of the law. It must also be considered when proposing changes

or analysing the law. For example, when discussing SGEI and the competences of

8 See Reichel, J, in Juridisk metodlära, p. 122. 9 Ibid. pp. 126–127. 10 Ibid. p. 131. 11 Ibid. p. 128. 12 Case C-313/90 Comité International de la Rayonne et des Fibres Synhétiques (CIRFS) v

Commission (ECLI:EU:C:1993:111), para 36 and Case C-57/95 French Republic v Commission of the European Communities (ECLI:EU:C:1997:164), paras 23 and 24.

13 Reichel, J, in Juridisk metodlära, p. 127. 14 Ibid.

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the EU and the Member States, the principle of conferral (article 5(2) TEU) must

be considered.

1.2.3 Economic analysis of law Economic analysis of law consists of analysing the law from the perspective of

how the legal rules can contribute to the maximization of economic welfare.15 It is

based on the assumption that market actors are rational and try to maximize their

own wealth.16 Its main value is when discussing de lege ferenda issues. I.e., how

the law should be interpreted in order to maximize economic efficiency (normative

analysis).17 This holds true in particular when discussing fields of law which are

heavily influenced by economic motives such as State aid law. Thus, when

discussing whether public funds should be used to pay private undertakings or not,

it is helpful to consider the impacts on, for example, the incentive effects that it

may have on that undertaking or on distortion of competition in general.

To some extent it may also be helpful in order to find out the state of the law

especially when considering the teleological approach of the EU.18 Moreover,

economic analysis of law has had a big impact on EU law.19 Arguments based on

economic analysis of law can thus hold authoritative value de lege lata (positive

analysis).

However, economic analysis of law can be criticised for making unrealistic

assumptions. For example, the assumption that market actors behave rationally.20

In this thesis this method will primarily be used in a normative fashion, i.e., when

discussing how the legal rules should be designed in order to maximize economic

efficiency.

15 Bastidas Venegas, V, in Juridisk metodlära, pp. 177–181. 16 Posner, R, Economic analysis of law, pp. 3 and 4. 17 Bastidas Venegas, V, in Juridisk metodlära, p. 180. 18 See ibid. and section 1.2.2. 19 Bastidas Venegas, V, in Juridisk metodlära, p. 185. 20 Ibid. p. 186.

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1.2.4 Materials In order to answer the research questions, the treaty provisions and relevant

protocols added to the treaties, concerning state aid as well as the Commission’s

powers in that field, has been used. This has been done in order to explain the state

of the law and to draw comparisons.

Furthermore, material consisting of court decisions from the CJEU and the

General court has been used since they interpret the treaty provisions that governs

state aid. Whenever possible, cases from the CJEU will be used since they are more

authoritative than the case-law of the General court.

In order to make the comparison between the Commissions interpretation of the

Altmark-criteria and the Courts’ interpretation, the Commission’s legal acts,

reports and decisions has been referred to as well. This includes the Decision,

which this thesis aims to examine, and the Commission’s communication on

European Framework for State aid in the form of public service compensation

(“the Framework”). 21 Regarding the Decision,22 it is important note that it is

generally binding (article 288(4) TFEU) and should not be confused with

individual decisions as referred to in section 1.2.2.

Moreover, some soft law from the Commission has been examined, in particular

the Framework. The reason for this is the significance of soft law in this field, as

well as the general purpose of examining the Commission’s approach to public

service compensation to SGEI. The Commission’s soft law is of great importance.

Therefore, the soft law, and in particular the Framework, will be frequently used

in this thesis. However, it is not binding, and the Framework only provides with

information about the Commission’s reasoning when making decisions under

21 Communication from the Commission — European Union framework for State aid in the form of

public service compensation (2011) OJ 2012/C 8/03 22 Commission Decision (2012/21/EU) of 20 December 2011 on the application of Article 106(2) of

the Treaty on the Functioning of the European Union to State aid in the form of public service compensation granted to certain undertakings entrusted with the operation of services of general economic interest OJ L 7, 11.1.2012, p. 3–10

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article 106(2) TFEU. Thus, when the Framework is used, it is article 106(2) TFEU

that is applied. Academic writing has also been used in this thesis. It is useful when

discussing different possible views on both unresolved legal issues and policy

issues.

1.3 Outline The thesis has the following structure. Firstly, the concept of SGEI is explained

shortly. The examination seeks to explain the concept and to examine the role of

the Member States and the Commission when designating and controlling SGEI.

Secondly, an examination of the relevant State aid law follows. This includes the

prohibition in article 107(1) TFEU as well as important exemptions in the treaty

and in secondary legislation. Thirdly, the Altmark-doctrine and the Decision are

examined. The Altmark-case is presented as well as the Decision and the different

criteria are examined. Fourthly, is a comparison between Case-law, Commission

decisions and the Decision. Finally, conclusions that can be drawn from the

examination is presented.

2 Services of General Economic Interest 2.1 Defining SGEI 2.1.1 The use of SGEI in EU-law The concept of SGEI was originally designed as a compromise between those

Member States that were free-trade oriented and those Member States that wanted

to preserve some State intervention in the economy.23 Thus, the purpose of the EU-

rules on SGEI is to strike a balance between the Member States national policy

goals and the Union interest of preserving the unity of the internal market and limit

23 Hofmann, H, Micheau, C, State Aid Law of the European Union, p. 88.

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distortions of competition.24 For a long time, article 106 TFEU, concerning

compatible aid, was the main reason why SGEI were of interest in the field of State

aid law.25 However, as we shall see the concept of SGEI is also relevant when

making the assessment of whether the measure in question is State aid at all. The

notion of SGEI is part of a wider concept of “services of general interest” (SGI)

on which there is a protocol to the treaties (protocol 26). This protocol lays down

interpretative provisions (article 1) regarding SGEI, with reference to article 14

TFEU. For the purposes of this thesis SGI are superfluous and will not be dealt

with in depth.

2.1.2 Designation and control There is no clear and precise definition of the concept of SGEI in Union law26 and

there is no finite list of services that may be designated as SGEI. Instead it is up to

the Member States to designate them. They have a wide discretion when doing

so.27 This is explicitly stated in protocol 26 to the TFEU on Services of General

economic interest. However, SGEI are services that display special characteristics

compared to other economic activities.28 Which national authority that designates

them is up to national law and may be done at a local level.29 As a consequence, a

service that is a SGEI in one Member State does not have to be a SGEI in another.30

It may be seen as an expression of subsidiarity since it leaves the Member States a

wide discretion in organizing and financing its public services.31 Furthermore, the

Member States are allowed to take their own national policy objectives into

24 See, for example, Case C 660/15 P Viasat Broadcasting UK v Commission (ECLI:EU:C:2017:178),

para. 31 regarding article 106(2) TFEU. 25 Hofmann, H, Micheau, C, State Aid Law of the European Union, 2016, p. 88. 26 Case T-289/03 BUPA and Others v Commission (ECLI:EU:T:2008:29), para. 165 27 Ibid. para. 166. 28 Case C-179/90 Merci convenzionali porto di Genova (ECLI:EU:C:1991:464), Para 27. 29 Hofmann, H, Micheau, C, State Aid Law of the European Union, pp. 90–91. 30 Ibid. p. 90. 31 Ibid. pp. 90–91.

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account when determining the scope and organisation of their SGEI.32 The

Commission’s control of Member States designation of SGEI is limited. The

Commission will check whether the Member State has made a manifest error when

designating the SGEI and assess State aid that is part of the compensation.33

Moreover, there is a requirement that the undertaking has been provided with a

“particular task” (article 106(2) TFEU). This requirement coincides with the first

Altmark-criterion (see section 4.5.1).34 The assignment of a particular task shall be

interpreted as implying that said task would not have been carried out or carried

out to a lesser extent or not under the same conditions if the undertaking only were

considering its own commercial interests.35 However, the CJEU has accepted that

in some cases private representative bodies (social partners) may define public

service tasks instead of the State.36 Moreover, the public service obligation does

not have to be related to the provision of the service per se, i.e., an obligation to

provide a certain service. It can also consist of certain obligations when performing

a service. For example, an obligation that if the service is provided, the service

provider must adhere to certain conditions relating to price or an obligation to

provide the service to everyone that wants it etc.37 It is also not necessary that a

particular undertaking has been assigned the SGEI mission. The SGEI mission

may be assigned to several undertakings or even all undertakings on a market.38

32 Case C-242/10 ENEL (ECLI:EU:C:2011:861), para 50 and Case C-67/96 Albany

(ECLI:EU:C:1999:430), para 104. 33 Communication from the Commission on the application of the European Union State aid rules to

compensation granted for the provision of services of general economic interest, OJ C 8, 11.1.2012, p. 4–14, para. 46.

34 Case T-289/03 BUPA and Others v Commission, para. 224. 35 Communication from the Commission on the application of the European Union State aid rules to

compensation granted for the provision of services of general economic interest OJ C 8, 11.1.2012, p. 4–14 para. 47.

36 Case C-437/09 AG2R Prévoyance v Beaudout Pére et Fils SARL (ECLI:EU:C:2011:112). 37 Case T-289/03 BUPA and Others v Commission, paras 174–176. 38 Ibid. para 179 and Case C-393/92 Gemeente Almelo and Others v Energiebedrijf Ijsselmij NV

(ECLI:EU:C:1994:171).

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Furthermore, the general interest pursued does not have to be economic, although

the activity should.39

However, the wide discretion for the Member States is only true as far as the

designation of what constitutes a service of general economic interest is concerned.

Whether the compensation granted for that service is compatible with the internal

market is another issue where the Commission exercises much more control. This

reflects the idea behind the concept of SGEI since it allows the Member States to

organize their economy according to their wishes. The EU institutions have only

limited influence in this regard.

2.1.3 Economic activity There are, as already mentioned, other types of Services of General Interest (SGI)

and there is a need to delimit SGEI towards other services. The main feature of

SGEI compared with other SGI is that the former are provided by undertakings

and thus consists of an economic activity.40 The classification of an entity as an

undertaking depends on the nature of its activities regardless of their legal

status.41An economic activity, in general, consists of offering goods or services on

a market.42 Since economic activities require a market, the absence of a market

generally results in a service not being an SGEI. However, if the national

legislation is the reason that there is no market, the relevant test is not whether

there is a market as such (in which case there would never be any SGEI). The

relevant test is instead to examine if other operators would be willing and able to

provide the service in that market.43 The Commission’s control in this regard is

39 Wehlander, C, Who is Afraid of SGEI? : Services of General Economic Interest in EU Law with a

Case Study on Social Services in Swedish Systems of Choice, Dissertation Umeå Universitet, 2015, p. 322.

40 Hofmann, H, Micheau, C, State Aid Law of the European Union, p. 88. 41 Joined Cases C-180/98 to C-184/98 Pavlov and Others (ECLI:EU:C:2000:428), para. 74. 42 Case 118/85 Commission v Italy (ECLI:EU:C:1987:283), para. 7. 43 Communication from the Commission on the application of the European Union State aid rules to

compensation granted for the provision of services of general economic interest OJ 2012/C 8/02

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limited to checking if the Member State has made any manifest errors concerning

whether or not something can be provided by the market.44 What a market activity

is may vary over time.45 An example of this would be an activity which used to be

a non-economic activity but that has been liberalised, for example postal services.46

The activity thus went from being a non-economic activity not covered by the State

aid rules to being an economic activity. SGEI-missions are sometimes necessary

to ensure the functioning of that activity in a Member state.

There are, however, activities that are not economic in nature. For example, no

economic activity is involved where the State exercises public powers or where an

entity performs an activity which forms part of the essential functions of the State.

Alternatively, that activity may be connected to those functions by its aim, its

nature and the rules to which it is subject.47 For example, air traffic control is

considered to be an activity which constitutes the exercise of public powers.48

There may be cases where an economic activity is carried out by a public entity

and that activity cannot be separated from activities connected to the exercise of

public powers. In those cases, the activities as a whole of that entity is regarded as

being connected with the exercise of public powers.49

Moreover, activities of a purely social character are not economic activities.50

However, those activities must display certain characteristics. Firstly, the activity

needs to be exercised within a social security system with a social purpose.

Furthermore, it must be clearly distinguishable from any economic activity carried

out at the same time.51 Secondly, that system must be based on the principle of

44 Communication from the Commission — European Union framework for State aid in the form of

public service compensation (2011) OJ 2012/C 8/03 para. 13. 45 Ibid. para. 12. See also for a similar development the Commissions argument in Altmark para. 69

concerning the effect on trade criterion. 46 Quigly, C, European State Aid Law and Policy p. 247. 47 Case C-118/85 Commission v Italy, paras. 6–8 and Case C-364/92 SAT/Eurocontrol

(ECLI:EU:C:1994:7), para. 30. 48 See Case C-364/92 SAT/Eurocontrol. 49 Case C-687/17 P Aanbestedingskalender and Others v Commission (ECLI:EU:C:2019:932), para

44. 50 Säcker, F, Montag F, European State Aid Law – a Commentary. p. 304. 51 Ibid. p. 305.

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solidarity, meaning that contributions and benefits are not proportional to each

other. This has the consequence that compulsory contributions are indispensable

for the scheme.52 Thirdly, the purpose of carrying out the activity must be a non-

profit purpose. This does not mean that a non-profit purpose excludes an entity

from carrying out an economic activity. Instead, it is a prerequisite for an activity

to be considered as non-economic (together with other criteria).53 Finally, the

benefit must be independent of the amount of compensation paid and provided by

law. Thus, there must be no possibility for the entity to decide whether to grant the

benefit or not.54

Accordingly, social security schemes may be considered as either economic

schemes or solidarity schemes depending on how they are structured.55 The

solidarity schemes are not considered an economic activity.56 The same distinction

between economic schemes and solidarity schemes can be found in the healthcare

sector.57 Moreover, the CJEU has held that education within the national education

system is generally not an economic activity even if pupils or their parents have to

pay tuition fees. Those fees usually only cover a fraction of the costs of the

service.58

2.2 Summary The concept of SGEI serves as the legal tool when striking a balance between the

Member States interest in pursuing their national policy goals and the EU interest

of preventing distortions of competition and maintaining the unity of the internal

52 Ibid. 53 Ibid. p. 306. 54 Ibid. 55 Communication from the Commission on the application of the European Union State aid rules to

compensation granted for the provision of services of general economic interest OJ C 8, 11.1.2012, p. 4–14, para. 17.

56 Ibid. para. 18. 57 Ibid. para. 22. 58 Ibid. para. 27

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market. The SGEI is accordingly designated by the Member States and subject to

less rigorous review by the EU-institutions. The Commission checks whether an

activity has been correctly defined, but its review is limited to manifest errors. The

constitutional position of SGEI in EU-law may have an impact on the possibility

for the courts and the Commission to solve problems arising in this field (see

section 6.2). The errors in question may relate to the correct definition of an SGEI

(for example, that it cannot be provided in whole by the market), and whether an

activity is economic in nature (for example, if a social security scheme is based on

solidarity or not).

The SGEI is distinguished from the SGI by the fact that the former carries out

economic activity and thus are subjected to the State aid rules. However, in the

field of State aid law, special rules apply to SGEI

3 State aid 3.1 The purpose of EU State aid control The ultimate goal of State aid control is to ensure economic efficiency (i.e.,

effective allocation of resources) through market mechanisms by maintaining a

level playing field between undertakings regardless of where in the EU they are

established.59 In order to achieve this goal, State aid should in general not be

granted as it distorts competition and prevents the market from allocating resources

to their best use. However, according to the economic theory behind State aid

control, State aid may be granted in order to correct market failures, i.e., when the

market is unable to deliver a positive outcome for society.60 The intervention by

the State may take the form of services of general economic interest (SGEI). The

EU position on State aid is that it is generally negative and thus should be

59 Hancer, L, Ottervanger, T, Jan Slot, P, EU State Aids, p. 32. 60 Ibid. p. 31.

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prohibited albeit with some exceptions (for example, SGEI through article 106(2)

TFEU).

3.2 Outline of the EU-State aid rules This section provides a brief summary of the EU-rules on State aid. The focus will

be on the treaty rules, but other important documents will also be presented as far

as they are relevant.

3.2.1 Article 107(1) TFEU – the concept of “State aid” Article 107 TFEU lays down a general prohibition on State aid and several criteria

that have to be fulfilled for a measure to be classified as such. The most interesting

in this context is the advantage-criterion.

Firstly, the aid has to be granted by the State or through State resources. This is

a logical necessity in the approach to State aid adopted by the EU in its infancy,

namely that the State ought to play an important part in correcting pre-existing

market failures. Therefore, the transfer of State resources is of particular interest.61

This includes any intervention by the State that encompasses a financial burden

borne by the State and witch results in an economic advantage for the receiving

undertaking.62 An obvious example of State aid is outright subsidies where an

undertaking or undertakings receive cash payments or tax reductions for producing

and/or exporting (in case of export subsidies) a product or service.63 However, the

way the economic advantage is conferred on an undertaking is not relevant when

deciding if the advantage is imputable to the State and may involve much more

complicated situations than the one described.64

Secondly, a measure must confer an advantage on the undertaking. There exists

an advantage when an undertaking receives an economic benefit which it would

61 Ibid. 62 Case C-280/00 Altmark Trans v Nahverkehersgesellschaft Altmark GmbH, para. 84. 63 Quigly, C, European State Aid Law and Policy, third edition, Hart Publishing, 2015, p. 12. 64 See footnote 8.

20

not have received under normal market conditions.65 The form and objective of the

measure is irrelevant, only the effects of it are to be considered.66 This means that,

when the State intervenes on a market and acts as an economic operator in line

with normal market conditions, those interventions does not confer an advantage

on the undertaking. Hence, they cannot constitute State aid since they are in line

with normal market conditions.67 For example, when a State or a State controlled

entity provides capital injections to an undertaking and a private investor, under

the same circumstances, might have done the same.68 Pari passu transactions (i.e.,

transactions carried out under the same terms and conditions as a private operator)

and the sale or purchase of goods and services in accordance with public tender

procedures are also considered to be in line with normal market conditions.69 When

compensation is granted for the provision of services of general economic interest

special rules apply. It means that the compensation will not confer an advantage if

certain criteria (the Altmark-criteria) are met (see chapter 4.5).

Thirdly, the advantage has to favour certain undertakings or the production of

certain goods, meaning it has to be selective. Thus, general measures that entails

economic benefits cannot be State aid. This excludes measures of a general nature

unless they favour certain undertakings (or the production of certain goods)

compared to other undertakings (or other production of goods), that are in a

comparable factual and legal situation.70

Fourthly, the selective advantage must distort or threaten to distort competition

and have an effect on trade between Member States. Distortion of competition and

65 Case C-39/94 SFEI and Others (ECLI:EU:C:1996:285), para. 60. 66 Case C-280/00 Altmark Trans v Nahverkehersgesellschaft Altmark GmbH, para. 84. 67 Case C-39/94 SFEI and Others, para. 61. 68 Case C-305/89 Italy v Commission (ECLI:EU:C:1991:142), para. 19. 69 Case T-296/97 Alitalia v Commission (ECLI:EU:T:2000:289), paras 80–81. See also Commission

Notice on the notion of State aid as referred to in Article 107(1) of the Treaty on the Functioning of the European Union

OJ C/2016/2946 and, concerning public tendering Joined Cases C-214/12 P, C-215/12 P and C-223/12 P Land Burgenland v Commission (ECLI:EU:C:2013:682), para. 94.

70 Case C-143/99 Adria Wien Pipeline and Wietersdorfer & Peggauer Zementwerke (ECLI:EU:C:2001:598), para. 41.

21

effect on trade are often interlinked.71 The CJEU has held that State aid states has

an effect on trade if it is granted to undertakings in competition with undertakings

from other Member.72 Furthermore the Commission does not need to show any

real effects on trade or competition.73 Relieving an undertaking from costs it would

normally have to bear, distorts competition.74

3.2.2 Article 107(2) and 107(3) TFEU – exemptions There are exemptions enshrined in article 107(2) and 107(3) TFEU for certain

types of aid. Those exemptions are of two different types. The first type, found in

article 107(2), leaves no discretion for the Commission since the treaty provision

says that those types of aid “shall be compatible with the internal market.” The

Commission will only examine whether the aid measure falls within one of the

categories in article 107(2) (a)–(c). If that is the case the aid is compatible. There

is no possibility for the Commission to exercise any discretion as to that aid

measures compatibility with the internal market.75

The types of aid in question are aid having a social character granted to

individual consumers under the condition that there is no discrimination with

regard to origin of the products, aid to make good the damage caused by

exceptional occurrences or natural disasters and aid to the economy of certain parts

of the Federal Republic of Germany that have been negatively affected by the

division of Germany. For example, subsidies on essential products given to

consumers (not the undertaking providing them) can be aid having a social

character.76 That aid measure must not discriminate against goods from other

countries, for example, by only granting the aid to the consumer for products made

71 Quigly, C, European State Aid Law and Policy pp. 82–83. 72 Case 730/79 Philip Morris v Commission (ECLI:EU:C:1980:209), para. 11. 73 Case C-301/87 France v Commission (ECLI:EU:C:1990:67), para. 33. 74 Ibid. para. 44. 75 Quigly, C, European State Aid Law and Policy, p. 197. See also Joined cases T-132/96 and T-

143/96 Freistaat Sachsen and Others v Commission (ECLI:EU:T:1999:326), para. 140 76 Ibid.

22

in the same state as the one granting the aid.77 Aid to make good damage caused

by natural disasters or exceptional occurrences may be granted to compensate for

damages caused by, for example, floods78 (natural disaster) or terrorist attacks79

(exceptional occurrence). There must be a direct causal link between the aid and

the exceptional occurrence and the aid must not overcompensate for the damage.80

Furthermore, since article 107(2)(b) TFEU is an exception to a general principle,

it must be interpreted narrowly.81 Both compensation for economic loss and

compensation for repairs are covered as long as the costs are not incurred due to

commercial decisions, i.e., being part of normal entrepreneurial risks.82 Aid

granted to the economy of certain parts of the Federal Republic of Germany cannot

be given generally to undertakings in the newly incorporated German States,83 but

only to compensate for economic disadvantages caused by geographical division

of Germany as such.84

The other type of compatible aid in article 107 TFEU is found in article

107(3)(a)–(e). Under these provisions the Commission exercises discretion as to

whether an aid measure is compatible with the internal market. I.e., first the aid

measure must fall within one of the categories of article 107(3) TFEU. Secondly,

the Commission will have to decide that the measure (that falls within a category

of article 107(3) TFEU) is compatible with the internal market.

The types of aid in question are aid to seriously underdeveloped areas, aid to the

execution of important projects of common European interest, aid for the

development of certain economic activities or economic areas, aid to promote

77 Joined cases C-442/03 P and C-471/03 P P&O European Ferries (Vizcaya) SA v Commission

(ECLI:EU:C:2006:356), paras. 123–127 78 Quigly, C, European State Aid Law and Policy, 2015, pp. 198–199 79 Ibid. p. 199. 80 Joined cases C-346/03 and C-529/03 Atzeni v Regione autonoma della Sardegna

(ECLI:EU:C:2006:130), para. 79. 81 Ibid. 82 Quigly, C, European State Aid Law and Policy, p. 200. 83 Case C-156/98 Germany v Commission (ECLI:EU:C:2000:467), paras 54–55. 84 Case C-158/99 Germany v Commission para. 52.

23

culture and heritage conservation and other categories of aid as specified by the

Council on a proposal from the Commission.

Aid to seriously underdeveloped areas means aid to areas that are

underdeveloped in relation to the EU average.85 Moreover, the aid has to promote

economic development, meaning it must be possible to foresee that the area

receives a lasting increase in income or reduction in unemployment.86 For aid to a

common European project to be compatible with the internal market under article

107(3)(b) TFEU, the project must be part of a transnational European programme

supported by several Member states or be part of concerted action by several

Member states to combat a common threat.87 Under article 107(3)(b) TFEU it is

also possible to grant aid in order to remedy a serious disturbance in the economy

of a Member state. The disturbance has to be serious compared to the general

situation in the EU and must affect the economy of a Member state as a whole.88

Furthermore, granting aid is only permissible to the extent that it does not

adversely affect trading conditions contrary to the common interest. This means

that aid should be limited to the minimum amount necessary.89 Aid to culture and

heritage conservation can be permissible. However, the scope of what is covered

in the concept of culture must be interpreted restrictively.90 There must also be a

close link between the aid measure and conservation measure.91 The aid must not

affect trade or competition to an extent contrary to the common interest. Finally,

85 Case 730/79 Philip Morris, para. 25. 86 Case 310/85 Deufil GmbH v Commission (ECLI:EU:C:1987:96), para. 17. 87 Joined cases 62/87 and 72/87 Exécutíf régional wallon v Commission (ECLI:EU:C:1988:132), para.

22. 88 Quigly, C, European State Aid Law and Policy, p. 207 and Case C-301/96 Germany v Commission

(ECLI:EU:C:2003:509), para. 106. 89 Quigly, C, European State Aid Law and Policy, p. 211. 90 Ibid. p. 214. 91 Ibid.

24

article 107(3)(e) TFEU allows the Council to specify categories of aid that may be

exempted and to establish the criteria to be used when assessing compatibility.92

3.2.3 Other exemptions Apart from the exceptions referred to in the previous section, there are multiple

exceptions in the secondary law. The Council may under article 109 TFEU

empower the Commission to exempt certain categories of aid from the notification

requirement. The Council has adopted a regulation which enables the Commission

to exempt certain categories of horizontal aid.93

There are general exceptions regarding de minimis aid in the de minimis

regulation94 and block exemptions for certain categories of aid in the General

Block Exemption Regulation (GBER).95 For example, regional aid and aid to

SMEs (article 1(1)(a) and 1(1)(b) GBER). The de minimis rules differentiate

between State aid granted as public service compensation to SGEI and other aid.96

The Commission has also issued several guidelines and notices on its

application of the State aid rules in certain situations. For example, the

Commission notice on the notion of State aid97 and the Commission

communication on State aid for the deployment of broadband.98 These form part

of the Commissions soft law and are thus not legally binding on others. However,

92 Ibid. p. 216. 93 Council Regulation (EU) 2015/1588 of 13 July 2015 on the application of Articles 107 and 108 of

the Treaty on the Functioning of the European Union to certain categories of horizontal State aid OJ L 248, 24.9.2015, p. 1–8

94 Commission Regulation (EU) No 1407/2013 of 18 December 2013 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid OJ L 352, 24.12.2013, p. 1–8 and Commission Regulation (EU) No 360/2012 of 25 April 2012 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid granted to undertakings providing services of general economic interest (OJ L 114, 26.4.2012, p. 8–13) regarding public service compensation

95 Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty OJ L 187, 26.6.2014, p. 1–78

96 See ibid. 97Commission Notice on the notion of State aid as referred to in Article 107(1) of the Treaty on the

Functioning of the European Union OJ C/2016/2946. 98 Communication from the Commission — EU Guidelines for the application of State aid rules in

relation to the rapid deployment of broadband networks OJ C 25, 26.1.2013, p. 1–26

25

they may be of great importance as they create legal certainty and, in some sense,

“exceptions” (to article 107(1) TFEU, not article 108(3) TFEU) since States and

undertakings will know what factors are important when deciding if aid is

compatible. Thus, the Member State can change the planned aid measure and

design the measure in a way that reduces the likelihood of it being considered

incompatible by the Commission. Even though the soft law is not an exemption in

the strict sense, it may serve the same purpose as exemptions. The use of soft law

reduces dangerous aid and allows for beneficial aid which is a goal that the

Commission has (“less and better targeted aid”).99

3.2.4 Article 106(2) TFEU and related documents An important exception in the field of State aid law is article 106(2) TFEU. Under

that provision the treaty rules apply to undertakings operating SGEI (and revenue-

producing monopolies). However, they apply only insofar those rules do not

obstruct the performance, in law or in fact, of the particular tasks assigned to them.

Moreover, the development of trade must not be affected to an extent that would

be contrary to the interest of the Union. Although the scope of this provision is not

limited to the field of State aid law, it is a very important exemption to the general

rule in article 107(1) TFEU. Since it is an exception to the Treaty rules, it must be

narrowly defined.100 In order to determine the scope of this exemption one has to

consider the economic conditions in which the undertaking operates (in particular,

the costs it has to bear) and the legislation to which it is subject.101 The Commission

probably has some discretion102 in this matter since it is the institution set to

safeguard the adherence of the EU State aid rules. If the Commission does not have

99 State aid action plan - Less and better targeted state aid: a roadmap for state aid reform 2005-2009

(Consultation document) {SEC(2005) 795} COM/2005/0107 final 100 Case 127/73 Belgische Radio en Televisie v SABAM (no 2) (ECLI:EU:C:1974:25), para. 19. 101 Case C-393/92 Municipality of Almelo v Energiebedrif Ijsselmij NV para 49. 102 Although the use of soft law may narrow its discretion to some extent (see Case C-313/90 Comité

International de la Rayonne et des Fibres Synhétiques (CIRFS) v Commission para 36 and Case C-57/95 French Republic v Commission of the European Communities paras 23 and 24.)

26

discretion, the second sentence of article 106(2) TFEU would be deprived of its

effet utile.103 However, the case law of the General court suggests otherwise.104

In order for article 106(2) TFEU to be applicable there must exist a real SGEI-

mission, entrusted by a public authority in an entrustment act. The parameters of

compensation have to be set up transparently and objectively and there cannot be

any overcompensation.105 Furthermore, the aid will not be compatible with the

internal market if it affects the development of trade to an extent contrary to the

interests of the European Union.

The existence of a genuine SGEI means that there is an undertaking, performing

an economic activity (offering goods or services on a market), that has been

entrusted with a “particular task.” Moreover, the particular task must not be

satisfactory carried out by the market and the activity must display some special

characteristics compared to other economic activity.106

The requirement of the existence of an entrustment act means that there must be

an act that specifies the following factors: The content and duration of the public

service obligation, the undertaking carrying out the SGEI, the nature of any special

or exclusive rights assigned to the undertaking by the granting authority, a

description of the compensation mechanism and the parameters for calculating,

reviewing and monitoring the compensation and the arrangements for avoiding

and recovering any overcompensation. The form of this act is decided by the

Member States.107 The period of entrustment should be decided by reference to

objective criteria. In principle, it should not be longer than the depreciation of the

most significant assets required to provide the SGEI.108

103 Hofmann, H, Micheau, C, State Aid Law of the European Union, p. 229–230 and case-law cited. 104 Ibid. 105 Säcker, F, Montag F,European State Aid Law – a Commentary, p. 331. 106 See sections 2.1.2 and 2.1.3. 107 Communication from the Commission — European Union framework for State aid in the form of

public service compensation (2011) OJ C 8, 11.1.2012, p. 15–22, paras 15 and 16. 108 Ibid. para. 17.

27

The requirement that there cannot be any overcompensation stems from the

requirement of necessity which contains a proportionality assessment.109 Firstly,

the performance of the SGEI must be ensured. There is, however, no requirement

that the application of the treaty rules would threaten the financial balance or

economic viability of the undertaking that is entrusted with the operation of the

SGEI-mission.110 The meaning of protecting “the performance of the SGEI” is that

the performance of the SGEI itself shall be protected and not the performance of

the SGEI-operator.111

The measure allowed must not affect the development of trade to such an extent

that it would be contrary to the common interests of the EU. The General court has

held that the measure must not alter trade and competition in a substantial manner

and in a manifestly disproportionate measure in relation to the objective sought to

be achieved by the Member State.112 However, the case in question concerned aid

to public broadcasting and in that field a special protocol (no. 29) applies.

Moreover, this case was decided by the General court and not the CJEU which

affects the value of the statement (see section 1.2.2).

The Commission has issued a decision113 which declares that certain types of

aid fulfil the conditions of article 106(2) TFEU and therefore are compatible.

Moreover, the aid is exempted from the notification requirement in article 108(3)

TFEU. There are several categories of aid that are exempted because of the

Decision. For example, aid that does not exceed 15 million euros per year (article

2(1)(a) of the Decision). However, the Decision puts up several requirements

109 Säcker, F, Montag F,European State Aid Law – a Commentary, p. 339. 110 Case C 660/15 P Viasat Broadcasting UK v Commission, para. 30. 111 Säcker, F, Montag F,European State Aid Law – a Commentary, p. 339. 112 Case T-533/10 DTS v Commission (ECLI:EU:T:2014:629), para. 155 113 Commission Decision 2012/21/EU of 20 December 2011 on the application of Article 106(2) of

the Treaty on the Functioning of the European Union to State aid in the form of public service compensation granted to certain undertakings entrusted with the operation of services of general economic interest

28

regarding inter alia the entrustment of an SGEI-mission (article 4), transparency

(article 7) and control of overcompensation (article 6).114

For aid that does not meet the requirements in the Decision, the Commission

has issued a communication on a framework for State aid in the form of public

service compensation.115 Note that the Framework forms part of the Commission’s

soft law and is not legally binding (see sections 1.2.2 and 1.2.4). It lays down the

conditions that the Commission uses in its assessment for when State aid shall be

compatible with the internal market under article 106(2) TFEU. It applies to the

form of public service compensation that does not meet the requirements of the

Decision. 116 Importantly, the State aids covered by this framework have to be

notified under article 108(3) TFEU and the Commission decides whether the aid

measure is compatible.117 The requirements are that there exists a genuine SGEI,

an entrustment act that specifies the methods of calculating compensation, a

proportionate period of entrustment, compliance with public procurement rules

and rules regarding transparency.118 Furthermore, there is a requirement of non-

discrimination, compliance with certain reporting- and transparency-requirements

and that the amount of compensation does not exceed what is necessary to cover

the costs of performing the SGEI plus a reasonable profit.119

The granting authority must comply with EU public procurement rules

including any requirements of non-discrimination, transparency and equal

treatment resulting from primary or secondary law.120 If those requirements are not

114 See chapter 5 for a more in-depth analysis of this decision. 115 Communication from the Commission — European Union framework for State aid in the form of

public service compensation (2011) OJ 2012/C 8/03. 116 Ibid. para. 7. 117 Ibid. 118 Namely Commission Directive 2006/111/EC of 16 November 2006 on the transparency of

financial relations between Member States and public undertakings as well as on financial transparency within certain undertakings, OJ L 318, 17.11.2006, p. 17–25.

119 Communication from the Commission — European Union framework for State aid in the form of public service compensation (2011) OJ 2012/C 8/03.

120 Communication from the Commission — European Union framework for State aid in the form of public service compensation (2011) OJ C 8, 11.1.2012, p. 15–22, para. 19.

29

met, the aid shall be deemed to affect trade between Member States to an extent

that is contrary to the interests of the Union.121

For aid to be compatible, the granting authority has to comply with the

requirements in Commission Directive 2006/111/EC122 concerning transparency

of the financial relations between the State and public undertakings.

The requirement of non-discrimination means that the compensation shall be

calculated on the basis of the same method for all of the undertakings if the SGEI-

mission is given to several undertakings.123 The reporting and transparency

requirements are that the Member State publishes information on inter alia the

amount of aid granted, the duration and content of the public service obligations

and the undertaking receiving aid.124

Finally, the amount of aid must not exceed what is necessary to cover the net

costs of discharging the public service obligations. This includes a reasonable

profit for the undertaking performing the SGEI-mission.125 The reasonable profit

is to be calculated as the rate of return on capital that would have been required by

a typical undertaking considering whether or not to provide the SGEI for the whole

period of entrustment, taking into account the level of risk.126 If the rate of return

of capital does not exceed a certain level it is to be considered as reasonable in any

event.127 Overcompensation is compensation that is not necessary for the operation

of the SGEI and it constitutes incompatible State aid.128

121 Ibid. 122 Commission Directive 2006/111/EC of 16 November 2006 on the transparency of financial

relations between Member States and public undertakings as well as on financial transparency within certain undertakings OJ L 318, 17.11.2006, p. 17–25.

123 Communication from the Commission — European Union framework for State aid in the form of public service compensation (2011) OJ C 8, 11.1.2012, p. 15–22, para. 20.

124 Ibid. para. 60 125 Ibid. para. 21. 126 Ibid. para. 33. 127 Ibid. para. 36. 128 Ibid. para. 48.

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3.2.5 The finding of aid and its influence on the notification- and standstill requirements

Under article 108(3) TFEU Member States are generally obliged to notify State

aid to the Commission. The Commission will then assess whether the aid is

compatible with the internal market. Before an aid measure has been approved by

the Commission and considered compatible with the internal market, the aid

measure may not be implemented. Furthermore, no aid may be paid to the recipient

undertaking(s) before the Commission’s approval of the aid measure. The Council

has also made use of its powers under article 109 TFEU and adopted a regulation

(the procedural regulation)129 which provides detailed rules on the notification

requirement and standstill requirement in article 108(3) TFEU. Importantly, there

are provisions on the recovery of unlawful aid in article 16 of the regulation.

Unlawful aid is defined in article 1(f) of the regulation as aid put into effect in

contravention of article 108(3) TFEU. The recovery of unlawful aid is one of the

few times national courts have a role to play in the EU State aid regime since it is

for the Commission and the EU courts to decide on the compatibility and legality

of aid and Commission decisions regarding aid.130

Furthermore, both aid measures falling within article 107(2) and 107(3) TFEU

have to be notified to the commission (see section 3.2.2).131 Even though the

Commission does not have any discretion and thus cannot refuse its permission for

aid falling under article 107(2) TFEU, it must nevertheless be able to examine that

the conditions in that article are fulfilled.132 Moreover, the possibility for the

Council to exempt other categories of aid than those in the treaty does not give the

Council the power to exempt those categories from the notification requirement.

However, it is possible to establish more stringent notification requirements.133

129 Council Regulation (EU) 2015/1589 of 13 July 2015 laying down detailed rules for the application

of Article 108 of the Treaty on the Functioning of the European Union 130 Fiedzuk, N, Towards Decentralization of State Aid Control: The Case of Services of General

Economic Interest, World Competition 36, no. 3 (2013): 387–408. p. 398 and 399. 131 Case T-308/00 Salzgitter v Commission (ECLI:EU:T:2004:199), para. 74. 132 Ibid. 133 Case C-71/04 Administración del Estado v Xunta de Galicia (ECLI:EU:C:2005:493), para. 26.

31

There are two ways for a Member State to avoid this requirement when granting

State aid. Firstly, the Member State can make sure that the aid fulfils requirements

specified by the Commission in various legal acts concerning exceptions from the

notification requirement. For example, the de minimis regulation134 lays down

criteria for when aid is to be considered de minimis and thereby “shall be deemed

not to meet all the criteria of Article 107(1).”135 Secondly, if the Altmark-criteria

are met, the compensation paid is not State aid but rather consideration for services

provided by the undertaking to the Member State.136 This is, however, only

possible for public service compensation for SGEI.137

As can be seen these scenarios have one thing in common. In both cases the

“aid” is considered not to be aid. Therefore, there is no need to notify it to the

Commission. It is also possible to conceive a system where the compensation is

always regarded as aid that then can be justified. These two approaches have been

labelled as the “compensation approach” and the “State aid approach.”138 Under

the “compensation approach” consideration for services rendered do not qualify as

State aid whereas under “the State aid approach” all compensation granted by the

State is considered as aid (that may then be justified). The State aid approach has

the advantage of bringing every possible form of aid within the supervision of the

Commission. However, the advantage of formal control may be offset in practical

terms since it would lead to an increased case-load for the Commission. This could

mean that the Commission would have to deal with more unimportant cases than

otherwise. Moreover, it could be detrimental to some public services as they would

134 Commission Regulation (EU) No 360/2012 of 25 April 2012 on the application of Articles 107

and 108 of the Treaty on the Functioning of the European Union to de minimis aid granted to undertakings providing services of general economic interest.

135 Ibid. article 2. 136 Case C-280/00 Altmark Trans v Nahverkehersgesellschaft Altmark GmbH, para. 95. 137 Ibid. paras 94–95. 138 See, for example, Quigly, C, European State Aid Law and Policy pp. 231–233.

32

have to wait for Commission approval.139 The issue of which approach is correct

has been settled by the Altmark-case where the compensation approach was

applied in the form of the Altmark-criteria.140

3.3 The problem arising from SGEI in a State aid context As mentioned earlier (section 2.1.3) SGEI consist of economic activity. I.e.,

providing goods or services on a market. By doing so SGEI-operator will be at risk

of competing with other undertakings while receiving State resources and thus

distort competition. Moreover, there may be undertakings that are (correctly)

granted State resources for the operation of a SGEI in a situation of a market

failure. However, they may also have other business activities that are carried out

in a functioning market environment. In those cases, there is a risk of cross-

subsidization from the SGEI-activity to the activity carried out on a functioning

market. It leads to a situation for an undertaking to receive aid for an activity where

no aid should be granted. The relevance of this from an EU perspective is obvious

if one considers that undertakings may receive support from one Member State but

also operate in another Member State Accordingly, there is a need to regulate the

use of the aid granted for the SGEI mission to make sure it is used for the intended

purpose.

Another issue arises in the case of liberalised markets where there is often a

former monopolist that has a dominant position. The granting of aid to that

undertaking may consolidate its position on the liberalised market. However, that

undertaking may also be carrying out unprofitable SGEI. An example would be

postal services where the undertaking is competing with others for profitable

activities in urban areas and also has an obligation to provide postal services in

139 Piernas Lopez, The Concept of State Aid under EU Law – From Internal Market to Competition

and beyond, pp. 85–86. 140 Sauter, W, Case T-289/03, British United Provident Association Ltd (BUPA), BUPA Insurance

Ltd, BUPA Ireland Ltd v. Commission of the European Communities, Judgment of the Court of First Instance of 12 February 2008, nyr, Common Market Law Review 46: 269-286, 2009

33

rural areas. Providing postal services in rural areas is often unprofitable and the

undertaking may thus receive compensation from the State for providing those

services. As can be seen these problems have an implication on how to handle

SGEI in State aid law. The regulation of State aid in general will be presented in

the next chapter. The particular problems that has been presented in this section

will be discussed in more detail in section 4.5.

3.4 Summary 3.4.1 Overview The economic rationale behind the EU-State aid control is to maximize economic

efficiency and to minimize State intervention in the economy. These objectives are

achieved by maintaining a level playing field between the Member States as far as

State aid is concerned. Moreover, maintaining a level playing field is a goal in

itself and is necessary in order to establish and maintain a functioning internal

market. These objectives are achieved, inter alia, through the general prohibition

in article 107(1) TFEU where the concept of aid is also defined. However, there is

a need of providing services that cannot be provided for by normal market

mechanisms. Therefore, the EU-treaties allows for some state intervention in the

event of market failure. The provisions on SGEI facilitates this need. It is up to the

Member States to designate them since the need may vary due to political choices

of different Member States or the difference in the economic environment of them.

The Commission’s control of the Member States designation of a service as SGEI

is limited to manifest errors.

There are also several exceptions from the prohibition in article 107(1) TFEU

in the treaty itself (article 107(2) and 107(3) TFEU) which also gives room for

Member states to intervene in their economies. Although, in the case of exceptions

under article 107(3) TFEU, the Commission will have the discretionary power to

grant or refuse the aid. This gives the Commission some power to shape the

economies of Member states through the use of State aid law. This also holds true

34

for article 106(2) TFEU although the Commission, through its use of soft law, has

put up some boundaries for its discretion. Article 106(2) TFEU is an important

exception since that article applies to all SGEI activity. It becomes more important

to control the measure under article 106(2) TFEU since the definition of a SGEI is

up the Member States and the Commission control in this regard is limited to

manifest errors. This structure enables the Member States to execute their political

decisions and allows the Commission to focus on the manner in which it is done.

Moreover, secondary law provides for an array of exceptions, for example, de

minimis aid and block exemptions.

The CJEU’s interpretation of the advantage-criterion and the notion that

consideration for rendered services does not constitute State aid is of particular

importance as far as this thesis is concerned. Furthermore, article 106(2), 107(2)

and 107(3) TFEU provides exemptions from the prohibition in article 107 TFEU.

Nevertheless, the Altmark-criteria and thereby the possibility of public service

compensation not constituting an advantage remains important. The Altmark-

criteria are important because the compensation in that case will also fall outside

the scope of article 108 TFEU and thereby the notification requirement will be

avoided.

SGEI causes certain problems in State aid law because of the risk of cross-

subsidization. Moreover, public service can be particularly dangerous when there

is a former monopolist on the market that receives public service compensation.

3.4.2 A brief guide to the application of the State aid rules to SGEI This section presents a brief guide to the order in which the different rules

regarding SGEI may be applied. Note that the rules presented here are the special

rules regarding SGEI and thus the existence of an economic activity etc. is

assumed. In order to assess the compatibility of compensation for a SGEI one has

to consider whether the compensation constitutes aid in the first place,141 i.e., if all

141 Note that the Commission has made its own analysis tree (available at

https://ec.europa.eu/competition/state_aid/overview/analysis_tree_en.pdf ) and that the order in

35

the conditions in article 107(1) are met. When examining this the conditions of the

Altmark-case has to be considered (see section 3.2.1 and 4.3) in order to decide

whether an advantage has been conferred on the undertaking. One must also check

if the conditions of the de minimis regulation are met. If neither the Altmark-test

or the requirements in the de minimis-regulation are satisfied one must continue to

apply the Decision. If the compensation falls within the categories in article 2 and

the other requirements of the Decision are met, the aid will be compatible. If some

of those requirements are not met or if the aid falls outside the scope of the

Decision (see article 2 of the Decision), the Framework is to be applied instead.

This means that the aid must be notified, and the Commission will then assess the

aid under the Framework. One of the following three things can then happen; the

Commission can decide that the aid is compatible with the internal market, it can

decide that it is incompatible or that it is compatible if certain conditions are met.

Also note that when the Commission is applying the Framework it is applying its

own soft law. Thus, the Commission is bound by it. However, if the Commission’s

decision is appealed the Union courts will not be bound by the Framework (see

section 1.2.2).

4 The Altmark-case 4.1 Factual background and questions referred The Altmark-case142 concerned aid given by a local government to an undertaking

(Altmark-Trans) performing public transport services in Germany. A competitor

challenged the granting of licenses to Altmark-Trans before a national court

which the different sets of rules are different than the order I present here. The reason for not following the Commission’s document is that from a theoretical perspective it makes more sense to start “upstream” with the question of whether there has been any aid in the first place, rather than applying the de minimis-regulation directly (which from a practical perspective makes more sense).

142 Case C-280/00 Altmark Trans v Nahverkehersgesellschaft Altmark GmbH.

36

insofar as subsidies were required by Altmark-Trans to discharge its public service

obligation. The national court then asked the CJEU for a preliminary ruling on

whether the State aid was contrary to article 87 EC (now article 107 TFEU). The

national court also asked other questions, but they are not relevant for the purposes

of this thesis and are excluded from this presentation.

4.2 Case law before the Altmark judgment As mentioned earlier (section 3.2.5) there were before the Altmark-case two

conflicting approaches to the handling of public service compensation. Under “the

State aid approach” all compensation granted to undertakings should be considered

as aid and notified. “The compensation approach,” on the other hand provided that

public service compensation should be considered as consideration for the services

that have been performed. Therefore, such compensation should not be considered

as aid. Both approaches had appeared in earlier case-law. In Procureur de la

République v ADBHU143 it was held that indemnities provided to undertakings for

the collection and disposal of waste oil did not constitute State aid because the

indemnities were consideration for the collection and disposal of those oils

provided by the undertakings.144 However, in FFSA v Commission State aid

granted in the form of tax benefits was still considered as aid even though the value

of the benefit was lower than the cost of discharging the public service

obligation.145 Because of the lower value of the benefit in comparison with the cost

of discharging the public service obligation, the aid was instead compatible with

the internal market under article 106(2) TFEU.146 Shortly before the Altmark-

judgment the court had decided the Ferring-case147 which also concerned taxation

143 Case 240/83 Procureur de la République v Association de défense des brûleurs d'huiles usagées

(ADBHU) (ECLI:EU:C:1985:59). 144 Ibid. para. 18. 145 Case T-106/95 FFSA v Commission (ECLI:EU:T:1997:23), paras. 166–170 upheld on appeal in

Case C-174/97 P FFSA v Commission (ECLI:EU:C:1998:130). 146 Ibid. para. 178. 147 Case C-53/00 Ferring SA v ACOSS (ECLI:EU:C:2001:627)

37

but where the tax benefit was not considered as aid as long as they corresponded

to the actual costs of the public service obligation.148

As can be seen from the cited case-law, it was unclear whether the “State aid

approach” or “the compensation approach” should prevail.

4.3 Judgment of the CJEU The court examined whether there existed an advantage in the meaning article

107(1) TFEU (see section 3.2.1). The issue was if the subsidies given by the local

government was to be considered as aid (and thereby also subjected to notification-

and standstill in article 108(3) TFEU) or if the subsidies constituted consideration

for the transport services that the recipient undertaking had provided for the local

government.

The CJEU held that public service compensation given to undertakings

providing Services of General Economic Interest does not confer an advantage on

the recipient undertaking. Therefore, the compensation does not constitute State

aid provided that four (cumulative) criteria are met. These criteria are known as

the Altmark-criteria and consists of, firstly, a requirement of a clearly defined

public service obligation (the SGEI-mission), secondly, a requirement that the

parameters deciding the compensation are established beforehand in an objective

and transparent manner and, thirdly, a requirement that the compensation is limited

to what is necessary to cover the net costs. The fourth criterion provides that the

level of compensation must be determined by reference to the cost that a typical

undertaking would have, including a reasonable profit, that is adequately provided

and well run.149

148 Ibid. para. 27. 149 Ibid. para. 95

38

4.4 Compensation or State aid approach? The Altmark-case finally settled the issue on whether to use the compensation

approach or the State aid approach (see section 3.2.5). Furthermore, it laid down a

generally applicable exclusion for SGEI resembling the already used market

economy operator test.150 This test cannot be applied as such considering that the

public authorities are not purchasing the services for its own needs but for the

needs of consumers. The State thereby acts in its capacity as a public authority and

is thus performing actions which no private operator could ever replicate even in

theory.151 In fact, the test used by the court may be seen as a refined version of a

test already promoted by advocate general Jacobs in the GEMO-case.152 In that

case the advocate general argued for the use of a test which would distinguish

between financing measures that are clearly intended as a quid pro quo. The most

obvious example would be measures taken in accordance with a public

procurement procedure.153 These measures should be distinguished from a second

category made up of the cases where it is not clear from the outset that the financing

measure is intended as a quid pro quo.154 This may be the case, for example, when

the public service obligation is not clearly defined.155

The Altmark-criteria clearly have some of the elements in AG Jacobs opinion,

namely the link to public procurement and the importance of a public service

obligation. The fourth Altmark-criteria also adds the benchmarking required to

determine if something is quid pro quo.

150 See section 3.2.1. 151 Fiedszuk, N, Towards a More Refined Economic Approach to Services of General Economic

Interest, European Public Law 16, no. 2 (2010): 271–288 at p. 286 and AG Légers opinion delivered on 14:th January 2003 in Case C-280/00 Altmark paras. 20–27 and Joined Cases C-278/92 to C-280/92 Spain v Commission (ECLI:EU:C:1994:325),para. 22.

152 Case C-126/01 GEMO (ECLI:EU:C:2003:622). 153 AG:s Opinion in Case C-126/01 GEMO para. 119. 154 Ibid. para 120. 155 Ibid.

39

4.5 The Altmark-criteria 4.5.1 The requirement of a public service obligation The first Altmark-criteria concerns the need for the undertaking to be subject to a

public service obligation.156 This ensures that the Altmark-criteria do not benefit

undertakings in cases where a private undertaking carries out activities that could

have been considered to be in the general economic interest but where there has

been no State control in the sense that the State has organized that “SGEI.” It

should be noted that the purpose of having exceptions for SGEI is to allow the

Member states to organize them in a manner they see fit (see section 2.1.1 and

2.1.2). There is thus no need to extend the exception for SGEI to cases where a

Member state has not exercised its possibility to exempt an undertaking from the

treaty rules through the assignment of a SGEI-mission, something that is also

required by article 106(2) TFEU.157 The reason for this is that if a Member State

has not made use of its possibility to organize a SGEI by assigning a public service

obligation, there is no reason to treat State aid as lenient as would be the case if a

SGEI existed.

The requirement of a clearly defined public service obligation in order to satisfy

the Altmark-criteria may be compared with the requirement in article 106(2) TFEU

that the undertaking has been assigned a “particular task.”158 In what form the

Member state assigns the public service obligation is not relevant as long as it is

clear. National legislation that merely designates a certain service as SGEI is not

sufficient for the first Altmark-criterion to be met.159 However, it is not necessary

156 Case C-280/00 Altmark Trans v Nahverkehersgesellschaft Altmark GmbH para. 95. 157 See Case 127/73 Belgische Radio en Televisie and société belge des auteurs, compositeurs et

éditeurs v SV SABAM and NV Fonior (ECLI:EU:C:1974:6) and especially paras. 19–21. 158 Case T-289/03 BUPA and Others v Commission paras 161–162. 159 Case C-81/16 P Spain v Commission (ECLI:EU:C:2017:1003), paras. 40 and 54.

40

that the entrustment is defined in a single act but may consist of several official

acts, including contracts.160

4.5.2 The requirement that the parameters of compensation are established beforehand

The second Altmark-criterion requires that the parameters on which the

compensation is based have been established beforehand in an objective and

transparent manner.161 In the view of the Commission this requirement is supposed

to ensure that the recipient undertaking does not benefit from an economic

advantage that could favour it over competing undertakings.162 Thus, it is a

safeguard against distortions of competition (see section 3.2.1 on article 107(1)

and the criterion of a distortion of competition). The criteria may, for example, be

that a certain price paid by the State for each bus passenger etc.163 Moreover, the

parameters shall include the parameter for calculating the “reasonable profit” (see

below sections 4.5.3 and 4.5.4).164 However, the Member States have a wide

discretion, not only when defining a SGEI-mission, but also when deciding the

parameters of compensation. The Member States may thus grant a certain

discretion to its national authorities as long as the parameters preclude abusive

recourse of the SGEI-concept by the Member State.165 This means that the Member

States may choose how to comply with the criterion as long as the rules for

determining the compensation are transparent and objective.166

160 See, for example, article 4 of Commission Decision (2012/21/EU) of 20 December 2011 on the

application of Article 106(2) of the Treaty on the Functioning of the European Union to State aid in the form of public service compensation granted to certain undertakings entrusted with the operation of services of general economic interest, OJ L 7, 11.1.2012, p. 3–10 Case C-159/94 Commission v France (ECLI:EU:C:1997:501), para 66.

161 Case C-280/00 Altmark Trans v Nahverkehersgesellschaft Altmark GmbH, para. 95. 162 Communication from the Commission on the application of the European Union State aid rules to

compensation granted for the provision of services of general economic interest OJ 2012/C 8/02 para. 54.

163 Ibid. para. 55. 164 Ibid. para. 57. 165 Case T-137/10 Coordination bruxelloise d’institutions sociales et de santé (CBI) v Commission

(ECLI:EU:T:2012:584), para. 191 and Case T-289/03 BUPA and Others v Commission, para. 214 166 Ibid. para. 192

41

4.5.3 Prohibition on overcompensation The third criterion requires that the compensation does not exceed what is

necessary in order to discharge the public service obligations. The receipts (all

income arising from the SGEI-mission) from the service and a reasonable profit

must also be taken into account.167 Thus, the public service compensation cannot

compensate for 100 % of the costs of the service if receipts exist, unless the receipts

fall within the ambit of what is to be regarded as a reasonable profit. Some of the

problems referred to in section 3.3 can be avoided by requiring the public service

compensation to only compensate for the costs of the public service obligation.

That sort of requirement may for example mitigate the problems associated with

ex-monopolists on liberalised markets. The concept of reasonable profit has been

elaborated by the Commission in its framework on State aid in the form of public

service compensation.168 The Commission holds the view that the reasonable profit

shall be the rate of return on capital required by a typical company when

considering whether or not to provide the SGEI for the period of the entrustment

act with consideration of the level of risk.169 The relevant receipts are all revenue

accruing from the SGEI-mission and other benefits arising from, for example,

special or exclusive rights.170

4.5.4 The selection of provider The fourth Altmark-criterion provides that the SGEI-operator must be chosen

through a public tender procedure. Alternatively, it can be chosen in a way that

ensures that the operator is compensated only to the extent that the costs arising

from the SGEI-mission for a typical undertaking that is well run and adequately

167 Case C-280/00 Altmark Trans v Nahverkehersgesellschaft Altmark GmbH, para. 95. 168 Communication from the Commission — European Union framework for State aid in the form of

public service compensation (2011) OJ C 8, 11.1.2012, p. 15–22. 169 Communication from the Commission on the application of the European Union State aid rules to

compensation granted for the provision of services of general economic interest OJ C 8, 11.1.2012, p. 4–14 para. 60.

170 Ibid. para. 56.

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equipped so as to meet the public service obligations, is covered. Relevant receipts

and a reasonable profit shall be taken into account.171 The effect of this requirement

is that the provider chosen will be the one who incurs the least costs for society,

i.e., the most efficient operator.172 What relevant receipts and a reasonable profit

are is explained in the previous section.

The interesting part of this criteria is that it leaves Member states with a choice

whether to do a benchmarking exercise or to use a public procurement procedure.

The Altmark-case thus provides incentives to use public procurement procedures

as the fourth Altmark-criterion will be met in that case. Moreover, the use of public

procurement procedures allows Member States to avoid the benchmarking

procedure. The fourth criterion may be difficult to fulfil if the public service

compensation is part of a system entailing a whole sector.173 Especially if the

compensation is based on operators receiving compensation without regard to the

direct costs and receipts of performing the SGEI.174 Thus, in the BUPA-case,175

which concerned a risk equalization scheme for health insurance providers, the

fourth Altmark-criterion could not be applied according to its wording (see section

6.1).

Generally speaking, public procurement procedures are seen as a positive thing

that should be promoted.176 The reason for promoting the use of public

procurement procedures is that they provide a solution to the “principal – agent

problem.” This occurs when an undertaking has better information about the

relevant market than the contracting authority and uses this information advantage

171 Case C-280/00 Altmark Trans v Nahverkehersgesellschaft Altmark GmbH para. 95. 172 Communication from the Commission on the application of the European Union State aid rules to

compensation granted for the provision of services of general economic interest OJ 2012/C 8/02 para. 62.

173 See, for example, State aid No N 178/2010 – Spain, Public service compensation linked to a preferential dispatch mechanism for indigenous coal power plants para. 106–108, State aid No E 2/2005 and N 642/2009 – The Netherlands, Existing and special project aid to housing corporations, para. 14 and Case T-289/03 BUPA and Others v Commission, para. 246.

174 Case T-289/03 BUPA and Others v Commission, para. 246. 175 Ibid. 176 Fiedzuk, N, Putting Services of General Economic Interest up for Tender: Reflections on

applicable EU Rules, Common Market Law Review 50: pp. 87–113 2013 at pp. 92–93.

43

to the detriment of contracting authority.177 Through public procurement this

problem may be avoided, and corruption and mismanagement of public funds may

be mitigated.178 Moreover, the public procurement procedure ensures that the most

efficient operator is chosen. This is important from a State aid law perspective

since State funds that are granted to an undertaking in excess of the necessary price

for the purchase of services is liable to give that undertaking an advantage. Thus,

the requirement of abiding by the public procurement rules179 can have the effect

of ensuring that no aid is granted.

However, the aim of ensuring that the most efficient operator is chosen to

provide SGEI does not necessarily require that a public procurement procedure is

used. The most efficient operator may, for example, avoid participating in the

tender procedure because that procedure itself is associated with costs.180

Furthermore, the most efficient operator may be chosen even when not using a

public tender procedure.

Even if the public procurement procedure leads to the most efficient operator

being chosen it may not necessary lead to overall efficiency since the public

procurement procedure incurs costs both for the contracting authority and for the

undertakings participating in the tender.181 Thus the public procurement procedure

is merely the means to an end and the CJEU has also provided for an alternative.

The CJEU gives the Member States an option to select SGEI providers without a

public procurement procedure through a benchmarking analysis with an efficient

operator.

177 Ibid. 178 Ibid. p. 93. 179 Which were designed for another purpose (see Fiedzuk, N, Putting Services of General Economic

Interest up for Tender: Reflections on applicable EU Rules, Common Market Law Review 50: pp. 87–113 2013 at. p. 90).

180 Ibid. p. 95. 181 Ibid.

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As mentioned earlier, particular problems arise when dealing with public

service compensation to former monopolists that perform SGEI (see section 3.3).

Regarding the fourth Altmark-criterion, it may be impossible to compare the costs

of the ex-monopolist with those of a “typical undertaking.” Something that also

holds true for the reasonability of profits (which is also relevant when assessing

whether the third Altmark-criterion is met). The reason for this difficulty is that

there are no “typical undertakings” in the sector, due to the former monopoly, and

thus no one to compare with. This problem is exacerbated by the fact that

sometimes the ex-monopolist has built up networks (and now has a public service

obligation to maintain them) that no private undertaking would have done because

of the lack of profitability. An example would be postal services where the State

may have constructed a delivery network covering not only the profitable urban

areas (in which private undertakings wants to establish and where there thus exists

“typical undertakings” if the sector is liberalised) but also the unprofitable rural

areas.

When the sector is liberalised, and the State lets the government agency in

charge of the postal services be transformed to a company it will be in competition

with private undertakings. That company will then often have a public service

obligation to serve the unprofitable rural areas of the State. In these areas it will be

the only operator and receive public service compensation for it. However, the ex-

monopolist will still be in competition with other undertakings in more profitable

areas. The ex-monopolist may then use its network to compete on those markets

as well. This situation may make it difficult to establish the costs of a typical

undertaking.

The Commission proposes that, in case there is not a sufficient number of

undertakings to compare with on the market, the comparison should be made with

45

undertakings in other Member States as well.182 However, the Commission stops

short of recommending comparisons with undertakings enjoying a monopoly

position.183 This is reasonable because a comparison with monopolists does not

provide an answer to what amount of compensation the objectively most efficient

operator would need since monopolists are not efficient.

4.6 Summary The Altmark-case settled the issue of whether the “compensation approach” or

“State aid approach” was correct. It lays down four criteria for when public service

compensation is to be considered as consideration for services provided by the

SGEI-operator. Hence, the “compensation approach” prevailed.

The first criterion can be used to make sure that SGEI is not used in order to

defend aid measures that were never intended to be SGEI by the Member State.

Thus, it is a safeguard against abuse by the Member States.

The second criterion serves a similar purpose. It improves accountability and

may be used as a safeguard against competition distortions as it ensures that the

correct amount of compensation is granted.

The third criterion ensures that the SGEI-operator does not receive more than

what is fair consideration for the services it provides. This is necessary since the

Altmark-criteria is a clarification of the advantage-criterion in article 107(1)

TFEU. Any overcompensation would therefore be State aid.

The fourth criterion is designed to make sure that the most efficient operator is

selected to provide SGEI. It can be achieved through a public procurement

procedure or through a bench-marking exercise. It therefore creates incentives to

use public procurement procedures which is generally seen as positive. Public

182 Communication from the Commission on the application of the European Union State aid rules to

compensation granted for the provision of services of general economic interest OJ C 8, 11.1.2012, p. 4–14 para. 74

183 Ibid.

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procurement procedures should ensure that the most efficient operator is selected

and reduce corruption and mismanagement of public funds. However, it does not

always lead to the desired outcome due to the fact that public procurement also

incurs costs.

Some problems may also occur if the bench-marking procedure is used. It may

be difficult to establish the costs of a “typical undertaking.” This is particularly

relevant on formerly regulated markets where a dominant ex-monopolist is

present.

5 The Decision 5.1 General remarks Commission decision (2012/21/EU) on the application of article 106(2) TFEU

(“the Decision”)184 exempts aid in the form of public service compensation from

the State aid prohibition. Moreover, it exempts the aid from the notification and

standstill requirement (article 3 of the Decision.). For an aid measure to be

exempted under the Decision a number of requirements have to be met.

Firstly, the aid must fall into one of the categories specified in article 2 of the

Decision. These relate either to the activity that the SGEI is comprised of, for

example, medical care by hospitals (article 2(1)(b) of the Decision), aid to ports

and airports (article 2(1)(e) of the decision) or to the amount of aid granted (article

2(1)(a) of the Decision).

Secondly, there must be an entrustment act (article 4 of the Decision) which

must include, inter alia, the content and duration of the public service obligations

(article 4(a) of the decision), a description of the compensation mechanism or the

184 Commission Decision (2012/21/EU) of 20 December 2011 on the application of Article 106(2) of

the Treaty on the Functioning of the European Union to State aid in the form of public service compensation granted to certain undertakings entrusted with the operation of services of general economic interest OJ L 7, 11.1.2012, p. 3–10

47

parameters for calculating and controlling the compensation (article 4(d) of the

Decision).

Thirdly, the compensation must not exceed the net cost of discharging the public

service obligation, including a reasonable profit (article 5(1) of the Decision).

These conditions very much resemble the Altmark-criteria; the first Altmark-

criterion is mirrored in the Decision by its article 4(a) and article 1(1). Article 4(d)

of the Decision corresponds to the second Altmark-criterion and article 5

corresponds to the third Altmark-criterion. Thus, the only Altmark-criterion

missing is the fourth.

Whereas the fourth Altmark-criterion is designed to ensure that the most

efficient operator is chosen,185 article 106(2) TFEU has a different purpose. The

Altmark-criteria have as their purpose to set out conditions for when public service

compensation is to be considered as consideration for rendered services.186 Article

106(2) TFEU, on the other hand, is aimed at allowing the Member States to pursue

their interests in using certain undertakings (particularly public undertakings) as

an instrument for fiscal and economic policy. At the same time, it should preserve

the EU interests of ensuring compliance with the competition rules and the rules

on the internal market.187

The related secondary law such as the Decision188 and the Framework,189 have

as their object to put this balancing act into practice by providing the detailed

provisions necessary for that test to be carried out. One has to bear in mind that the

185 See, for example, Case T-289/03 BUPA and Others v Commission, para. 246. 186 This can be compared with the market operator test (see section 3.2.1) although the test is not

identical (see section 4.4) as it operates independently of any commercial considerations. 187 Quigly, C, European State Aid Law and Policy p. 246. 188 Commission Decision (2012/21/EU) of 20 December 2011 on the application of Article 106(2) of

the Treaty on the Functioning of the European Union to State aid in the form of public service compensation granted to certain undertakings entrusted with the operation of services of general economic interest OJ L 7, 11.1.2012, p. 3–10

189 Communication from the Commission — European Union framework for State aid in the form of public service compensation OJ C 8, 11.1.2012, p. 15–22. Hereinafter referred to as “the Framework.”

48

Decision and the Framework concern the application of article 106(2) TFEU. As

an exception to the treaty, they differ in logic from the Altmark test since that test

is used to establish the existence of an advantage (as a necessary component in the

concept of State aid).

In the context of the Altmark-test the most efficient operator should be used

since any compensation that is unnecessary due to the operator’s inefficiencies is

State aid. Article 106(2) TFEU on the other hand is designed as an exception to

the treaty rules for SGEI that could not operate if the normal rules apply. Thus,

there is no logical need for a requirement on selecting the most efficient operator.

However, one could have thought that the Commission should have wanted to

promote the use of public procurement procedures as the Commission and the

CJEU otherwise is keen on doing so190

In the Framework for State aid in the form of public service compensation191

the Commission has stated that it will only consider aid compatible with the

internal market under article 106(2) TFEU if the aid granting authority complies,

or commits to comply, with the applicable EU-rules on public procurement.192 As

a result, aid measures that do not satisfy the Altmark-criteria and that do not fall

within any special exemption (such as block-exemptions or de minimis

exemptions) and thus is to be examined under article 106(2) TFEU, have to abide

by the public procurement rules. Although these rules contain thresholds meaning

that aid falling under these thresholds does not have to be granted through public

procurement. 193

However, a public procurement procedure is not necessary if the aid measure

satisfies the conditions of the Decision. Thus, the Decision may be used to avoid

190 See, for example, the fourth Altmark-criterion (Section 4.5.5) and the European Union framework

for State aid in the form of public service compensation (OJ C 8, 11.1.2012, p. 15–22) para. 19. 191 Ibid. 192 Ibid. para. 19. 193 See, for example, article 4 of Directive 2014/24/EU of the European Parliament and of the Council

of 26 February 2014 on public procurement and repealing Directive 2004/18/EC (OJ L 94, 28.3.2014, p. 65–242)

49

public procurement for sums exceeding the thresholds in the public procurement

directives194 and the de minimis regulations. This may be beneficial in terms of

economic efficiency since the public procurement procedure incurs costs on both

the contracting authority and the participating undertakings.195 One could however,

on the one hand, argue that it is possible to avoid a public procurement procedure

under the fourth Altmark-criterion as well if the operator is chosen by reference to

a cost analysis of a typical undertaking, well run and adequately provided, taking

into account the relevant receipts and a reasonable profit.196 Thus, the costs

connected to the public procurement procedure could have been avoided by

adherence to the Altmark-criteria. On the other hand, the benchmarking alternative

that is offered there is presumably also connected with additional costs and may

thus not be a satisfying option in that respect. However, these costs may be hard

to avoid as the Decision also requires an analysis of the reasonable profit of a

typical undertaking (article 5(5) of the Decision). Moreover, it should be said that

under the Decision a rate of return on capital not exceeding the relevant swap rate

plus a premium of 100 basis points is to be considered as reasonable in any event

(article 5(7) of the Decision) and those costs may thus be avoided in such cases.

5.2 Procedural aspects The Commission is the institution that makes decisions on the compatibility of aid

with article 106(2) and applies the Framework197 when doing so.198 As mentioned

earlier (sections 4.3, 3.2.5 and 4.5.4) public service compensation that either meets

the conditions laid down in the Altmark-judgment or that meets the requirements

194 See the previous note for one example. 195 Fiedzuk, N, Putting Services of General Economic Interest up for Tender: Reflections on

applicable EU Rules, Common Market Law Review 50: pp. 87–113 2013 at p. 95. 196 Case C-280/00 Altmark Trans v Nahverkehersgesellschaft Altmark GmbH, para. 95. 197 Communication from the Commission — European Union framework for State aid in the form of

public service compensation (OJ C 8, 11.1.2012, p. 15–22) para. 19. 198 Ibid. para. 7.

50

of the Decision does not have to be notified to the Commission and the standstill-

provision does not apply. However, aid not meeting those criteria are State aid that

has to be notified.

Moreover, since the Commission has exclusive competence to decide on the

compatibility of State aid with article 106(2) TFEU, there is no place for the

national courts in the process. Although, a national court may be obliged to ensure

the compliance of the public service compensation with the Altmark-criteria if a

complainant in the national court claims that a competitor that receives public

service compensation has been given State aid. However it will not be allowed to

rule on the compatibility of the compensation with article 106(2) TFEU.199 This

inconsistency has been criticised for being inefficient and that the arguments in

favour of having the Union interests supervised by the Commission in the

application of article 106(2) TFEU are not sufficient.200 It is also criticised since

the Altmark-criteria and article 106(2) TFEU are so similar.201 However, the

Decision resolves a part of this inconsistency since compensation complying with

the requirements of the Decision is exempted from notification (article 3 of the

Decision) and is thus not subject to that intense supervision by the Commission.

6 Comparing case-law, decisions and secondary law

6.1 The BUPA-case The BUPA-case202 concerned a risk equalization scheme for the private health

insurance sector in Ireland. The scheme was designed to offset the burden of

insurance providers having so-called “bad risks” with money from insurance

199 Fiedzuk, N Towards Decentralization of State Aid Control: The Case of Services of General

Economic Interest, World Competition 36, no. 3 (2013): 387–408. p. 403. 200 Ibid. pp. 402–404. 201 Ibid. p. 103. 202 Case T-289/03 BUPA and Others v Commission

51

providers having a healthier segment of insured persons as customers.203 The

purpose of this was to make sure that all persons living in Ireland would have

access to a minimum level of affordable private health insurance on similar quality

conditions.204 In essence, the scheme provided that insurance companies may be

forced to commence payments to the scheme (“RES-payments”) after a decision

by the Minister for Health. The Minister’s discretion to do so was limited since he

or she could not commence RES-payments if a certain risk differential did not

exceed a threshold of 2%. If the risk differential was in the range of 2 – 10%, the

Minister had discretion but was given a recommendation from a government

agency. If that rate exceeded 10%, the payments should as a general rule not be

commenced unless there were good reasons for doing so.205 The payments were to

be made to a fund administered by the Irish State. That fund would in turn, after a

decision to commence RES-payments, pay the insurers with a less healthy risk

profile. 206 The aim of the RES-payments was to ensure that the insurers had to

bear the costs they would have had to bear if their own risk profile corresponded

to the average risk profile. Those costs were calculated with reference to the

average costs due to claims because of hospital stays by age groups and gender

groups (average market risk profile). On that basis, the hypothetical costs of each

insurer were calculated as if the average costs of the age groups and gender groups

had been true for the insurer in question. Depending if this hypothetical cost was

higher or lower than the real risk profile of the insurer in question, the insurer

should either pay or receive payment from the scheme. 207

The Commission had decided that the scheme did not constitute State aid with

reference to the Courts ruling in Ferring208 (see section 4.2) since the scheme was

203 Ibid. para. 27. 204 Ibid. para. 175. 205 Ibid. para. 30. 206 Ibid. para. 27. 207 Ibid. para. 33. 208 Case C-53/00 Ferring.

52

intended as compensation for SGEI-obligations.209 The dominant undertaking on

the market benefited from the scheme. A competitor lodged a complaint and

requested the General court to annul the decision.210

The General court said, regarding the first Altmark-criterion, that despite the

fact that all undertakings providing this form of insurance had to fulfil certain

obligations it did not mean that those obligations could not be SGEI-obligations.211

However, a requirement of prior authorization by a government agency or the

imposition of certain rules on the control or functioning of all operators in a sector

in order to be active on a market, does not in itself mean that there is an SGEI-

obligation on the undertakings that have been authorized.212 Moreover, since the

Irish authorities did not authorize undertakings or exercise control over them, the

obligations – such as open enrolment, community rating, lifetime coverage and

minimum benefits – were considered to form a specific mission by a public

authority consisting in providing insurance services in line with the obligations.213

The General court also held that the fact that the services were not universal and

compulsory did not exclude them from being SGEI.214

The second Altmark-criterion was held to be met since the calculation and

comparison of the different risk profiles did not leave the national authorities with

any discretion. Furthermore, even if the national authorities would have had some

discretion, that would not per se mean that the second Altmark-criterion would not

be fulfilled since that criterion does not require the absence of all discretion by

national authorities.215

The scope of review by the Commission of the third Altmark-criterion was

limited to manifest errors and so was the scope of review by the courts of the

209 Case T-289/03 BUPA and Others v Commission, para. 41 210 Ibid. para 61. 211 Ibid. para. 179. 212 Ibid para 178. 213 Ibid. para 182. 214 Ibid. paras 186–189. 215 Ibid. paras 213–214.

53

Commission’s decision. The reason for this was the fact that the case concerned

SGEI and that the Member States enjoy a wide discretion when defining the SGEI-

mission and its conditions of implementation. This discretion includes the

assessment of additional costs incurred in discharging that SGEI-mission. The

General court also made reference to the complex economic assessments that is

required when assessing the additional costs incurred.216 The General court held

that although there was a link between the RES-payments and the SGEI-mission

those payments did not have a direct relationship with the real costs of an

insurer.217 Moreover, since the risk equalization system in this case radically

differs from the system in the Altmark-case, it cannot fulfil the third Altmark-

criterion in the strict sense since that requires the compensation to match the costs

of performing the SGEI-mission. The General court nonetheless considered that

criterion to be fulfilled. The reason for this was that the risk equalization scheme

lived up to the spirit and purpose of the third Altmark-criterion insofar as the

compensation was calculated “on the basis of elements which are specific, clearly

identifiable and capable of being controlled.”218 Moreover, although the receipts

and profits from discharging the SGEI-mission was not taken into account the

scheme nonetheless fulfilled the third Altmark-criterion since that compensation

system operated independently of receipts and profits. The objective of the system

in BUPA was to equalize burdens of different risk profiles among the insurers by

comparing actual risk profile with average risk profiles and compensate for the

difference. Therefore, by definition the system cannot take receipts and profits into

account.219

As to the fourth Altmark-criterion, the General court held that that criterion, just

as the third, could not be strictly applied in this case. The reason for this was that

216 Ibid. para. 220. 217 Ibid. paras. 234 and 235. 218 Ibid. para. 237. 219 Ibid. para. 240.

54

the fourth Altmark-criterion requires a comparison of costs and receipts linked

directly to the supply of the SGEI. 220 Moreover, the RES-compensation was not

only calculated with reference to the contributions of the insurer that receives the

compensation. The compensation was also calculated with reference to the other

operators since the compensation is calculated on the basis of a risk differential.

The General court acknowledged that the third and fourth Altmark-criteria could

have been used, if only the contributions of the receiving operator had been taken

into consideration when calculating the RES-payments.221 Furthermore, the

Commission was under an obligation to check that the scheme did not entail the

possibility of offsetting costs due to the inefficiency of an operator.222 Even though

the scheme contained some possibilities for this to happen, they were limited. The

Commission was accordingly entitled to find that the scheme did not entail the

possibility of offsetting costs due to inefficiencies.223

6.2 The Framework and the Decision In contrast to the BUPA-decision, both the Framework and the Decision lay down

fairly stringent conditions for the third Altmark-criterion224 and set out detailed

rules for that criterion to be fulfilled.225 The third criterion broadly coincides with

the proportionality criterion in article 106(2).226 Thus, a similar application of those

criteria would be logical. However, at least when considering the BUPA-case, this

does not seem to be the case. A reason for this may be that the Decision and the

Framework operate with the situation in the Altmark-case as a benchmark. As the

General court pointed out in BUPA the criteria set out in that case were not created

with risk equalization schemes as their intended target of application. Therefore,

220 Ibid. para. 246. 221 Ibid. para. 247. 222 Ibid. para. 249. 223 Ibid. paras. 250 and 253–255. 224 The Framework para 21 and the Decision article 5(1). 225 The framework paras 29–50 the decision article 5(2)–(9). 226 Case T-289/03 BUPA and Others v Commission, para. 224.

55

the Altmark-criteria does not function as intended. Thus, the Altmark-criteria

should not be applied according to their exact wording in those cases.227

The problem of risk equalization schemes illuminates the difficulties that can

arise when the Union courts and the Commission try to lay down generally

applicable criteria to SGEI. The criteria laid down in court judgments and in

Commission communications and decisions may be fairly stringent and must

perhaps be so to ensure the efficient functioning of the internal market. Hence, a

stringent application may be necessary in order to prevent the use of harmful State

aid by Member states claiming that the aid is compensation for the provision of

SGEI. However, the concept of SGEI is vague and thus a SGEI may be created or

already exist that is not in line with the scenario envisaged by the Commission and

the Union courts when they devised those criteria. The result of that can be seen in

BUPA where a service was considered SGEI but where the Altmark-criteria (or

for that matter the conditions in the Framework and the Decision) could not

possibly be fulfilled.

The question that arises from this line of reasoning is whether the Altmark-

criteria are inadequate (and the Framework and the Decision) or if risk equalization

schemes are not fit to be SGEI, or if risk equalization schemes also should have to

comply with those conditions (even if that may affect the operation of those

schemes or render them useless).

One could argue, as the General court in BUPA, that risk equalization schemes

can be SGEI but that the Altmark-criteria are not fit for the purpose of assessing

those schemes. This may be true in the sense that the Altmark-criteria did not have

risk equalization schemes as their target. However, it could then be argued that the

risk equalization schemes may confer an advantage on an undertaking within the

meaning of article 107(1) TFEU. This is something those schemes arguably can.

227 Ibid. para. 237.

56

In BUPA it was common ground that a particular insurer would benefit from the

scheme. Moreover, the Altmark-test is the legal tool with which one can assert

whether an advantage has been granted or not. Thus, the scheme will confer an

advantage on an undertaking since the aid from the risk equalization scheme does

not fulfil those criteria. Hence, the compensation constitutes aid that may be

justified under article 106(2) TFEU. However, in order for the aid arising from the

scheme to be exempted under article 106(2) TFEU, the proportionality assessment

under article 106(2) TFEU must differ from the third Altmark-criterion (since the

scheme will not fulfil that criterion).228.

A second alternative would be to not consider those schemes to be SGEI at all,

at least not if they show the same characteristics as in BUPA. However, this raises

constitutional questions about the Member States competence to designate SGEI

and the competence of the EU courts and the Commission to review it. Article 14

TFEU recognises the competences of the Member States and article 1 of Protocol

26 to the TFEU explicitly recognises the wide discretion of the Member States and

their subdivisions to provide, commission and organize SGEI.

A third option would be to let these risk equalization schemes be subject to the

Altmark-criteria without the lenient application of them that the General court

showed in BUPA. However, this would lead to that the type of risk equalisation as

the Irish scheme in BUPA cannot comply with the Altmark-criteria as the

compensation and contributions are not linked to the real costs of discharging the

public service obligations in question.229

As has been noted earlier (see chapter 5) both the Framework and the Decision

set up conditions that resembles the first three Altmark-criteria to a high degree.

However, according to the case law of the CJEU that is not a requirement

stemming from the courts case-law concerning the Altmark-criteria.230 The reason

228 See ibid. para 224. 229 Case T-289/03 BUPA and Others v Commission, para. 240. 230 Case C 660/15 P Viasat Broadcasting UK v Commission, para. 33.

57

for this is that the Framework and the Decision lays down detailed provisions for

the Commission’s application of article 106(2) TFEU which is different from the

Altmark-criteria since the application of those criteria are “upstream” in relation

to article 106(2) TFEU.231 I.e., the Altmark-criteria should be applied before article

106(2) TFEU is applied since the Altmark-test is part of the Advantage-criterion

in article 107(1) TFEU.

One can ask why the same or similar criteria as in the Altmark-case should be

used. Regarding the Decision and the second Altmark-criterion, recital 14 of the

Decision provides an explanation to why the act of entrustment is important. It will

be difficult to assess whether the conditions of article 106(2) TFEU are met without

a clear entrustment act with reference to the decision and a description of the

compensation mechanism. Furthermore, the 15:th recital of the Decision explains

that the compensation should not exceed the costs of discharging the public service

obligations since, otherwise competition could be distorted. Thus, the criteria used

serves to ensure the proportionality of the measure.

In this assessment the only missing component from the Altmark-case is the

requirement of an efficient operator (the fourth Altmark criteria, see section 4.5.4).

This discrepancy is logical if one considers that the purpose of article 106(2) TFEU

is to allow, as an exemption from the treaty rules, entities performing SGEI to

perform their services without being hindered by the State aid rules including the

Altmark-test. The State aid rules, in fact, requires the Member States to be efficient

when granting public service compensation since all compensation exceeding what

an efficient operator would spend to discharge its public service obligation are

considered as State aid.

The Decision and Framework,232 on the other hand, allows the operators

performing an SGEI to be inefficient when discharging those obligations.

231 Ibid. para. 34. 232 Although the Framework requires the use of efficiency incentives (see below).

58

However, the Framework and the Decision does not give inefficient SGEI-

operators a possibility to be overcompensated in the sense that they receive more

compensation than the inefficient operators need to discharge their public service

obligations. It only gives them the possibility to be inefficient when discharging

them. Thus, it would be possible for a bus operator to utilize busses that are more

fuel-consuming, and thus less efficient, than an efficient operator would have. But

it would not be possible to grant more compensation to the less inefficient operator

than the actual costs that operator has when discharging the public service

obligation using those inefficient busses.

The result of this can sometimes be questioned. Why should the Member States

be allowed to be inefficient when organizing SGEI-missions? Firstly, the Member

States enjoy a wide discretion when organizing SGEI and the interest of the EU is

mainly to ensure that the distortions of competitions that SGEI-missions may cause

are mitigated and the preservation of the unity of the internal market.233 From that

perspective there is no real reason to insist on efficiency in the area of SGEI since

it is in the domain of the Member States. If a Member State wants its public

services to cost more than they need that does not have to be an issue at EU level

provided that the inefficient operator is unable to distort competition on other

markets where SGEI services are not provided. This presupposes that the distortion

does not affect trade to any higher degree (see article 106(2) TFEU and the effect

on trade criterion).

Secondly, one could argue that article 106(2) TFEU would be rendered useless

if the criteria to assess aid under that article would be the same as the Altmark-

criteria. This, however, is not entirely true. Article 106(2) TFEU provides an

exemption from all treaty rules and not only State aid rules. Therefore, it could still

have a role to play in the field of SGEI since some SGEI-operators may be

dependent on exemptions from other treaty rules, for example, the free movement

rules. However, in favour of requiring an efficient operator in order to enjoy the

233 Case C 660/15 P Viasat Broadcasting UK v Commission, para. 31.

59

exemption in article 106(2) TFEU is the fact that the use of public funds and thus

removing competitive pressure will cause distortions of competition on the

(sometimes potential) market where the SGEI is carried out. There is, therefore, a

risk that the State will aid an inefficient undertaking that may be in competition

with more efficient undertakings. This form of aid is especially problematic where

there is a risk of cross-subsidization between an unprofitable activity and activity

where there exists a functioning market (see for example postal services in section

4.5.5). Furthermore, it may lead to that the pace of development of those services

slows down since the competitive pressure does not exist.

The Framework also contains a requirement that the Member State introduces

efficiency incentives in the aid scheme unless the Member State can justify that it

is not appropriate or feasible to do so.234 According to some authors235 the

requirement of introducing efficiency incentives should be seen as a requirement

stemming from the necessity requirement in article 106(2) TFEU (see section

3.2.3). Their idea is that the article 106(2) TFEU only exempts aid that is necessary

for the functioning of the SGEI. Inefficient operators should therefore not be

exempted in the long run since they have costs that is incurred from not utilizing

their efficiency potentials to a reasonable level. Thus, article 106(2) TFEU would

only allow inefficiencies that are initially necessary, for example since only an

inefficient undertaking is able to meet the conditions necessary for the provision

of the SGEI.236

If this line of argument is accepted, it would mean that the fourth Altmark-

criterion in spirit and purpose becomes a requirement that has to be complied with

under article 106(2) TFEU as to the result if not in form. The result would be that

the requirement of choosing an efficient operator to perform the SGEI (as in the

234 Communication from the Commission — European Union framework for State aid in the form of

public service compensation (OJ C 8, 11.1.2012, p. 15–22) para. 39 235 Säcker, F, Montag F,European State Aid Law – a Commentary, p. 342 236 Ibid.

60

fourth Altmark-conditions) is replaced by an obligation for that operator to become

efficient after some time (or be replaced by an efficient operator).237 Thus, the

purpose of the fourth Altmark-criterion would be achieved but without the formal

requirements of benchmarking or a public procurement procedure. This might be

beneficial for society as a whole since those procedures may incur costs both for

the Member State and the undertakings that perform the SGEI (see section 4.5.4).

Therefore, the use of efficiency incentives may to some extent be used to achieve

the same or similar outcome as the fourth Altmark-criteria in terms of efficiency

but without the costs that compliance with that criterion incurs.

However, even though this argument may seem attractive it is difficult to

understand how to implement it in practice. An option could perhaps be to have

short entrustment periods and let the Commission review the need for inefficiency

at regular intervals. However, this would perhaps not be the best use of the

Commission’s resources. This line of argument may also be questioned since it to

some degree renders article 106(2) TFEU less useful. On the other hand, as already

mentioned, that article could still be used in order to exempt SGEI from other treaty

provisions than those on State aid.

However, instead of questioning the use of Altmark-like criteria in the

Framework and the Decision one could also see the Altmark-case itself as a poorly

decided case.

One the one hand, as has been described above (See section 4.4), there were

proponents of the so-called State aid approach which in essence sees public service

compensation as State aid that can be justified under article 106(2) TFEU. This

approach can be supported by the view (shared by the CJEU)238 that public service

compensation does not fall within the ambit of the market economy operator test.

The reason for this is that public services pursues another objective than

commercial transactions and that test can therefore not be used to justify public

237 Ibid. 238 Joined Cases C-278/92 to C-280/92 Spain v Commission, (ECLI:EU:C:1994:325), para. 22.

61

service compensation. The Altmark-test is thus something different than the

market economy operator test. Hence, it can be argued that this test does not belong

“upstream” in the assessment of what constitutes an advantage but instead under

article 106(2) TFEU.

On the other hand, it would be formalistic to pursue the idea that, just because

the transaction is not commercial in the strict sense, any compensation granted

constitutes an advantage. After all, the State is paying for services that it wants to

provide to the citizens and just because no commercial operator would do that (and

therefore the market economy operator test is not satisfied) it does not mean that

the compensation constitutes State aid. It seems formalistic and artificial to find an

advantage just because the ultimate purpose of the purchase of the services is

different from a private undertaking.

6.3 Commission practice Although a generous interpretation to the third and fourth Altmark-criteria was

given by the General court in BUPA, the Commission has adopted an approach

that underlines the importance of the fourth Altmark-criterion and the importance

of public procurement. The Commission has declined to adopt the concept, taken

from free movement law, regarding overriding reasons of public interest.

One case concerned State aid to a postal provider with a public service

obligation requiring services in the form of post offices to be maintained beyond

the optimum commercial number.239 In that case the Member State had

commenced a public procurement procedure but cancelled it. Instead the State

awarded it to a State entity that had been one of three bidders in the original

procurement procedure. The reason for this was that the State operator was the

only operator that could be entrusted with benefits and pensions of 4 million

239 N 508/2010 – United Kingdom Post Office Limited (POL): Continuation of Network Subsidy

Payment and Working Capital Facility

62

customers in light of the 2008 financial crisis. Due to these overriding reasons of

public interest the Member State argued that the fourth criteria should be

considered fulfilled despite the cancellation of the public procurement procedure

and despite the absence of a benchmarking exercise.240 The Commission rejected

this argument.241

However, it continued to assess the aid scheme under article 106(2) TFEU and

found it compatible since there was a genuine SGEI242, an act of entrustment that

fulfilled the criteria in the 2005 Framework243 and the compensation only

compensated for necessary costs.244 Accordingly, even though the Altmark-criteria

were assessed without any creative reasoning concerning free movement

principles, the Commission eventually did not raise objections. The reason was

that, even though the scheme did not fulfil the fourth Altmark-criteria, the other

criteria were fulfilled. Thus, the aid could be justified under article 106(2) TFEU.

In another decision, concerning ferry services on a certain route, the

Commission held that even though a public procurement procedure was

conducted, it still did not satisfy the fourth Altmark-criterion. This was due to the

fact that the time between the award of the contract and the start of the service was

too short in view of the investments to be made. That might lead to that the winning

bidder would have won due to its links with existing infrastructure.245 Therefore,

the Commission considered that the use of a public procurement procedure was

not enough to satisfy the fourth Altmark-criterion since it would not allow for the

selection of the bidder that would provide the service with the least cost to

society.246

240 Ibid. paras 29–30 241 Ibid. para. 31. 242 Ibid. para. 42. 243 Ibid. para. 47. 244 Ibid. para. 68. 245 SA.48120 (2017/N) – Croatia, SGEI – scheduled coastal maritime public transport on the shipping

route No 409 Preko – Ošljak – Zadar, recitals 38 and 39. 246 Ibid. recitals 36 and 37.

63

This shows a teleological approach to the Altmark-criteria with the Commission

considering the purpose of the Altmark-criteria and thus refusing to accept any

public procurement procedure that does not ensure that the most efficient operator

is chosen.247

It would seem that it is common that the Commission consider State aid schemes

not to meet the fourth Altmark-criterion. Instead, the Commission consider the

State aid schemes compatible when assessing them under article 106(2) TFEU and

secondary law concerning the application of that article. The reason for this is that

the other Altmark-criteria met. Those criteria corresponds to the criteria used when

assessing aid under article 106(2) TFEU. Moreover, the Commission has a

tendency to be particularly strict in assessing compliance with the second and

fourth criteria.248 This might enhance State aid control since it means that the

Commission proceeds to apply article 106(2) TFEU. When applying this article,

the Commission can use its discretion.

Scrutiny by the Commission is of particular relevance in cases where there has

been no public procurement. These cases may be regarded as more suspicious from

a competition law perspective since market actors have not been able to offer their

services. Instead, under the fourth criterion, a benchmarking procedure may be

used. Although the benchmarking procedure requires a comparison with an

efficient undertaking, it leaves more uncertainty as to whether the most efficient

undertaking has been chosen. This is due to the fact that the use of that method is

theoretical. No definitive answer can be given as to which operator would be most

efficient in any given case since no offers will be made unless there is a public

procurement procedure. Thus, the strict application of the fourth criterion may

mitigate the lack of formal control without requiring all schemes to be notified

247 See for another example State aid N 196/2010 – Estonia, Establishment of a Sustainable

Infrastructure Permitting Estonia-wide Broadband Internet Connection (EstWin project), recital. 61 248 Hofmann, H, Micheau, C, State Aid Law of the European Union, p. 102 and Hancer, L,

Ottervanger, T, Jan Slot, P, EU State Aids, p. 266

64

(disregarding exemptions in secondary law such as article 3 of the Decision).

Thereby, a balance can be maintained between formal control and practicalities

such as case-load for the Commission etc. However, the increase in formal control

may to some extent be lost since the compliance of all the Altmark-criteria leads

to the finding that no State aid exists in a situation and thus the notification

requirement is not applicable. This leaves some room for misapplication of the

Altmark-criteria since it may be national courts that decides on those cases.

The use of similar criteria when assessing aid under article 106(2) TFEU and

assessing the existence of an advantage under article 107(1) TFEU, should have

the effect that the overall assessment of whether or not public service

compensation is compatible is simplified and can be done with legal certainty and

transparency. However, even though the criteria are generally overlapping, there

are deviations in secondary law that can be important. For example, there is no

need for notification if the public service compensation complies with the Decision

(article 3) but there is when the Commission applies the Framework. Furthermore,

national courts may be under an obligation to check the compliance of a measure

with the Altmark-criteria in court proceedings regarding recovery of unlawful aid,

but the application of the Framework is a task for the Commission (see section

5.1).249

7 Conclusion 7.1 General remarks The concept of SGEI and its use in State aid law provides Member States with the

possibility to select and organize their public services in the way they want in order

to achieve their national policy goals without conflicting with EU State aid law.

All aspects of this concept should be seen in the light of this balancing act. This

249 Fiedzuk, N Towards Decentralization of State Aid Control: The Case of Services of General

Economic Interest, World Competition 36, no. 3 (2013): 387–408. p. 403.

65

helps to understand the vagueness of the concept itself and accordingly why it is

difficult to provide an exact definition of the concept. The reason for this

vagueness is the wide discretion afforded to the Member States when designating

the SGEI. This means that many different categories of services can be SGEI.

However, as can be seen from the BUPA-case this may cause some problems when

combined with general rules established by the CJEU.

A mitigating factor for these problems can be the Commissions secondary law

since it provides for an exemption from the prohibition in article 107(1) TFEU

even when the Altmark-test is inapplicable. Even when the Altmark-criteria are

inapplicable article 106(2) TFEU can be used. Together with the Altmark-criteria

it provides a balance between the compensation approach and the State aid

approach. In fact, if not in law, this system provides for a middle way between

those approaches since it makes it possible for the Commission to exercise control

of State aid (applying article 106(2) TFEU) that may be potentially dangerous by

a more rigorous check of the fourth Altmark-criteria. It also has the beneficial

effect of promoting the use of public procurement in general which benefits the

use of market mechanisms. The use of those market mechanisms should provide

for a more accurate compensation of SGEI.

7.2 The difference between the criteria used The use of the same (or roughly the same) criteria in the Decision and Framework

as in the first three Altmark-criteria may be necessary since the Union interests

would otherwise be infringed. The first and the second criteria are necessary in

order to control ex post if there has been a SGEI. The third criterion is a logical

necessity under the Altmark-doctrine since it ensures that there is no advantage in

the form of overcompensation to the SGEI-operator. It is in that sense the key-

criterion. It is also necessary under article 106(2) TFEU since that article aims to

exclude only those services whose function would be threatened if no exceptions

66

from the State aid prohibition existed. Thus, compensation should only be allowed

up to the amount necessary carry out the SGEI-mission.

The fourth Altmark-criterion, however, has no equivalent in the Decision or

Framework which is also not necessary since the purpose of article 106(2) TFEU

would not be achieved if it had to live up to the conditions of Altmark. Thus, in

order to escape the prohibition in article 107(1) TFEU, the operator has to be

efficient. Whereas under article 106(2) TFEU it must not be efficient. Instead, the

task of that article is to exempt inefficient operators (or efficient operators that

cannot demonstrate their efficiency through the means provided in the fourth

Altmark-criterion) from the requirements of article 107(1) TFEU.

As has been discussed earlier, the lack of an equivalent to the fourth criterion in

the Decision can lead to the use of inefficient operators since there is no

requirement to select an efficient operator. This can be compared with the

Framework in which there is a requirement to introduce efficiency incentives

unless it is not feasible or appropriate. One could argue that, as a matter of policy,

it is wrong not to include a requirement of selecting the most efficient operator

since the aim of the CJEU’s Altmark case-law is to ensure that an efficient operator

is chosen. However, one could also argue that there is no need to include a

requirement of choosing the most efficient operator since the Decision serves a

different purpose that the Altmark-doctrine.

This argument rests on the idea that, firstly, the requirement of choosing the

most efficient operator in the Altmark-case is necessary in order to ascertain that

the compensation only amounts to what is absolutely necessary in order for the

SGEI to be carried out. The reason for this is that otherwise the operator will be

receiving more than the appropriate consideration for the services that it

provides.250

Secondly, in order for this argument to be convincing, one must also accept the

idea that, since the purpose of the Decision is different from the Altmark-case,

250 Compare with the reasoning in Procureur de la République v ADBHU

67

there is not the same need to ensure that the compensation only amounts to what

is objectively251 necessary for the SGEI to be carried out. This second part is

unconvincing from a policy perspective since there is no real reason to allow

inefficient operators at all. However, it may be argued that it is a constitutional

necessity considering the Member States wide discretion in organizing SGEI.

Thus, if the Member States want to spend their money on inefficient SGEI-

providers, it is not a matter for the EU since the relevant checks on distortions of

competition have already been made.

However, it could be argued that an efficiency-criterion should be inserted to

the Decision. If not, there is a risk that inefficient undertakings may use this in

order to gain a competitive advantage by receiving compensation for the

performance of SGEI-missions. If that inefficient undertaking that receives State

Aid is active on several national markets there is a clear EU interest of stopping

that aid. However, the use of an effect on trade criterion may mitigate or even solve

the issue of cross-border competition distortions.

The argument could also be made that having an equivalent to the fourth

Altmark-criterion in the Decision would deprive article 106(2) TFEU of its

purpose since the Decision would then correspond to the Altmark-test.

However, firstly, an efficiency requirement in the decision does not have to

correspond with the fourth Altmark-criterion. It could be designed as a requirement

of introducing efficiency incentives as in the Framework.

Secondly, even if such a requirement would be inserted in the Decision, or even

if this requirement applied throughout the area of application of article 106(2)

TFEU, that article would still have a purpose since it allows for exemptions from

other rules in the treaty than the State aid rules. For example, it may be used to

251 I.e., necessary for the most efficient operator.

68

limit free movement if the SGEI is dependent on this. Thus, I find the argument,

arising from a systematic approach to the treaty rules, unconvincing.

One could argue that the danger to competition of having inefficient operators

are lower since the Decision provides for an exemption from notification and the

categories of SGEI-missions that can benefit from this Decision is limited.

However, this does not explain why a requirement of a public procurement

procedure has to be left out. On the contrary, the less control the Commission can

exercise, the greater the need for procedural safeties in order to ensure that there

are no distortions of competition.

Accordingly, the absence of a requirement of choosing the most efficient

operator is problematic. I find the arguments for upholding this difference between

the Decision and the Altmark-test unconvincing.

7.3 Comparing Commission practice and the EU-courts case-law The approach used by the General court in BUPA does not seem to have been

followed by the Commission in its decision making. The Commission seem to

attach great weight to the fourth criterion and then proceed to use article 106(2)

TFEU instead, which increases the Commission’s control over the aid measure

granted, especially since it may require amendments to the aid measure in order

for the Commission to declare it compatible with the internal market under that

article.

One of the ultimate results of the relation between the Altmark-case, article

106(2) TFEU and the Framework and the Decision is that they balance the need

for notification since many schemes, that would have been State aid if the Altmark-

criteria did not exist, does not need to be notified. By strictly testing the compliance

with the second (which is applicable to all public service compensation) and

especially the fourth criterion, the system is designed to ensure ex post control. By

being strict in the application of the fourth criterion, the Commission asserts

control over the more dangerous forms of compensation schemes (compensation

granted without the use of any market mechanism in the form of public

69

procurement). It then gives up some of that control by the use of the Decision (and

block exemptions and de minimis rules) for cases in which the overall danger for

competition and the internal market is low even if the compensation mechanism is

dangerous in itself.

This approach by the Commission is reasonable if one considers that the fourth

criterion is an essential part of the Altmark-test. Without the fourth criterion in that

test the compensation will not be the objectively lowest possible and thus the State

may overcompensate the SGEI-provider.252 The strict approach regarding the

fourth Altmark-criterion thus leads to an accurate application of the Altmark-test

and results in increased control by the Commission since the aid measure in that

case should be notified.

Moreover, the Commission’s reluctance to adopt the line of reasoning from the

BUPA-case on the one hand increases legal certainty and transparency. On the

other hand, it has the effect of making the application of the Altmark-case and the

Altmark-package inflexible and formalistic. This was something the Commission

was trying to get away from by adopting a “refined economic approach.”253

7.4 Need for change? The findings of the previous sections in this chapter lead to two general

conclusions.

Firstly, the Commission’s decision-making practice, with a strict application of

the fourth Altmark-criterion, may lead to a formalistic approach to assessing public

service compensation to SGEI (although the approach favours legal certainty and

transparency). This is unfortunate since the Commission’s ambition is to have less

focus on formalistic categories and a more refined economic approach. Moreover,

252 See also the market operator test (section 4.4). 253 State aid action plan - Less and better targeted state aid: a roadmap for state aid reform 2005-2009

(Consultation document) {SEC(2005) 795} COM/2005/0107 final

70

the use of the Decision, which is less strict since it does not require compliance

with the fourth Altmark-criterion, may mitigate the effects of that criterion since it

exempts certain forms of aid. However, the use of the Decision does not make the

Commission’s approach less formalistic. If anything, the use of certain categories

of aid that may benefit from the Decision contributes to formalism (albeit, again,

contributing to legal certainty).

Secondly, as was explained in section 6.2, the exclusion of any equivalent to the

fourth Altmark-criterion in the Decision may be questioned. The reason for this is

that there is no convincing reason to allow less efficient operators. The use of those

operators may also have negative effects on competition since they may be

strengthened in relation to competitors on other markets if they are granted public

service compensation.

However, one can also argue that the more refined economic approach has

already been taken into consideration when creating the various forms of

Commission acts such as the Decision and the Framework. Accordingly, there

should be no need for a high degree of flexibility in the decision making. The

reason for this is that the categories of aid that may be exempted under the Decision

are the ones which in all cases should be treated in the way the Decision provides

for, considering the danger they pose to competition etc. In that case rigidness in

the application of the different criteria is positive since it provides for legal

certainty whereas the legislation itself provide for the refined economic approach

(in contrast to formalism).

Thus, the question if the use and non-use of the Altmark-criteria in the Decision

is positive in relation to the Commission’s goals, depend on the accuracy of the

Commission’s secondary legislation and the level of rigidness in which the

Altmark-criteria are applied. However, as a matter of policy I conclude that it is

questionable to leave out a requirement of efficiency in the Decision.

71

References Literature Fiedzuk, N, Putting Services of General Economic Interest up for Tender:

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113 (2013)

Fiedszuk, N, Towards a More Refined Economic Approach to Services of General

Economic Interest, European Public Law 16, no. 2: 271–288 (2010)

Fiedzuk, N Towards Decentralization of State Aid Control: The Case of Services

of General Economic Interest, World Competition 36, no. 3: 387–408 (2013)

Hancer, L, Ottervanger, T, Jan Slot, P, EU State Aids, fourth edition, Sweet &

Maxwell, 2015

Hofmann & Micheau, State Aid Law of the European Union, Oxford University

Press, 2016, p. 88

Nääv, M, & Zamboni, M, (editors) Juridisk Metodlära, edition 2:2,

Studentlitteratur, 2018

Piernas Lopez, J, The Concept of State Aid under EU law From Internal Market to

Competition and beyond, Oxford University Press, 2015,

Posner, R, Economic Analysis of Law, 9:th edition, Wolters Kluwer Law and

Business, 2014

Sauter, W, Case T-289/03, British United Provident Association Ltd (BUPA),

BUPA Insurance Ltd, BUPA Ireland Ltd v. Commission of the European

Communities, Judgment of the Court of First Instance of 12 February 2008,

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Säcker, F, Montag F, European State Aid Law – a Commentary, Verlag C.H. Beck,

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Wehlander, C, Who is Afraid of SGEI?: Services of General Economic Interest in

EU Law with a Case Study on Social Services in Swedish Systems of Choice,

Dissertation Umeå Universitet, 2015

Quigly, C, European State Aid Law and Policy, third edition, Hart Publishing,

2015.

Table of cases Court of Justice Case 127/73 Belgische Radio en Televisie v SABAM (no 2)

(ECLI:EU:C:1974:25)

Case 730/79 Philip Morris v Commission (ECLI:EU:C:1980:209)

Case 240/83 Procureur de la République v Association de défense des brûleurs

d'huiles usagées (ADBHU) (ECLI:EU:C:1985:59)

Case 118/85 Commission v Italy (ECLI:EU:C:1987:283)

Case 310/85 Deufil GmbH v Commission (ECLI:EU:C:1987:96)

Joined cases 62/87 and 72/87 Exécutíf régional wallon v Commission

(ECLI:EU:C:1988:132)

Case C-301/87 France v Commission (ECLI:EU:C:1990:67)

Case C-305/89 Italy v Commission (ECLI:EU:C:1991:142)

Case C-179/90 Merci convenzionali porto di Genova (ECLI:EU:C:1991:464)

Case C-313/90 Comité International de la Rayonne et des Fibres Synhétiques

(CIRFS) v Commission (ECLI:EU:C:1993:111)

Joined Cases C-278/92 to C-280/92 Spain v Commission, (ECLI:EU:C:1994:325)

Case C-364/92 SAT/Eurocontrol (ECLI:EU:C:1994:7)

Case C-393/92 Gemeente Almelo and Others v Energiebedrijf Ijsselmij NV

(ECLI:EU:C:1994:171).

Case C-39/94 SFEI and Others (ECLI:EU:C:1996:285)

Case C-57/95 French Republic v Commission of the European Communities

(ECLI:EU:C:1997:164)

Case C-67/96 Albany (ECLI:EU:C:1999:430)

73

Case C-301/96 Germany v Commission (ECLI:EU:C:2003:509)

Case C-174/97 P FFSA v Commission (ECLI:EU:C:1998:130)

Case C-156/98 Germany v Commission (ECLI:EU:C:2000:467)

Joined Cases C-180/98 to C-184/98 Pavlov and Others (ECLI:EU:C:2000:428)

Case C-143/99 Adria Wien Pipeline and Wietersdorfer & Peggauer Zementwerke

(ECLI:EU:C:2001:598)

Case C-158/99 Germany v Commission

Case C-53/00 Ferring SA v ACOSS (ECLI:EU:C:2001:627)

Case C-280/00 Altmark Trans v Nahverkersgesselschaft Altmark GmbH

(ECLI:EU:C:2003:415)

Case C-126/01 GEMO (ECLI:EU:C:2003:622)

Case C-345/02 Pearle BV, Hans PrijsOptiek Franchise BV and Rinck Opticiëns

BV v Hoofdbedrijfschap Ambachten (ECLI:EU:C:2004:448)

Joined cases C-346/03 and C-529/03 Atzeni v Regione autonoma della Sardegna

(ECLI:EU:C:2006:130)

Joined cases C-442/03 P and C-471/03 P P&O European Ferries (Vizcaya) SA v

Commission (ECLI:EU:C:2006:356)

Case C-71/04 Administración del Estado v Xunta de Galicia

(ECLI:EU:C:2005:493)

Case C-437/09 AG2R Prévoyance v Beaudout Pére et Fils SARL

(ECLI:EU:C:2011:112).

Case C-242/10 ENEL (ECLI:EU:C:2011:861)

Joined Cases C-214/12 P, C-215/12 P and C-223/12 P Land Burgenland v

Commission (ECLI:EU:C:2013:682)

Case C 660/15 P Viasat Broadcasting UK v Commission (ECLI:EU:C:2017:178)

Case C-81/16 P Spain v Commission (ECLI:EU:C:2017:1003)

Case C-687/17 P Aanbestedingskalender and Others v Commission

(ECLI:EU:C:2019:932)

74

General court Case T-106/95 FFSA v Commission (ECLI:EU:T:1997:23)

Joined cases T-132/96 and T-143/96 Freistaat Sachsen and Others v Commission

(ECLI:EU:T:1999:326)

Case T-296/97 Alitalia v Commission (ECLI:EU:T:2000:289)

Case T-308/00 Salzgitter v Commission (ECLI:EU:T:2004:199)

Case T-289/03 BUPA and Others v Commission (ECLI:EU:T:2008:29)

Case T-137/10 Coordination bruxelloise d’institutions sociales et de santé (CBI) v

Commission (ECLI:EU:T:2012:584)

Case T-533/10 DTS v Commission (ECLI:EU:T:2014:629)

Commission decisions State aid No N 178/2010 – Spain, Public service compensation linked to a

preferential dispatch mechanism for indigenous coal power plants

State aid No E 2/2005 and N 642/2009 – The Netherlands, Existing and special

project aid to housing corporations

State aid N 196/2010 – Estonia, Establishment of a Sustainable Infrastructure

Permitting Estonia-wide Broadband Internet Connection (EstWin project)

N 508/2010 – United Kingdom, Post Office Limited (POL): Continuation of

Network Subsidy Payment and Working Capital Facility

SA.48120 (2017/N) – Croatia, SGEI – scheduled coastal maritime public transport

on the shipping route No 409 Preko – Ošljak – Zadar

Internet sources https://ec.europa.eu/competition/state_aid/overview/analysis_tree_en.pdf