The law on SGEIs in theory, and in practice (the pending Spanish DTT cases)
The provision of Services of General Economic Interest (SGEIs) is a key feature of a social market economy. EU Law has always acknowledged this; see Article 106 TFEU, Protocol 26 to the Treaties of the Altmark case law.
In theory, and pursuant to a logic of subsidiarity, Member States enjoy wide discretion t provide these services. In practice, however, the Commission appears to enjoy wide discretion to question Member States choices.
Last week I was invited by ERA (Academy of European Law) to speak at their Annual State Aid conference about SGEIs and, specifically, about a saga of cases on which I have been working for some years and that are now pending before the CJEU (AG Wathelet delivered his incomplete Opinion last September).
The cases are relevant because, albeit paying lip service to Member States’ margin of discretion in this area (or, rather, by an exercise of confusing/meaningless copy-paste like the ones that were the subject of AG Wahl presentation at our recent litigation workshop), the Commission, the General Court and AG Wathelet are actually introducing (discreetly, through the backdoor and in some cases probaby inadvertedly!) novel requirements that would enable the Commission to challenge the provision of virtually any SGEI at the national level. Few people seem to have realized about the relevance of what is going on, but do me a favour: check any SGEI in your Member State and verify whether it complies with the requirements set in these cases…
In spite of the relevance of the legal questions at stake, and of the risk that they pose to the consistency of the case-law, the AG Opinion did not really address them.
For my view on what these questions really are, and on why this case is so relevant and (so far) so problematic, see here:
Services of General Economic Interest (DTT_Lamadrid_ERA 2017)
Chillin'Competition 
However, when one reads the judgment of the General Court it seems rather clear that the Spanish authorities had not defined anywhere the activity at issue as an SGEI.
The activity in question was the roll out of a Digital Terrestrial Television (DTT) network in some remote parts of the territory of Spain. All Spain had to do in order to start discussing about SGEI, was to state somewhere that this activity was considered an SGEI and to entrust the relevant operators with its provision. However, Spain did not do any of that. Instead, Spain used public money to roll out that network and then (when it discovered that it could face State aid problems) Spain and the relevant beneficiaries started looking for possible “hooks” anywhere in national legislation to argue that somehow they had defined DTT as an SGEI entrusted to those beneficiaries.
However, the only references that Spain could come up were general references in Spanish legislation about the general interest of TV/radio broadcasting in the abstract, but nothing defining specifically digital terrestrial TV as an SGEI. Why should then DTT infrastructure be funded by taxpayers, whereas a private radio station has to build his own broadcasting infrastructure? By the way, even DTT infrastructure was funded by the public purse only for those remote areas in Spain, whereas for the territory covering 96% of the Spanish population the cost had to be born by private operators.
Where in Spanish legislation was DTT specifically defined as SGEI? I would be interested to have the relevant provision quoted here.
In short, the Commission and the Courts are not saying that you cannot fund those activities from the public purse. You can and there may be very good reasons why you should be able to do so. All they are saying is that you cannot just start throwing money into an activity that you have not even defined specifically as an SGEI and not even specifically entrusted to a given operator, and then shout “SGEI!!!” based on whatever provision you find with the term “general interest” in your national legislation, just because you are facing a State aid investigation.
Member States of course have a wide margin of discretion in defining SGEIs, and that’s why this must be counterbalanced with strict transparency requirements, so that the Commission and EU Courts can effectively control that discretion for manifest error. In simple language: if an “SGEI” can pop out of nowhere ex post, this is not really transparency. This was also stressed in the recent SNCM (T-454/13) and Saremar (T-219/14) judgments.
I would bet my money on the Court confirming this (correct) line of case-law also in the DTT cases.
theduckavenger
15 November 2017 at 3:15 pm
Excellent. Now we can debate:
Your point and that of the General Court is indeed that no one had defined the activity at issue as a SGEI. Actually, it was labelled, literally, as a SGEI and the objection is that there is no provision labelling it as a public service. And, actually, there are some laws that do label it as a “public service” but the GC said they had not been provided to the Court (even if they had been discussed in the proceedings), but let’s assume you and the GC are right on this factual point (because, as explained below, that is irrelevant for the legal question at issue).
You ask “where in Spanish legislation was DTT specifically defined as a SGEI?”. Let me respond with a question to which I would encourage you to please reply, because that’s what everyone has avoided to do so far:
Where in EU Law can you find the requirement that public service obligations must be specifically labelled as SGEIs??
That’s the very premise of your point and of the reading of the Commission, the GC and the AG.
The Commission has always said that such requirement does not exist. Take a look at its Guide to the application of the European Union rules on state aid, public procurement and the internal market to services of general economic interest, and in particular to social servicesof general interest”, section 2.2:
“EU law does not create any obligation to designate formally a task or a service as being of general economic interest, except when such obligation is laid out in Union legislation. If the content of an SGEI – i.e. public service obligations – is clearly identified, it is not necessary for the service in question to be designated ‘SGEI’.”
If what matters is a material analysis of substance as opposed to a formal one, then this is a SGEI as clear as there can be. Scream SGEI?? How can one claim that it is not a SGEI to ensure that TV reaches rural and isolated areas not covered by market forces but accept that it is a SGEI to deploy a broadband network in Paris or to grant 1.83 billion to a bank to act like a bank?? See the two examples at the beginning of my slides my slides.
What Altmark literally says and what emerges from SNCM and Saremas is that transparency as to the identification of “public service obligations” is key (it’s about identifying the obligations, not about their formal labelling). And here no one has questioned that the obligations exist (in fact, in most cases there were tenders, and the Commission has often said that by nature tenders comply with the 1st Altmark condition).
Alfonso Lamadrid
15 November 2017 at 3:49 pm
First of all, nobody doubts that a certain activity may be worth to be designated as an SGEI. As I acknowledged already in my first comment, there may be very good reasons why the State should pay for the DTT network in some remote areas.
What EU State aid law requires is simply that the MS wishing to fund this activity as SGEI defines and entrusts it specifically. This does not mean that the MS must always put an “SGEI label” to such activities. Of course the MS is free to use other terminology as long as it is clear that a specific activity is entrusted to a specific operator in pursuit of a public interest not satisfied by the market. If that is the case, the public money paid to that operator can qualify as compensation for an SGEI (even if the term “SGEI” has not been used in the entrustment).
For example, a State may decide that, for the purpose of connecting with the mainland a remote island which no ferry operator currently serves (public interest not satisfied by the market), it will cover the costs of ferry operator X, who will provide 2 weekly connections. You see? I entrusted an SGEI without using the term 😉 . In such a case there is a point to start discussing about Altmark or about Art. 106(2) TFEU.
The above requirement is not just a formality. If none of this is required and the Member State is simply allowed to come ex post facto and invoke all kinds of general interests (not reflected in contemporary acts) to “invent” an SGEI, this admittedly does not allow the necessary transparency for the Commission and EU Courts to check for manifest error in the definition. To draw an analogy with more generalist concepts of law, it is as if the State could legislate for individuals without having to follow formalities for voting and publishing its laws. Those are not just mere formalities, as they allow you and me to know what is a law and what is just e.g. a point of view expressed by an administration or a civil servant. Similarly, the requirement to define and entrust the SGEI allows the Commission and EU Courts to distinguish the above example of a genuine SGEI entrustment from e.g. the situation of Saremar, where Italy came up will all kinds of “SGEIs” (neither defined nor entrusted anywhere at the time) to justify the blatant coverage of operating losses of the company. Maybe Saremar had also loss-making routes that no other private operator would serve and maybe it was worth being assigned an SGEI in that regard. But if the Member State has not properly entrusted and defined the SGEI at the time, there can be no meaningful substantive assessment ex post.
In the DTT cases, when reading the General Court’s judgment, I cannot honestly find any basis in Spanish law which would define the public interest not served by the market and entrusted to the developers of DTT. I would be ready to accept that the Commission and the General Court assessed wrongly the facts of the case, if you could quote here a provision of Spanish law that defined as SGEI (or public service or any other term you want) the roll out of Digital Terrestrial TV network in those remote areas and entrusted them to the relevant beneficiaries in return for compensation.
Such factual rectification would not win you the case before the Court of Justice (unless you prove distortion of evidence), so I would still bet my money with the Commission, but it would certainly be very interesting for our debate 😉
theduckavenger
15 November 2017 at 5:55 pm
1) You say: “What EU State aid law requires is simply that the MS wishing to fund this activity as SGEI defines and entrusts it specifically. This does not mean that the MS must always put an “SGEI label” to such activities”
Absolutely, we agree, the activity must be defined and specifically entrusted. I don’t see anyone contesting that public service obligations exist; what I see is the argument that there was no provision labelling them as a “public service”.
2) You say :”For example, a State may decide that, for the purpose of connecting with the mainland a remote island which no ferry operator currently serves (public interest not satisfied by the market), it will cover the costs of ferry operator X, who will provide 2 weekly connections. You see? I entrusted an SGEI without using the term 😉 . In such a case there is a point to start discussing about Altmark or about Art. 106(2) TFEU“.
But that’s exactly the case here!! The State verified that there was a market failure because remote places would not be satisfied by the market (this is explicitly accepted by the EC -Decision, para.151-152 and there is case law from the Supreme Court speaking about the undeniable public interest in the measures) but irrelevant in the formal construction endorsed by the GC and the AG. And there are also different public contracts entered into by every authority with every company providing the service; these agreements clearly set out the obligations (essentially digitalize a network in the area not covered by market forces) and even underline their public service nature!
[Example, para. 123 of the Decision: 123: “The Basque authorities argue that the assignment of the provision of this service of general economic interest to Itelazpi is explicitly contained [in the Conventions in with the Basque administration which] recognises that values such as universal access to information and plurality of information require the universalization of free-to-air television and undertakes to safeguard these values by extending the coverage of the state multiplexes. However, no provision of the Conventions actually suggests that the operation of terrestrial network is considered to be a public service”].
This text clearly reveals that the problem is an strictly formal one “no provision suggesting that (it) is considered to be of public service” after acknowledging that the Convention explains that “values such as universal access to information and plurality of information require the universalization of free-to-air television and undertakes to safeguard these values by extending the coverage of the state multiplexes”?
Doesn’t this “define the public interest not served by the market and entrusted to the developers of DTT”??
3) If I read the decision well, the public interest not served by the market was clearly argued and in fact acknowledged by the Commission.
Decision, para. 152: In the opening decision, the Commission recognised that there is a market failure
in that the broadcasters are unwilling to bear the additional costs of the extension
of coverage beyond their statutory obligations. Moreover, neither the satellite
platforms nor private households have carried out investments ensuring the
reception of digital channels via satellite by all the inhabitants of Area II.
Therefore, the Commission recognises that people whose usual residence is in a
rural area may be totally excluded from the free-to-air digital television signal
reception if the digital coverage is left entirely to market forces and that public
intervention can be beneficial through financial supports to individual
Don’t you agree?
Alfonso Lamadrid
15 November 2017 at 8:21 pm
But I agree with you that at this stage I would (sadly) still bet my money for the Commission. Not sure the house always wins, but let’s say that it’s not rare that it happens..
Alfonso Lamadrid
15 November 2017 at 8:23 pm
I see that we agree that whether an SGEI can be defined for a given market failure is an issue different from the Member State’s obligation to define such SGEI and entrust it to a provider. There can be situations that may very well justify an SGEI, but if the Member State has not defined it and entrusted it to a given provider then the public money that such provider received should be returned (unless there is another basis of compatibility, of course).
Your points 1 and 3 seem to relate to this issue, which I will thus leave aside and I will go directly to the point where we seem to disagree: whether there was such SGEI definition and entrustment in the DTT cases.
You mention the public contracts and the Basque authorities’ understanding of them, as mentioned in para. 123 of the decision. In that paragraph the Commission describes the Basque authorities’ interpretation of those contracts and not what those contracts objectively provided for. After describing that interpretation presented by the local authorities, the Commission concludes that there is no provision in the contracts that would confirm such interpretation.
So the question remains: what provision of those public contracts defined and entrusted an SGEI or public service? Could you quote that provision here? Then we can have it in front of us and see together whether it indeed defines and entrusts the specific activity in question as SGEI or public service (or however else we wish to call it :-)).
theduckavenger
16 November 2017 at 11:12 am
It seems we are undoing some of the progress we made along the way; since you are engaging (thanks again!) let’s try to approach this important issue constructively and clearly:
I think we do agree that “whether an SGEI can be defined for a given market failure is an issue different from the Member State’s obligation to define [obligations which materially must be of public interest, not to formally label those as a SGEI] and entrust them to a provider”.
My nuance (in brackets) is, again, that one must not formally define the “SGEI” using those precise words, but rather clearly define the service/obligations/activity so that the Commission and the Courts can later verify whether they really address a market failure in the public interest (which, again, is not controverted here).
You said you agree with this interpretation (which is evidently in line with the case law, practice and EC’s own views cited above) on the second paragraph of your second comment. However, you are now moving away from that when you also slip in the requirement that you said wasn’t necessary! (“a provision that defines and entrusts the activity in question as SGEI or public service”). That’s exactly what the GC and AG did, pay lip service to an idea and then do the contrary. Didn’t we agree that the formal label isn’t necessary?
Once you accept that, what you need to look for in the Conventions, contracts or in the legislation is a clear definition of obligations that 1) are in the public interest and address an uncontroverted market failure; 2) that are compulsory and 3) that have an element of universality. That’s what the case law has consistently said; to give you only one example, see T-289/03 BUPA, 169-172); I can send you all precedents you want saying the same.
THAT is what the EC, the GC and the AG should have verified, but no one has even made the attempt. Like you, all have looked for “the provision” that specifices that the activity is formally labelled as a “SGEI/public service” (all while acknowledging that materially it is a public service…). But again, that’s missing the point completely!!! There is not a single case in history where that approach was followed (can you cite one so that we can have it in front of us and see it together?) and there are very few SGEis in the EU that would meet that test.
Now, if we can agree on this (which is the real general legal issue that should interest readers) I’ll be happy to immediately give you as many examples as you want so that we can check whether those criteria are met or nor in the facts of this case. I would actually be happy to do that, as this is what we tried to have the Court examine in the 4 (out of 6) subpleas that the AG’s Opinion does not address (without trying to explain why).
Alfonso Lamadrid
17 November 2017 at 10:24 am
It is a pleasure. Thanks to you too for engaging!
Yes, indeed, it seems we finally disagree not just on the facts of the DTT cases but also on the question of principle.
You consider that it is enough to stipulate obligations and then we can search in the whole legal system of the Member State to see if there can be an SGEI or something similar to link that obligation to. However, I consider that those obligations must also be linked to an SGEI (or public service or any other similar term the MS wishes to use) explicitly at the moment that they are stipulated.
Just because you included an obligation to provide a service in a contract, it does not mean that you assigned an SGEI. MS also act as market operators (and clearly market operators do not care about assigning SGEIs) and it must be clear whether the MS has acted as a market operator (e.g. to apply the MEOP test) or as a public authority (in which case it makes sense to discuss about SGEIs). This is not just a formality but an essential requirement of legal certainty and transparency that are important not just for the Commission to control aids effectively but also for third parties to know what the MS is doing and to complain to the Commission if they consider that aid has been granted to their competitors.
If this explicit link of the obligation to an SGEI (or similar term used by the MS concerned) is not made at the moment the obligation is set out, the MS could argue all kinds of “general interests” that can even remotely be linked to that obligation. In my example of the ferry connecting an island to the mainland, the MS can come ex post and argue e.g. first the need to connect remote areas of the country. But if that does not finally work (e.g. because the island is not so remote), the MS can then invoke access to health because it happens that there is no large hospital in the island. If that does not work either, maybe the MS can then invoke public order because there were some crimes in the island and the police should get there on time. And so on and so forth, my point is that if you do not require transparency, you then get lost in a million imaginative justifications that the MS and its beneficiaries will come up with.
Such requirements of transparency in State aid law are increasingly emphasized by the case-law (see e.g. the recent Dilly’s wellnesshotel judgment) and this trend is also followed in the particular area of SGEIs, and rightly so. In Saremar the General Court emphasized that the reason of existence of the second Altmark condition (which requires compensation parameters to be set objectively and transparently in advance by the MS) is that MS must not resort abusively to the concept of SGEIs. One could think (along the lines you have argued for the first Altmark condition) that the MS could also have set proper and precise parameters after the event and why should we all be so formalistic? But it doesn’t work like that and the second condition is not fulfilled if the parameters are set ex post, even if they could be the right ones, had they been set in advance. Similarly in SNCM, the General Court emphasized that the MS can either put the SGEI hat or the MEOP hat on. This also goes towards more transparency, as it is not possible for a MS to set out an obligation in a contract and then to decide a few years later whether it will play the SGEI card or the MEOP card, when it discovers that there is a State aid investigation for the measure it implemented.
So the DTT case is not the odd one out, but simply a piece in a steady trend towards transparency requirements in the interpretation of EU State aid law. And soon the Court’s DTT judgment will hopefully be added to that trend. 🙂
This is not to say that your view is implausible. It is also a valid interpretation of State aid rules and it could have been followed by the case-law some years ago. But this was not the case and now this view seems quite far from where the case-law has gone.
Anyway, it has been a very interesting discussion and congratulations for your blog, which gives so much interesting food for thought and debate 🙂
Have a nice weekend!
theduckavenger
17 November 2017 at 6:45 pm
It’s indeed the question of principle that matters. You acknowledge that it’s not necessary to label something specific as SGEI, yet when you require “transparency” you are in reality requiring that something specific is labelled as SGEI. Anyone with the patience to have read our comments will spot where our difference lies.
In this case, moreover, no one challenges the fact that the service was “ideal to have been labelled as SGEI” (the EC’s words, not mine). And on top of that there were plenty of legal acts (laws, Supreme Court orders and contracts) referring to the service explicitly as SGEI! or as public service, or to the need to ensure universal coverage; if anything, the problem may be that there were too many and not always using the same words (unfortunately none of them were of the Conmission’s liking). The idea couldn’t be more evident, though.
As shown in my slides, challenging this case and not 1.8 billion granted in France to a bank to… act as a bank provides an interesting Illustration on the actual application of State aid rules.
Alfonso Lamadrid
21 November 2017 at 10:48 pm