Any non-SGEI obligation attached to a public service contract may not raise the cost of the service above the level of the “least cost to the community”.
Introduction
It is very rare for measures of compensation for public service obligations to be found by the European Commission to be compliant with the Altmark conditions. Nonetheless, in the past two years the Commission has concluded that two Italian measures were free of State aid because they satisfied the Altmark conditions.
The most recent of those two measures was the subject of Commission decision 2022/348 on aid implemented by Italy and the Region of Tuscany for Toremar and its acquirer Moby [published in OJ L 64, 2/3/2022].[1]
After receiving complaints concerning public service compensation for companies belonging to the former Tirrenia group, the Commission opened several formal procedures which have already led to a number of other decisions during the past decade [e.g. Commission decision 2020/1411]. The Tirrenia group initially included six companies: Tirrenia, Adriatica, Caremar, Saremar, Siremar and Toremar. These companies provided maritime transport services under separate public service contracts. In 2012, following a public tender, Toremar, together with a public service contract, was sold to Moby.
The current decision concerns Toscana Regionale Marittima [Toremar] and examines several measures involving compensation for public services, extension of contracts and berthing priority for vessels operated by Toremar. What is interesting in this case is the Commission’s analysis of Italian arguments that the compensation did not constitute State aid on the grounds that it was compliant with the four Altmark conditions.
Existence of State aid
Measure 1: Prolongation of a “convention” [contract] between Toremar and public authorities that relieved Toremar from paying any fee for its berthing priority.
[1] The full text of the Commission decision can be accessed at:
EUR-Lex – 32022D0348 – EN – EUR-Lex (europa.eu)
The berthing priority has economic value. “(178) The berthing priority has at least in theory the potential to lower the operator’s costs (e.g. because the guaranteed berthing could reduce waiting times in ports and hence result in lower fuel costs) or increase its revenues (e.g. because some timings possibly attract more demand from passengers). Indeed, to the extent the berthing priority allows for a faster docking procedure, users of the ferry service may prefer the ferry operator that benefits from this measure. Even if these effects would only materialise in limited circumstances or would be relatively small, the berthing priority could nevertheless constitute an economic advantage for Toremar.”
The Commissions considers that, since all ferry companies pay berthing fees, Toremar should have paid an additional fee for enjoying priority. This priority was a selective advantage that was stipulated by law and, therefore, it was attributed to the state and entailed loss of potential revenue, as port fees were state resources.
The Commission finds that the measure is not compliant with the Altmark conditions because the fourth Altmark condition is inapplicable.
“(174) For none of the prolongations of the initial Convention in the period 1 January 2009 until 1 January 2012 Toremar was selected following a public tender procedure. Italy merely prolonged the system already in force thereby entitling the pre-established operator to continue receiving compensation for the discharge of the public service obligations.”
“(175) Moreover, Italy has not provided the Commission with any indication that the level of compensation has been 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 revenues and a reasonable profit for discharging the obligations. Italy’s argument that the Region of Tuscany was monitoring Toremar’s efficiency during the period 2010-2011 is not sufficient for compliance with this criterion, as it does not show whether the costs actually incurred by Toremar in the provision of its public service obligations were in line with those of a typical undertaking, well run and adequately provided with means of transport.”
Measure 2: Award of a new public service contract bundled with Toremar’s business to Moby/Toremar.
For this measure the Commission assesses the applicability of all four Altmark conditions.
First Altmark condition: Well defined public service obligation
“(186) The Commission recalls that there is no uniform and precise definition of a service that may constitute an SGEI under Union law, either within the meaning of the first Altmark condition or within the meaning of Article 106(2) TFEU.”
“(187) National authorities are therefore entitled to take the view that certain services are in the general interest and must be operated by means of public service obligations to ensure that the public interest is protected when market forces do not suffice to guarantee that they are provided at the level or conditions required.”
However, because in the field of cabotage, there exist EU rules governing public service obligations, Member States that conclude public service contracts or impose public service obligations, must do so on a non-discriminatory basis in respect of all EU shipowners.
For this reason, “(193) in order to examine whether the first Altmark criterion is met, the Commission will carry out a three-step assessment to verify whether there is a real public service need (steps one and two) and whether it was necessary and proportional (step three). The Commission will assess:
(1) Whether there was user demand;
(2) Whether that demand was not capable of being satisfied by the market operators in the absence of an obligation imposed by the public authorities (existence of a market failure);
(3) Whether simply having recourse to public service obligations was insufficient to remedy that shortage (least harmful approach).”
In addition, the Commission must also check, according to case law, whether the public service obligations are clearly defined.
With respect to whether there was a demand for Toremar’s services, the Commission finds that that is the case. Italy showed with reliable statistics that there was strong and constant demand for those services. [paragraphs 194-199]
With respect to the existence of market failure, the Commission assesses whether the services offered by other ferry operators were similar to those of Toremar. It concludes that “(207) at the moment of the entrustment, market forces alone were insufficient to meet the public service needs. Indeed, on a number of routes Moby/Toremar was the only operator while on the other routes the services provided by the competitors in the Tuscany archipelago were not equivalent in terms of continuity, regularity, capacity and quality and therefore did not satisfy in full the public service requirements laid down in the new service contract with Moby/Toremar.”
With respect to whether the measure was the least harmful approach, the Commission notes that “(208) Italy has chosen to conclude a public service contract with one operator (Moby/Toremar) rather than to impose public service obligations on all operators interested in serving the routes at stake. Based on the information provided by Italy, the Commission accepts that user demand could not have been met by imposing public service obligations (see recital (196)) [recital 196 merely states that the routes in question have always been served by ferries companies under public service contracts]. In particular, on several routes Moby/Toremar is the only operator and where this is not the case, the offer provided by the other operators does not meet (all) the requirements of regularity, continuity and quality. Further, the operation of most routes, especially in the low season, is loss-making, so that without public service compensation they would not be operated at all. In addition, the Commission takes note of Italy’s and the beneficiaries’ argument that the choice for a public service contract was also necessary in view of the privatisation of Toremar. More specifically, Italy argues that tendering out Toremar together with a new public service contract allowed to (i) ensure continuity of the maritime public service and (ii) maximise value for the State. It is for these reasons that the Commission agreed (see recital (96)) that Italy would tender out Toremar business together with a new public service contract. In doing so, the Commission also accepted, and reiterates in this Decision, that Italy could not rely on public service obligations that apply to all operators but that it would rather conclude a public service contract with Moby/Toremar only.”
The explanation above is puzzling. Is maximisation of value for the state a relevant issue in this context? It seems that the only relevant issue is whether the ferry companies could provide the required service without compensation. And even if some routes were loss-making in the low season, it does not necessarily follow either that they were loss-making on an annual basis or that all the routes together were loss-making. In other words, whether a public service obligation is loss-making depends on how it is designed and what routes are included in its scope. Admittedly, however, a public authority may not want to bundle together all routes in an exclusive contract and may choose instead to grant several contracts to different companies in order to be able to compare performance in terms of quality and costs. But again, the Italian authorities chose neither to bundle routes in an exclusive contract, nor to award contracts to several operators.
With respect to clearly defined obligations, the Commission notes that “(210) the public service obligations are clearly described in the new public service contract and its annexes (which include for instance ship specifications for each route). […] The new public service contract also has a clear duration (12 years), identifies Moby/Toremar as the public service operator and contains the arrangements for avoiding and recovering any overcompensation (see also recital (228)). Therefore, the Commission concludes that the first Altmark criterion is observed.”
The Commission also accepts that the berthing priority is linked to the obligation of Toremar to provide regular and punctual services. [paragraph 211]
Second Altmark condition: Parameters of compensation defined in advance
In paragraphs 212-214, the Commission finds that the parameters of compensation are indeed defined in advance as the relevant public directive specified the calculation method and the costs to be included in the calculation.
Third Altmark condition: Compensation does not exceed the next extra costs plus reasonable profit
The Commission, first, observes that the Altmark judgment does not contain a precise definition of reasonable profit. “(217) According to the SGEI Communication, reasonable profit should be taken to mean the rate of return on capital that would be required by a typical company considering whether or not to provide the service of general economic interest for the whole duration of the period of entrustment, taking into account the level of risk. The level of risk depends on the sector concerned, the type of service and the characteristics of the compensation mechanism.”
Then the Commission explains that it considered that Toremar may have been overcompensated because the compensation included a fixed risk premium of 6.5% [i.e. a profit] which “(218) did not reflect an appropriate level of risk because prima facie Moby/Toremar did not appear to assume the risks normally borne in the operation of such services. More specifically, the cost elements for the purpose of calculation of the compensation include all costs involved in the provision of the service and variations in e.g. fuel prices have been taken into account.” In addition, the Commission notes that “(219) certain aspects of the compensation method […] seem to reduce the commercial risk incurred by Moby/Toremar. In particular, the maximum fares that Moby/Toremar can charge are adjusted annually to take into account inflation and reflect variations in the consumer price index. Moreover, the new public service contract contains certain clauses at maintaining the economic-financial equilibrium of the public service. In particular, in case the public service compensation would be insufficient to cover the cost of the services entrusted by the new public service contract, these clauses allow to revise (i) the tariff system, (ii) the level of the public services offered, (iii) the level of the annual price cap, and (iv) the capital grants for investments.”
However, the Commission goes on to acknowledge that requests by Toremar for “rebalancing” its compensation are not necessarily approved automatically and that “(223) not all cost categories are subjected to a rebalancing contribution. Particularly, […], the costs related to managerial inefficiencies, the borrowing costs and increases in staff unit costs to meet labour legal requirements should be borne by Moby/Toremar. Therefore, Moby/Toremar remains incentivised to perform its services efficiently and at the least cost to the community.”
Then the Commission examines the amount of compensation and finds that although it covered the costs of the service it was not enough to provide a return of 6.5% to capital invested. For this reason it concludes in paragraph 225 that there is no overcompensation. The Commission also compares, in paragraph 227, the return of 6.5% to the average return of a sample of operators in the sector and concludes that the return of Toremar is “not unreasonable”.
Lastly, because any cost savings from the berthing priority would have been reflected in the actual costs of Toremar and, a lower compensation, the Commission reaches the overall conclusion that the compensation conforms with the third Altmark condition.
Fourth Altmark condition: Competitive selection
Because the Commission considers that the Directive 2004/18 can only apply in case of a public contract but not when it concerns a service concession, “(236) it assesses whether the tender procedure used by Italy was competitive, transparent, non-discriminatory and unconditional. To make this assessment, the Commission relies on the relevant guidance set out in its Notion of Aid Communication (in particular in its paragraphs 89 et seq.) and the SGEI Communication (in particular in its paragraphs 63 et seq.).”
Competitive & transparent tender
According to the Commission’s 2016 Notice on the Notion of State Aid, a selection procedure is competitive when it meets the following criteria:
- The tender must be well publicised.
- All interested and qualified bidders are allowed to participate in the process.
- The procedure must be transparent.
- All bidders should have access to all relevant information.
- Bidders must be given sufficient time to assess the relevant documents and submit bids.
- The selection criteria must be clear and objective.
In paragraphs 238-250, the Commission finds that the Italian procedure satisfied all of the above criteria. Eleven companies expressed interest and the winner was awarded a 12-year contract. The Commission also notes some unusual features of the tender, namely that it was specified that the annual amount of public service compensation was set at maximum EUR 13 million per year and that Toremar was to be sold at the fixed price of EUR 10 million. In other words, the winner would be the bidder that would be willing to pay the EUR 10 million and accept the lowest possible compensation below EUR 13 million.
Non-discriminatory procedure and award criteria
Both the procedure and the award criteria of the selection must be non-discriminatory. The Commission notes that the only requirement was that bidders needed to be able to “guarantee the continuity of the maritime transport service”. “(252) All 11 parties that responded to the call and expressed an interest were aware of that obligation. The Commission considers that this condition was objective and had been made sufficiently clear to all interested parties in the call for expressions of interest.”
Services are provided at the least cost to the community
The 2012 SGEI Communication specifies that the lowest price as well as the most economically advantageous offer are regarded as compliant with the requirement of “least cost”. The problem here was that the sale of Toremar was bundled together with the public service contract. The sale price was fixed at EUR 10 million after independent expert valuation.
Nonetheless, “(258) the Commission considers that the use of the most economically advantageous tender for the service concerned bundled with the sale of the Toremar business enabled Italy to create effective competition and obtain a service with the highest possible value at the least cost to the community.”
Although the Commission initially considered that the inclusion of the sale of Toremar in the contract would not result in the provisions of a service that was the least cost to the community, it changed its mind. Because of the competitive selection procedure, because 11 bidders participated, and because the sale and the contract were interrelated, it reaches the conclusion in paragraphs 259-266 that the service would not have been provided at a lower cost.
More specifically, “(262) the Commission considers that the bundling of the Toremar business with the new public service contract and the award of the berthing priority do not result in a lower price than if the assets and this contract would have been sold separately, for the following reasons.”
“(263) The Toremar business has been solely purposed for the delivery of the public service and to ensure the territorial continuity. Indeed, all of Toremar’s vessels have been and currently are used for the public service. The Commission is of the view that a private vendor would not have been able to obtain a higher price for the vessels on the market. […] out of the eight vessels of Toremar, three were budgeted for the residual value, whereas the remaining five, which have been completely amortised, were budgeted to their scrap values.”
“(264) The Commission considers it unlikely that potential bidders could have had the necessary eight vessels readily available for redeployment to operate the public service obligations laid down in the new public service contract.”
“(265) Any market economy vendor would have decided to sell Toremar along with a new public service contract in order to obtain the highest price. The Commission concludes that Italy has not attached conditions that were likely to depress the price or which a private seller would not have demanded.”
It is difficult to understand the reasoning of the Commission on the effect of the bundling of the sale and service contract. In the first part of the fourth Altmark condition, the Court of Justice said that the chosen provider must be the “tenderer capable of providing those services at the least cost to the community”. Hence the issue at hand is whether the purchase of the vessels by the service provider resulted in a higher cost to the community. That would have been the case had the provider spent more money acquiring alternative vessels. But it appears that it would have been more costly for the service provider to buy alternative vessels [see the explanation in paragraph 263 above].
Perhaps the Commission was concerned that there could be an issue of State aid had the vessels been sold too cheaply. But as also explained above, their price reflected the fact that they were completely or almost completely amortised.
At any rate the Commission concludes that the fourth Altmark condition is satisfied and, therefore, the compensation is free of State aid.
Conclusion
The Commission finds that other measures, such as the berthing priority and previous compensation before Toremar was sold to Moby, were State aid. However, the State aid is compatible with the internal market according to the 2012 SGEI Framework.
[1] The full text of the Commission decision can be accessed at:
EUR-Lex – 32022D0348 – EN – EUR-Lex (europa.eu)
