State aid control comes into play when these services are provided by a company and financed through the public budget, because overly generous compensation could enable the service providers to cross-subsidise their other commercial activities, and thereby distort competition.
In its 2003 Altmark judgement, the European Court of Justice held that public service compensation does not constitute State aid when four cumulative conditions are met:
- the public service obligations is clearly defined;
- the parameters for compensation are objective, transparent and established in advance;
- the compensation cannot exceed the costs incurred in the exercise of the public service obligations, plus a reasonable profit;
- If the firm has not been chosen through public procurement (a public tender where the winning firm is the one providing the service at the least cost), the firm should be compensated on the basis of the costs of a typical well run company.
Where at least one of the Altmark conditions is not fulfilled, the public service compensation will be examined under State aid rules.
According to the Court of Justice, ‘Where a State measure must be regarded as compensation for the services provided by the recipient undertakings in order to discharge public service obligations, so that those undertakings do not enjoy a real financial advantage and the measure thus does not have the effect of putting them in a more favourable competitive position than the undertakings competing with them, such a measure is not caught by Article (107(1) of the Treaty). However, for such compensation to escape qualification as State aid in a particular case, a number of conditions must be satisfied.
- … First, the recipient undertaking must actually have public service obligations to discharge, and the obligations must be clearly defined. …
- … Second, the parameters on the basis of which the compensation is calculated must be established in advance in an objective and transparent manner, to avoid it conferring an economic advantage which may favour the recipient undertaking over competing undertakings. … Payment by a Member State of compensation for the loss incurred by an undertaking without the parameters of such compensation having been established beforehand, where it turns out after the event that the operation of certain services in connection with the discharge of public service obligations was not economically viable, therefore constitutes a financial measure which falls within the concept of State aid within the meaning of Article (107(1) of the Treaty).
- … Third, the compensation cannot exceed what is necessary to cover all or part of the costs incurred in the discharge of public service obligations, taking into account the relevant receipts and a reasonable profit …
- … Fourth, where the undertaking which is to discharge public service obligations, in a specific case, is not chosen pursuant to a public procurement procedure which would allow for the selection of the tenderer capable of providing those services at the least cost to the community, the level of compensation needed must be determined on the basis of an analysis of the costs which a typical undertaking, well run and adequately provided with means of transport so as to be able to meet the necessary public service requirements, would have incurred in discharging those obligations, taking into account the relevant receipts and a reasonable profit for discharging the obligations’(8).
(8) Case C-280/00 Altmark Trans GmbH and Regierungspräsidium Magdeburg v Nahverkehrsgesellschaft Altmark GmbH, paragraphs 87 to 93