State Aid Unit Services of General Economic Interest (SGEI) Guidance
If you have not heard of SGEI, you are not alone. However, you may be surprised to learn that it could apply to the area that you work in. SGEI are relevant in Scotland in relation to the funding of Ports and Harbours, maritime and aviation transport, airports, social housing and credit unions.
European Commission Article 86 (2) gives Member States the ability to award public funding to undertakings carrying out Services of General Economic Interest. The SGEI decision and framework are Commission Communications introduced by the EC in 2005 to give further clarity on the application of Article 86 (2). The Communications only apply to entities engaged in economic activity and they give Member States the scope to fund all of the costs incurred, allowing for a reasonable profit, in carrying out public service tasks as defined and entrusted to them by the relevant public authorities, There should be no overcompensation. Member States are able to grant compensation for services, such as, hospitals and social housing, without notifying to the Commission.
Introduction
In 2008 the European Commission wrote to all Member States reminding them of their reporting obligations as detailed in the Services of General Economic Interest decision (SGEI), sometimes known as the block exemption, issued in November 2005. The Decision, under Article 8 advises that Member States should submit a report to the Commission every 3 years. As a result the UK submitted a report early this year. Scotland was the main contributor to this, public spending on social housing, maritime transport links to Islands, air links to Islands and aid to airports was reported. To enable us to report accurately on activity funded as an SGEI it is important that we understand what an SGEI is:
What is a Service of General Economic Interest ?
To a certain extent defining a SGEI is left to the discretion of the Member States. Each Member State has services which it deems vital and is not being provided on the open market. A common example across Member States is the provision of Social Housing, this can take many forms. Examples are the provision of social housing e.g. affordable housing schemes aiming to provide low-cost housing. The service has a “social” aim and is filling a gap in the market.
The recent BUPA decision by the Court of First Instance upheld the Commission decision which was that it is within the Irish Governments discretion to impose levies on private health operators in Ireland to help fund a health service for those not accepted by the private health providers for profitability reasons e.g. individuals with long standing pre- existing health problems. The decision reinforced the point that it should be left up to Member States, depending on their individual circumstances, how they define and deliver services which they deem to be a necessity. The European Commission will investigate a SGEI only where they consider that a Member State has made a “manifest error”. That said, it is important that the set up and delivery of an SGEI should be done so within the parameters laid out in Article 86 (2).
SGEI have several important common characteristics:
• Economic Services – State aid rules only apply to “undertakings” (this is any entity engaged in economic activity, regardless of its legal status or the way in which it is financed.) engaged in an economic activity (consists of offering goods and/or services on a given market, even if the motive is social, charitable or not-for-profit. Examples of economic activity are the public funding of social housing, airports and transport.
• Non-economic activities - do not come within the remit of SGEI – They consist of core services provided by the national or local government e.g. the public funding of a police force, army, State education. There is not an open market in these areas.
• General Interest – The service must be for the good of the general populous and not restricted to certain individuals. In the case of activities funded by a Local Authority a service open to everyone within that specific area would suffice.
• Market failure – If a service is already being provided on the open market, generally there would not therefore be justification for an SGEI e.g. a Member State may have to step in to provide a vital transport service which otherwise would cease due to a lack of profitability. This is the case with several maritime transport links to Scottish Islands.
• Generally, If a service is procured by a public authority via an open and competitive tender there is no State aid. The authority is simply paying for a service and the provider has been chosen in an open manner. There should be no element of subsidy involved. However Commission case law has shown that even when a service has been procured there can still be an element of subsidy, each case has to be looked at on an individual basis.
Is the SGEI funding aid ?
The funding of a public service can constitute aid or not. To assess whether the funding is aid the Commission use the “Altmark test”. The Court of Justice held that public service compensation does not constitute State aid provided that four cumulative criteria are met:
• the undertaking is given a public service obligation to perform and
that obligation is clearly defined;
• the parameters of funding are set out transparently in advance;
• compensation does not exceed what is necessary to carry out the
service, allowing for a reasonable profit; and
• if the undertaking was not chosen via a public procurement procedure. The level of compensation required must be calculated on the basis of an analysis of the costs which a typical well run undertaking would have incurred.
These criteria are very difficult to meet and we are not aware of any instances in the UK where all conditions have been met. In practice most services would require a competitive tender to be held. There are examples of where the Commission believe that Altmark has been met. For example, the financing of a scheme promoting investments in order to ensure security of electricity supply in Ireland (N475/2003) , the financing of general broadband in France (N381/2004) . Most compensation given towards a SGEI is likely not to meet all of the Altmark criteria and will therefore be aid.
If Altmark is not met then the public service compensation constitutes aid, this does not mean that it cannot be granted but it must meet the criteria of the SGEI decision or the framework:
SGEI 2005 decision and Framework
The SGEI decision, sometimes known as the Block Exemption, came into force on 19 December 2005. It sets out the conditions under which compensation for SGEI will be regarded as compatible with the common market and does not need to be notified to the European Commission. The only major difference between the Decision and the framework is that compensation covered by the decision does not need to be notified to the Commission. As soon as the criteria of the decision are met the Member State can grant the compensation. However when the conditions of the decision are not met e.g. the amount of compensation exceeds the limits of the decision then the compensation must be notified to the Commission to allow it to assess the compatibility of the aid.
The block exemption applies to:
• annual compensation of less than €30 million given to
undertakings whose annual turnover in the last two financial
years was less than €100 million
• compensation of any amount given for hospitals and social housing,
provided they are carrying out SGEI;
• compensation for air or maritime links to islands with annual traffic
in the last two years of less than 300,000 passengers;
• compensation for ports and airports where annual traffic in the
last two financial years does not exceed 1 million passengers in
the case of airports and 300,000 passengers in the case of ports.
Aid for SGEIs in the field of land transport are not covered by the Block Exemption.
What are my responsibilities if I am giving aid under the Block Exemption ?
You must entrust the SGEI to the recipient undertaking Entrustment must be made by means of one or more official acts carrying legal force in national law primary legislation e.g. a contract or a Ministerial instruction, laws and acts. There is no standard act of entrustment it depends on the authority entrusting the service and on the activity concerned. It must set out the following:
• The nature and the duration of the public service obligations
• The undertakings and the territory concerned
• The parameters for calculating, controlling and reviewing the compensation
• The arrangements for avoiding and repaying any overcompensation.
The entrustment document should be made publicly available. Competitors should be able to see exactly who you are funding, where, why and how much you are giving. If competitors are unaware of the terms of your entrustment they may complain to the Commission. The more precise an entrustment is at specifying an SGEI mission then the greater the level of protection should the award of compensation be challenged by a competitor. An act of entrustment does not have to be set in stone; it is possible to update the act if the public authorities’ requirements change due to unforeseen circumstances.
You must ensure that there is no over compensation – i.e. you must only pay the amount needed to discharge the service allowing the undertaking to make a “reasonable” profit based on a rate of return on capital adjusted to the level of risk to which the undertaking is exposed in carrying out the service. This should not exceed the normal profit levels of companies in the sector. SGEI funding is only supposed to ensure that the entrusted company is no worse off because it is carrying out the service – it should not be significantly better off. You must make regular checks to ensure that there is no over compensation. However if there is over compensation and it does not exceed 10% of the annual compensation it can be carried over to reduce payments the next year. In the area of social housing this can be up to 20% provided that the undertaking concerned only operates services of general economic interest.
You must keep detailed records of the aid given. The UK will have to provide reports every three years on any activities carried out under the scope of the block exemption. These records are the only way of proving that you have complied with the block exemption and have not given illegal aid. They must be kept for ten years and the Commission can ask to see them at any time.
Separate Accounting: The costs incurred by the undertaking entrusted with an SGEI must be identifiable. There is an obligation for undertakings involved in commercial activities to keep separate accounts in line with the State aid Transparency Directive:
The Transparency Directive
The European Commission published the Financial Transparency Directive on 29 November 2005. The Directive requires bodies (whether public, not-for-profit or private) both engaged in commercial activities and in receipt of public funding support for the performance of Services of General Economic Interest (SGEIs) to ensure that their management accounts are sufficiently separate to distinguish between the publicly supported activities and the purely commercial activities. It only applies to undertakings whose annual turnover - amongst other things- is at least €40m. The UK
In June 2009 the European Commission requested that the UK implement the Transparency Directive. It was due to be implemented into national law by 19 December 2006. The UK has now incorporated this legislation into UK national law and it came into force on 22 September 2009
Future Developments
In July 2008 the European Commission wrote to all Member States reminding them of the reporting obligation as set out in the Commission SGEI Decision. Earlier this year the State aid unit responded providing extensive information on SGEIs operating within Scotland. This was sent to the Commission as part of a UK report. The Commission have yet to respond to Member States, but are shortly to post details of Member States responses on the EC website.
In recent years the Commission has attempted to provide some clarity on SGEI. Access to the Commission guidance note can be found at the link below:
http://ec.europa.eu/competition/state_aid/legislation/sgei.html
Compliance with the EC Directives on SGEI and identification of currently operating SGEIs in Scotland is an ongoing exercise.