Services of General Economic Interest (SGEI)

The concept of general interest

With regard to services of general interest (SGI), the competence lies mainly with the Member States.

Thus, the definition, method of implementation and financing of the SGI depend primarily on the Member States. A public service obligation refers to the provision of certain services, which are seen to be of particular benefit to consumers, including companies. These obligations may involve both commercial and non-profit services and service providers, to which public authorities have entrusted public service obligations.

A service considered to bring public benefit or be of general interest may be imposed a public service obligation. The difference to services provided directly by public authorities is that the Member State imposes the public service obligation to be fulfilled by a public or private company. Where the services are of general economic interest, the Member States are required to apply the Community law, such as competition rules (including those on State aid) and rules on public procurement.

A straightforward definition of public interest does not exist either at the national or Community level. Meanwhile, the EC Court of Justice has issued several individual judgements concerning the general interest of certain functions. The concept of general interest is also incorporated in many national laws and decrees, often relating to shared responsibility, autonomy and ideological or non-profit making nature of operations.

In Finland, the key element of general interest is that the activity in question may not bring financial advantage to the involved parties. Where the activities of general interest do not involve an economic aspect, they are exempt from the Community regulations. On the other hand, economic activities undertaken in conjunction to activities of general interest fall under the Community's sphere of authority. At the national level, general interest is closely related to the non-profit nature of activities, whereas in Community law, it is a question of defining the general interest content of the activity. 

Services of general economic interest

Services of general economic interest (SGEI), as laid down in Article 16 and Article 86 of the EC Treaty, are often profit-making services of general interest. However, despite being profit-making, they are primarily of universal interest and the Member States have therefore imposed special public service obligations on them. The SGEI relate to operations which serve the whole society and strive to fulfil its economic, social or regional functions.

The EC Court of Justice has considered the following services, among others, to be of general economic interest: employment services, social housing, air transport, postal services, electronic communications, inland waterways and port services (e.g. berthing). As opposed to normal services, the SGEI are considered essential by the authorities, even though the market might not offer sufficient incentives to provide them. Fulfilling a public service requirement may involve special or exclusive rights and special funding arrangements.

Offsetting the cost of SGEI versus State aid - Background

In recent years, several different interpretations have been offered concerning the relationship between State aid, as defined in the relevant articles of the EC Treaty, and offsetting the cost of the SGEI provision. For a considerable period, the Commission held a view that aid granted by the Member States to undertakings providing SGEI did not correspond to State aid within the meaning of Article 87(1) of the Treaty. However, this interpretation was made under the condition that the public sector would only offset any additional costs incurred from the discharge of the imposed public service obligation.

This situation changed in 1997, when the Court of First Instance issued the following ruling of FFSA (Case T-106/95, 27/2/1997) and SIC (Case T-46/97, 10/5/2000): "The fact that a financial advantage is granted to an undertaking by the public authorities in order to offset the cost of public service obligations which that undertaking is claimed to have assumed has no bearing on the classification of that measure as aid within the meaning of Article 87(1) of the Treaty..." This was a fairly problematic interpretation in terms of the methods traditionally applied when granting State aid. From this ruling followed that, since all public funding channelled to offset the cost of providing the SGEI was considered State aid within the meaning of Article 87, the Commission had to be notified of the measures in advance, in accordance with Article 88(3).  

The Court's judgement of Ferring (C-53/00) of November 2001 restored the situation. This judgement states that when exemption from tax is granted to undertakings discharging their public services obligations as compensation for the additional costs they incur when providing the services, the undertakings are not enjoying any real advantage for the purposes of Article 87(1) and hence do not receive State aid. However, exemption from tax exceeding the amount required to fulfil the public service obligation is to be considered State aid. Thus the interpretation reverted back to the one held prior to 1997.

The judgement of Altmark Trans (C-280/00) emphasised the dual nature of compensation, as previously described in the Ferring case. The Altmark Trans (C-280/00) case set a number of detailed criteria, albeit open to interpretation. Where these criteria were met, the compensation paid for discharging a public service obligation would not be considered State aid and would therefore be compatible with the common market. If the criteria were not met, the compensation would be regarded as State aid (see the section "The Commission's regulation package").

The decision on whether compensation for providing SGEI should be considered State aid is now made on the basis of the EU Court of Justice's judgement of Altmark Trans (Case C-280/00). It lays down four cumulative conditions under which public service compensation does not constitute State aid:

• 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 will be calculated must be established in advance in an objective and transparent manner.
• Third, the compensation cannot exceed what is necessary to cover all or part of the costs incurred in the discharge of public service obligations.
• Fourth, where the undertaking which is to discharge public service obligations 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 able to meet the necessary public service requirements, would have incurred in discharging those obligations.

Where these four criteria are not met, public service compensation does constitute state aid. 

The Commission's regulation package (the Monti Package)

Following the Altmark Trans case, the Commission understood that the four cumulative criteria might be difficult to satisfy in many circumstances. Therefore, it published a package of regulations ("the Monti Package"), with the aim of regulating the State-aid aspect of the compensation paid for providing SGEI.

Published in 2005, the Monti Package lays down the assessment criteria for the compatibility with the common market of compensation constituting State aid. The Monti Package requires the Member States to bring their national SGEI compensation and aid systems into line with the Commission's regulations. Within the concept of general interest, the Member States may define, fairly flexibly and to a reasonably wide extent, the services falling into the scope of general economic interest. However, the Commission retains the right to monitor the decisions.

The Monti Package comprises the following documents:

1. Commission Decision on the application of Article 86(2) to State aid in the form of public service compensation granted to certain undertakings entrusted with the operation of services of general economic interest
2. Community framework for state aid in the form of public service compensation
3. Commission Directive 2005/81/EC amending Directive 80/723/EEC on the transparency of financial relations between Member States and public undertakings

The Commission Decision entered into force on 19 December 2005.

The new public service obligations are discharged in accordance with the principles laid down in this Decision. The actual legal condition concerning public services has not changed, since the Decision only defines the compatibility of public service compensation with the prior notification requirement, as laid down in Article 88(3) of the Treaty. The Decision thus defines the conditions under which a measure will not be subject to the notification requirement to the Commission. Where the conditions are not met, the Commission must be notified of the compensation system.

In accordance with Article 8 of the Decision, reports on the implementation of the Decision, comprising a detailed description of the conditions of application in all sectors, including the social housing and the hospital sectors, must be submitted to the Commission by each Member State every three years. The first report must be submitted by 19 December 2008.

The Framework document spells out the principles according to which the Commission finds SGEI to be compatible with the common market. Similarly to the Decision, the Framework does not change the current principles, since it merely draws together the interpretation practices consistently applied by the EC Court of Justice and the Commission, and the conditions laid down in Article 86(2) of the Treaty.

The Directive is designed to ensure that financial transfers between public authorities and public undertakings, or providers of the SGI, follow the Community regulations on State aid. 

Role of the Ministry of Employment and the Economy in the services of general economic interest

Measures to implement the so-called Monti Package are currently underway. Each Ministry is responsible for bringing the systems of compensation within their administration into line with the regulations, including providing the relevant service definitions. On 1 June 2007, the MEE established a working group to prepare for the national implementation of the Monti Package. The MEE´s  Working life and markets department acts as the general coordinator for services of general interest.

Legislation (SGEI)
EU rules on State aid