How State Aid saved Borgen
In two recent judgments, the European Court of Justice clarified the scope of EU state aid law towards services of general economic interest, providing insight in the conditions for state aid to public broadcasting companies.
In two judgments that came out on 24 September 2015, the European Court of Justice (ECJ) has clarified the conditions for granting state aid to for services of general economic interest (‘SGEI’s’) in the public broadcasting sector. The cases, TV2 Danmark v Commission (T-674/11) and Viasat v Commission (T-125/12), create a more consistent standard for the application of the so-called ‘Altmark test’. Moreover the ECJ ruled that the revenue from advertising granted toTV2 did not constitute state aid. This blog will primarily deal with the application of the state aid rules to SGEI.
The concept of SGEI is mentioned in Articles 14 and 106(2) TFEU; however, this concept is not defined in the EU Treaties. Qualifying public service obligations and entrusting undertakings with a SGEI is left to the Member States. As a result the concept of SGEI has developed into various areas of public services such as healthcare, bus services and public broadcasting. According to the landmark Altmark judgment (C-280/00) compensation for a public service obligation does not constitute state aid, provided that four cumulative criteria are met. Firstly, there must be a clear public service obligation. Secondly, prior to entrustment objective and transparent criteria must be determined to calculate the costs that must cover the compensation. Thirdly, the compensation may not exceed the total net cost incurred by the SGEI provider, including a reasonable profit. The fourth criterion requires that a public service provider is selected pursuant to a public tender or must be compensated based on the analysis on the costs a well-run, average undertaking would incur.
The Altmark test can be regarded as the problem child of the state aid provision of 107 (1) TFEU. In applying the Altmark test the ECJ has navigated between a very lenient stance (BUPA, T-289/03,) on the four cumulative conditions and a more strict interpretation (TF1, T‑520/09). In 2008 the ECJ held in TV2 Danmark I (T-309/04) that the Commission had failed to provide a legal and economic analysis in its application of the 2nd and 4th Altmark conditions. The ECJ did not rule out that the financial supervision of the Danish Parliament could satisfy the 2nd and 4th Altmark conditions. In 2011 the Commission re-examined the Danish aid scheme and decided that the compensation was still in breach with the 2nd and 4th Altmark conditions. However the aid was declared compatible with Article 106(2) TFEU.
TV2 Danmark and commercial competitor Viasat started two separate actions for annulment at the ECJ. In TV2/Danmark v Commission II (T-674/11) Denmark invoked the BUPA judgement and claimed that the ECJ should have applied a more lenient approach towards the 2nd and 4th Altmark conditions. In the BUPA case the ECJ applied the principle of proportionality in the assessment of the Altmark conditions, noting that a compensation fulfils these criteria when it was designed in accordance with the “spirit and the purpose of Altmark”. The ECJ stipulates that in BUPA the circumstances were of a special nature given the private insurance equalisation scheme in the healthcare sector. In the case of TV2 Danmark there are no comparable special circumstances. Accordingly the ECJ distances itself from the BUPA ruling, stating that solely examining the goals of Altmark does not make any sense without actually applying the Altmark conditions. Secondly, Denmark claimed that based on the CBI judgement (T-137/10) Altmark must be interpreted more leniently in certain public sectors. The ECJ rules that TV2 operates in a competitive sector with private broadcasting companies, and therefore the compensation must be examined based on a strict interpretation of the Altmark conditions. Accordingly the Commission is allowed to examine the compensation on the criterion of an efficient expenditure.
In Viasat v Commission the ECJ ruled that the 2nd Altmark criterion does not require Member States to incorporate efficiency incentives for the calculation of the cost parameters. However the selection of a well-run undertaking does require the introduction of an ex ante efficiency framework. Denmark’s claim that TV2 is a very productive broadcasting company comparable to the BBC and the Swedish public television was not enough to substantiate that TV2 is compensated based on the cost which a well-run undertaking would incur. An ex post efficiency audit by the Danish Parliament did not suffice.
The ECJ also clarified the scope of the compatibility test of Article 106(2) TFEU. Citing the Commission’s soft law on Article 106 (2) TFEU Viasat claims that the 2nd and 4th Altmark conditions are part of the compatibility test of state aid with the internal market. The ECJ dismisses this claim and refers to the BUPA case as an incidental case in which the proportionality condition of Article 106(2) TFEU was applied in the assessment of the Altmark conditions. By giving the impression that the BUPA judgement was an anomaly, the ECJ clarifies the division between Altmark and Article 106(2) TFEU. The former is the applicable test for establishing a breach of Article 107(1) TFEU and the latter the test that must be applied when investigating the compatibility of state aid with the internal market.
Why are these judgments important? First of all the previous “Altmark- light” approach of the ECJ, leaving room for a proportionality test in the healthcare and social sectors, cannot be applied to competitive sectors such as the broadcasting sector. Moreover, only the 4th Altmark condition, and not the 2nd Altmark condition, requires that an undertaking is compensated based on efficiency incentives. Even more important for the development of legal theory is that the ECJ emphasized that the Altmark conditions may not be confused with the proportionality test of article 106(2) TFEU.
Both judgments are also relevant for practice. They may give the Member States further guidance on designing state aid-proof compensation schemes for public services. In addition they may have an effect on the Commission’s decision practice based on Article 106(2) TFEU. The clear distinction the ECJ made between the Altmark test and the compatibility test, may require the Commission to clarify this important legal aspect in its SGEI Communications.