The European Court of Justice (“ECJ”) has delivered an important judgment, on 24th July 2003, in Case C-280/00 Altmark Trans GmbH, concerning the application of the EC state aid rules (Article 87 of the EC Treaty) to state subsidies for the provision of public services. The Opinion of Advocate General Léger had proposed a general presumption that the provision of funding by a Member State for the provision of public services should normally be treated as a notifiable state aid irrespective of the relationship between the levels of funding and costs of the service. The judgment of the ECJ has limited the applicability of the EC state aid rules, in line with previous case law, most recently Case C-53/00 Ferring, (2001) ECR I – 9067.
The Altmark Trans case concerns the licensing of regional bus transport services and a provision of public subsidies for those services, as they could not be operated profitably on the basis of operating income. The licences required the operator to charge only the fares authorised by the licensing authority and to comply with an approved timetable and other statutory obligations.
The ECJ stated that the requirement of an effect on trade between Member States for purposes of applying Article 87(1) EC did not depend on the local or regional character of the transport services supplied or on the scale of the field of activity concerned. The ECJ did state that if the licences and subsidies involved did not satisfy the conditions of EC Regulation No.1191/69 (on action by Member States concerning the obligations inherent in the concept of a public service in transport by rail, road and inland waterway), then the licences and subsidies must be considered incompatible with EC law irrespective of the state aid provisions of the EC Treaty. However, the ECJ concluded that Regulation No.1191/69 allows Member States not to apply the Regulation to the operation of urban, suburban or regional scheduled transport services which necessarily depend on public subsidies. The ECJ concluded that public subsidies intended to enable the operation of urban, suburban or regional scheduled transport services are not caught by the EC state aid rules where such subsidies are to be regarded as compensation for the services provided by the recipient undertakings in order to discharge public service obligations.
In accordance with previous case law, the ECJ concluded that where a state measure provides compensation for services provided by the recipient undertaking in order to discharge public service obligations, 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 their competitors, so that the measure will then not be caught by the EC state aid rules (Article 87(1) EC). This is based on the ECJ’s judgment in the Ferring case, in which it held that provided a tax on direct sales imposed on pharmaceutical laboratories corresponded to the additional costs actually incurred by wholesale distributors in discharging their public service obligations, an exemption from that tax for such wholesale distributors could be regarded as compensation for the public services provided and hence not state aid. This was because the only effect of the tax was to put distributors and laboratories on an equal competitive footing.
The ECJ ruled that in order not to constitute state aid, the compensation must not exceed the cost of discharging the public service obligations, taking into account the relevant revenue and also allowing for a reasonable profit for discharging such obligations. However, in reaching this conclusion, the Court stated that the public service obligations and also the basis of compensation must be clearly and transparently defined in advance.
The ECJ’s judgment also clarified to some extent the relationship between the public procurement of services and the question of whether state funding of public services amounts to state aid. The ECJ ruled that where the undertaking which is to discharge public service obligations is not chosen in a public procurement procedure, the level of the compensation must be determined on the basis of an analysis of the costs which a typical, efficiently-run undertaking would have incurred in discharging those obligations, taking into account the relevant revenue and a reasonable profit.
It would seem to follow from this that where the public procurement rules for services procurement had not been correctly followed, or whether following a procurement or a contract award, there has been a revision of the contract terms, then the state subsidy or funding could be caught by the EC state aid rules.
In any event, whilst providing welcome clarification in principle, the judgment of the ECJ does leave open potential uncertainty in individual cases. Where there has been no valid public procurement award procedure (for example where the public procurement rules do not apply or where there has been a departure from the rules), the subsidies in question could constitute state aid if it cannot be demonstrated that the compensation does not exceed the costs that would be incurred by a hypothetical efficiently-run undertaking plus a “reasonable” profit. Due to these variable factors, EC state aid notifications for such public service subsidies may, in many cases, still be considered appropriate.