Introduction
The two most difficult issues in imposing a public service obligation on a providers of a service of general economic interest is, first, the correct definition of the obligation and, second, the correct calculation of the amount of compensation that covers only the net extra cost of the service.
The correct definition must take into account what the market already provides, if any. This requires a prior analysis of actual market conditions. By contrast, the correct calculation must hypothesise what the provider would do without the compensation. If the obligation is imposed for the first time, then the counterfactual scenario is observable. It is what the market already does. However, if the obligation has been imposed for a long period of time on an incumbent market operator and the market situation has evolved, it is much more difficult to identify with much certainty the counterfactual scenario: what the incumbent would do in the absence of the obligation.
On 10 November 2022, the Court of Justice had to consider the credibility of the counterfactual scenario and the costs that it would include in its judgment in case C-442/21 P, ITD & Danske Fragtmænd v European Commission. It was yet another judgment in a series of cases involving Post Danmark and its parent, PostNord.[1]
ITD and Danske Fragtmænd appealed against part of the judgment of the General Court of 5 May 2021 in case T-561/18, ITD and Danske Fragtmænd v European Commission, to the extent that it partially dismissed their application for annulment of Commission decision SA.47707 concerning compensation granted to Post Danmark for the provision of universal postal service in Denmark.
Background
ITD is a trade association of companies in the sector for road transport of goods and logistics services. Danske Fragtmænd is a company that is also active on the market for road transport of goods and parcel distribution services.
Post Danmark is the designated universal postal service provider in Denmark and is entrusted with a public service obligation [PSO]. Post Danmark is 100% owned by PostNord, whose share capital is 40% owned by Denmark and 60% owned by Sweden. However, each of the two shareholder states has 50% of the voting rights in the board of directors.
During the past 20 years there has been a decline in correspondence through letters, which has been attributed to the increase in electronic communications. As a result, Post Danmark’s turnover fell by 38% between 2009 and 2016 and resulted in losses. Consequently, in February 2017, PostNord made an injection of capital in Post Danmark amounting to DKK 1 billion [approximately EUR 134 million].
Post Danmark adopted a new business model which included a reduction of its workforce by approximately 4,000 employees, with an overall estimated cost of approximately SEK 5 billion [approximately EUR 491 million]. Because its employees had formerly civil servant status and enjoyed certain protections and non-wage benefits, the Danish government had to offset those costs by way of a capital contribution to PostNord of SEK 1.533 billion [approximately EUR 150 million].
The capital contribution was notified to the Commission which, in May 2018, found that it did not constitute State aid. In the same decision it also authorised compensation for the PSO, without initiating the formal investigation procedure.
In the same decision the Commission also assessed several other measures and concluded that a state guarantee was existing aid, a VAT exemption did not constitute State aid because it was mandated by EU legislation on VAT for postal services, and that, as already mentioned, the capital increase of February did not constitute State aid.
On appeal by ITD and Danske Fragtmænd, the General Court annulled the decision in so far as it had found that, first, an exemption from VAT and, secondly, the capital increase of February 2017 not to be State aid. According to the General Court, Denmark had widened the exemption defined by EU law to include mail-order companies and the Commission was wrong to find that the capital injection was not imputed to the state. However, the General Court dismissed the action in so far as it concerned, first, the compensation for provision of the PSO, second, a state guarantee, and third, the accounting allocation of common costs that were included in the calculation of the compensation.
Intangible benefits and efficiency incentives
The 2012 SGEI Framework requires that the calculation of the public service compensation [PSC] takes into account all tangible and intangible [e.g. reputation, brand recognition] benefits from the PSO and that Member States must provide incentives to providers of SGEI to increase their efficiency [i.e. decrease their costs] without reducing the quality of the service they supply.
The appellants alleged that the aid enhanced the reputation of Post Danmark and that it was not sufficiently taken into account.
The Court of Justice analysed the reasoning of the General Court. “(63) The General Court recalled […] that the net avoided cost calculation must assess the benefits, including intangible benefits, to the provider of the service of general economic interest (SGEI), where those benefits are attributable to an SGEI.”
“(64) The General Court found, […] that, although the Commission took into account two categories of intangible benefits resulting from, first, the VAT exemption for services falling within the discharge of universal service obligations and, second, the publicity benefits of visible contact points such as mailboxes and installations for customers’ self-service collection of parcels, that institution did not take into account the intangible benefits connected with the enhancement of Post Danmark’s reputation and its ubiquity on the Danish territory.”
“(66) However, […], the General Court found that the appellants had not been able to explain how those considerations applied to Post Danmark, for which the generalised use of electronic communications had resulted in a fall in turnover of 38% between 2009 and 2016.”
The Court of Justice added that “(71) the SGEI Framework [does not] oblige the Commission to include, in all circumstances, in a decision declaring an aid compatible with the internal market on the basis of Article 106(2) TFEU, specific reasoning concerning types of intangible benefits that it regards as non-existent.”
The ubiquity of Post Danmark as an intangible benefit
The Court of Justice recalled that “(82) the General Court found, […], that, in the postal sector, ubiquity attracts customers and increases the loyalty of customers, who are more inclined to choose the universal service provider than its competitors, since they know that, as a result of the universal service obligation, that provider offers services covering the entire national territory. […][However] in the present case, the General Court held, […], that the Commission had specifically stated, […], that clients of distributors of catalogues, magazines and newspapers were fully prepared to select distributors that did not offer universal territorial coverage. That finding, which the appellants do not dispute, tends to establish that Post Danmark does not enjoy, by virtue of its status as a universal service provider, an intangible benefit linked to ubiquity.”
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Lack of efficiency incentives?
The Court of Justice rejected the argument of the applicants that Post Danmark was under no obligation to reduce its costs.
“(88) In the present case, […], as regards taking into account efficiency incentives, the appellants submitted before the General Court that the net avoided cost calculation in connection with the discharge of the universal service obligation breached paragraphs 39 to 43 of the SGEI Framework in two respects. First, that calculation was not carried out on the basis of an efficient service provider and, secondly, it would not have been possible to verify the quality of the universal service since the compensation for provision of the universal service 2017-2019 was, in part, paid ex post.”
“(89) The General Court held, in essence, that the appellants’ arguments were based on confusion between, first, efficiency incentives as required under paragraphs 39 to 43 of the SGEI Framework and, secondly, the idea that the net avoided cost must be calculated on the basis of an efficient service provider.”
It is true that the increase in efficiency is measured against the starting costs of the provider itself, not those of a provider that is efficient by industry or sectoral standards.
The costs arising from the dismissal of former civil servants of Post Danmark
The appellants submitted that the Commission could not, in accordance with the SGEI Framework, declare PSC to be compatible with the internal market when its purpose was not to support the SGEI but to cover the costs of dismissing the former civil servants of Post Danmark.
The Court of Justice recalled that “(97), in accordance with Article 106(2) TFEU, undertakings entrusted with the operation of services of general economic interest are to be subject to the rules contained in the Treaties and, in particular, to the rules on competition, in so far as the application of such rules does not obstruct the performance, in law or in fact, of the particular tasks assigned to them, and that the development of trade must not be affected to such an extent as would be contrary to the interests of the European Union.”
“(98) Thus, exemptions to the FEU Treaty rules are permitted provided that they are necessary for performance of the particular tasks assigned to an undertaking entrusted with the operation of a service of general economic interest”.
“(99) In that context, paragraph 1 of the SGEI Framework states that financial support from the public authorities may prove necessary where revenues accruing from the provision of the service do not allow the costs resulting from the public service obligation to be covered. According to paragraph 21 of the SGEI Framework, the amount of financial support granted by way of compensation for discharging the public service must not exceed what is necessary to cover the net cost of discharging public service obligations, including a reasonable profit.”
“(100) The appellants’ line of argument must be understood as amounting to the submission, in essence, that the General Court’s reasoning, which led it to hold that the taking into account of the costs of dismissing the former civil servants of Post Danmark in the net avoided cost calculation was not a factor that should have led the Commission to find that there were serious difficulties within its assessment, is vitiated, principally, by an error of law and, subsidiarily, a distortion of the evidence.”
“(101) In that regard, […], the General Court found that the implementation of Post Danmark’s new production model involved the dismissal of its former civil servants, which led to the payment of special redundancy payments, financed, in part, by means of the compensation for provision of the universal service 2017-2019, whereas Post Danmark had already been entrusted with discharging the universal service obligation. Thus, […], the General Court recalled, […], that that compensation constituted, on that basis, a component of Post Danmark’s new production model.”
“(102) In addition, […], the General Court found that […] the creation of a new production model within Post Danmark had been made necessary by the change in the nature of the postal market due to the increased use of electronic communications in Denmark. The General Court also stated that that new model was largely focused on the rationalisation of certain personnel costs associated with mail delivery, which constitute, as is clear from paragraph 2 of the universal service entrustment, […], a central activity of the universal service obligation.”
“(103) It is apparent from the General Court’s findings that the dismissal of the former civil servants of Post Danmark constitutes a parameter for the discharge of the universal service obligation through a net cost taking into account the costs relating to those redundancies.”
“(104) In those circumstances, it must be held that the General Court did not err in law in deciding, […], that the costs of dismissing the former civil servants of Post Danmark was intrinsically linked with the discharge of the universal service obligation, such that they could duly be taken into account for the purposes of the calculation of the net cost necessary for the purposes of discharging that obligation. In that regard, it should be added that the appellants do not devote any of their analysis to the impact that retaining in employment the former civil servants of Post Danmark would have had on the net cost necessary for discharging the universal service obligation.”
“(105) It follows that the General Court established to the requisite legal standard the link between the dismissal of the former civil servants of Post Danmark and the related costs, on the one hand, and the discharge of the universal service obligation, on the other hand, with the result that the taking into account of the costs in question for the purposes of the net avoided cost calculation does not constitute an infringement of the SGEI Framework or, consequently, the principles of equal treatment and of legitimate expectations.”
“(106) In addition, the General Court also found, […], that, […] the Danish authorities had adopted, in the counterfactual scenario, a cautious approach according to which, even if it were not entrusted with the universal service obligation, Post Danmark would still have had to pay the costs of dismissing the former civil servants in the same amount as that provided for in the factual scenario. As the General Court observed in the same paragraph of the judgment under appeal, that approach reduced the impact of those redundancy costs on the amount of the net avoided cost.”
One may disagree with the findings of the Court of Justice because the costs that may be included in the PSC should not be determined by the operator but by the public authority that imposes the PSO. This is because, according to the 2012 SGEI Framework, the relevant costs and the parameters for calculating them must be defined in the act of entrustment. The Court has said in essence that since the dismissal of employees was necessary for Post Danmark to continue to deliver its public mission, the cost of the dismissal had to be included in the cost of the mission. But what an operator considers to be necessary is not the same as what a public authority may be willing to subsidise. For example, the relevant public authority may have asked Post Danmark to subtract the cost of dismissals from future profits.
However, aside from this legal argument, it can be shown that in accounting terms Post Danmark did not receive any advantage. Consider the simple numerical case that is presented in the table below.
| Factual situation [FS]
(without dismissal costs) |
Counterfactual situation [CFS]
(without dismissal costs) |
|
| Operating & fixed costs | 80 | 50 |
| Cost of dismissals | 20 | 20 |
| Total costs | 100 (80) | 70 (50) |
| Revenue | 75 | 55 |
| Total costs – revenue | – 25 (– 5) | – 15 (+5) |
| PSC with dismissal costs = FS – CFS | – 25 – (– 15) = – 10 | |
| PSC without dismissal costs = FS – CFS | – 5 – (+ 5) = – 10 | |
As it can be seen, the NAC methodology includes the dismissal costs of 20 in both scenarios. So they cancel each other out.
The classification of the state guarantee as an existing aid
Existing aid is aid that has already been approved by the Commission or that was granted before the Member State in question acceded to the EU or became aid as a result of the evolution of the internal market [e.g. liberalisation of a previous closed sector]. In addition, an aid measure is considered to be existing if it was adopted more than 10 years before the Commission first examines it. In this latter case, the aid falls outside the 10-year limitation period and the Commission cannot order its recovery even if it is found to be incompatible with the internal market. But the Commission can propose appropriate measures to the Member State concerned.
In the present case, the Court of Justice, first, noted that “(113) the General Court rejected the appellants’ line argument, which considered that that guarantee constituted an aid scheme, since that line of argument was based on confusion between, on the one hand, advantages granted on a periodic basis, pursuant to the repeated individual application of an aid scheme and, on the other hand, the grant of an individual guarantee which might have the effect of continuously improving the situation of the beneficiary. In the latter case, the date on which the aid was granted was the date on which the guarantee was adopted. […], it is therefore without erring in law that the Commission determined that the starting point of the limitation period relating to any aid that may have been granted by means of the state guarantee at issue was the date of its adoption, namely 6 June 2002.”
Indeed, one has to be very careful when establishing whether a guarantee is new or existing aid. The date of granting of aid is always defined by the moment the right to the aid is conferred by a decision of a public authority. However, the benefits of all aid, and even more so in the case of guarantees, do not evaporate on that date. They extend into the future, especially in the case of guarantees that may be called years after they are granted.
Even though the guarantee for Post Danmark was existing, the Commission did not propose any appropriate measures, because it covered only certain costs, could be activated only under certain conditions and, most importantly, it did not appear confer any benefit to Post Danmark. This, of course, immediately raises the question why it was classified as State aid if one of the criteria of Article 107(1) was not satisfied.
The Court of Justice observed that because the “(114) guarantee could only be implemented in the event of bankruptcy, that is to say the cessation of Post Danmark’s activity, and covers only the costs of dismissing the employees who entered into service before 2002, it was not, in any event, of such a nature as to improve Post Danmark’s situation. In addition, the General Court observed that it was not apparent from the case file before it that the state guarantee at issue exempts Post Danmark from regular contributions which its competitors are required to pay in order to ensure redundancy payments in the event of bankruptcy, or even that its regular personnel costs are reduced as a result of that guarantee. In those circumstances, the state guarantee at issue conferred, above all, an advantage on the former civil servants who became employees of Post Danmark at the time of its transformation into a limited liability company, since such employees have the assurance, in the event of Post Danmark’s bankruptcy, of receiving their full special redundancy payments.”
The Court here did not examine the presence of any indirect benefits for Post Danmark such as the effect of the guarantee in inducing experienced employees to stay at Post Danmark. Otherwise, they may have had an incentive to move to other positions in the Danish civil administration.
“(115) In that regard, by finding, […], that the fact that the state guarantee at issue could only be implemented in the event of Post Danmark’s bankruptcy, and for the benefit of a certain category of workers who were already employed in 2002, excluded the possibility of regarding it as granting a competitive advantage to Post Danmark, the General Court did not make an error of law. It was also without erring in law that the General Court found that, if that guarantee did not reduce the costs that Post Danmark had to bear so long as it remained active, whether those costs were social security contributions or regular personnel costs, it did not confer any competitive advantage to Post Danmark within the meaning of Article 107(1) TFEU.”
The accounting allocation of common costs
The appellants claimed that Post Danmark was required to allocate all common costs to costs solely relating to the universal service. That indicated that there was a cross-subsidisation of services falling outside the scope of the PSO.
First, the Court of Justice observed that the Commission concluded in its decision that the internal allocation of costs had not conferred an advantage on Post Danmark.
Indeed the Court of Justice confirmed that the claim of the appellants was incorrect. First, the relevant “(123) accounting regulations did not require or even permit Post Danmark to attribute all of the common costs to costs solely relating to the universal service.” Second, Post Danmark’s accounting practice was in conformity with the 2012 SGEI Framework. “(126) as regards the common costs, the principle established in [the relevant accounting regulation] was, […], allocation on the basis of a direct analysis of their origin.”
The Court of Justice dismissed the appeal in its entirety.
[1] The full text of the judgment can be accessed at:
