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Public Compensation for Services of General Economic Interest: An Analysis of the 2011 European Commission Framework


Damien Geradin


George Mason University School of Law; Tilburg University - Tilburg Law and Economics Center (TILEC); Covington & Burling LLP

March 30, 2012


Abstract:     
For a long time, the legal regime applicable to State compensation for Services of General Economic Interest (“SGEIs”) was a source of uncertainty under State aid law. It is only in its Altmark judgment that the Court of Justice of the EU (“CJEU”) brought clarity on the matter by setting out the conditions under which SGEI compensation escapes State aid scrutiny. Drawing on the clarifications brought by the Altmark judgment, the European Commission (“Commission”) adopted in 2005 a so-called “SGEI Package”. It consisted of two documents, a Decision and a Framework, which detailed the conditions under which SGEI compensation would constitute compatible State aid. The 2005 SGEI Package, which has been applied extensively by the Commission, expired in November 2011. To anticipate this, the Commission engaged in a wide consultation process on the revision of the Package. As a result, a draft Package was published in September 2011 and after additional comments were made by various stakeholders, the Commission adopted the final version of the Package in December 2011.

The new Package includes three documents, a Communication, a Decision and a Framework. The Communication clarifies the Altmark conditions. When the SGEI compensation meets these conditions, it does not constitute State aid and does not need to be notified to the Commission. When the SGEI compensation does not meet the Altmark conditions, the analysis turns to the Decision and the Framework. In the Decision, the Commission describes certain types of SGEI compensation that are regarded as compatible with Article 106(2) TFEU and exempt from the requirement of prior notification. If the conditions set in the Decision are not met, the State aid measure is subject to the prior notification requirement, but it can still be declared compatible with the internal market if it meets the criteria spelled out in a third document: the EU Framework.

The Framework is perhaps the most contentious document in the Package. It has received both praise and criticism from stakeholders. Among the conditions that the Framework introduces for the compatibility of SGEI compensation with the internal market, some are not of a strictly economic nature as they relate to the existence of a genuine SGEI and the act by which it has been entrusted. For the sake of convenience, these are thus referred to as the “procedural” conditions. However, the most important condition, to which the largest part of the Framework is dedicated, is economic in nature in that it provides a methodology to determine whether the amount of compensation paid by the State exceeds what is necessary to cover the net cost of discharging the SGEI (including a reasonable profit). In this regard, the context of the financial crisis in which this Framework was developed is important. As Commissioner Almunia put it in one of his speeches, the Commission has to respond to the challenges created by the depleted state of “public coffers almost everywhere in Europe” and the “deep cuts into public services and the welfare state” by ensuring that public money earmarked for such services is spent wisely and efficiently. Finally, the Framework foresees that an SGEI entrustment can sometimes generate serious distortions of competition, in which case the Commission can impose additional requirements to declare it compatible with the internal market.

Against this background, this paper is structured as follows. Section II reviews the procedural conditions and places particular emphasis on the problems of linking State aid with the application of public procurement rules. Section III discusses in detail the economic condition that the SGEI provider should not be overcompensated. Section IV explores the additional requirements imposed when the SGEI entrustment seriously distorts competition. Section V concludes.

It is submitted that the 2011’s SGEI Framework is in many ways a remarkable document for which the Commission should be commended. A number of provisions contained in the Framework give, however, rise to uncertainty in particular regarding the application of the “net avoided cost” methodology to assess the absence of overcompensation for SGEIs. In addition, linking public procurement with State aid control can lead to important practical difficulties, which will be discussed below. On the other hand, the emphasis placed by the Framework on efficiency is particularly welcome, especially at a time where public money is scarce given the imperative of fiscal discipline. As every new set of rules, the Framework should be applied with flexibility so as not to penalize SGEI providers. These undertakings should neither be advantaged not penalized as if Member States expect them to deliver quality public services they must be viable in the long-run.

Number of Pages in PDF File: 19

Keywords: public procurement, state aid, EU, European Commission, tendering, public subsidies, SGEI, universal service, competition, utilities

JEL Classification: E62, H41, H53, H57, H61, H70, K21, K40, L90

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Date posted: April 2, 2012  

Suggested Citation

Geradin, Damien, Public Compensation for Services of General Economic Interest: An Analysis of the 2011 European Commission Framework (March 30, 2012). Available at SSRN: http://ssrn.com/abstract=2031564 or http://dx.doi.org/10.2139/ssrn.2031564

Contact Information

Damien Geradin (Contact Author)
George Mason University School of Law
3301 Fairfax Drive
Arlington, VA 22201
United States

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Tilburg University - Tilburg Law and Economics Center (TILEC) ( email )
Warandelaan 2
Tilburg, 5000 LE
Netherlands
HOME PAGE: http://www.tilburguniversity.nl/tilec/
Covington & Burling LLP ( email )
1201 Pennsylvania Avenue, N.W.
Washington, DC 20004-2401
United States
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