Introduction
Member States are free to determine what the regard as a service of general economic interest [SGEI]. The Commission may only check whether the definition is free of manifest error and that any compensation that is provided conforms with the conditions laid down in the 2012 SGEI package. Member States commit a manifest error when they designate as SGEI a service that is provided by the market on satisfactory terms and price.
Recently, the Czech Republic designated as SGEI the operation of Data Boxes Information System [DBIS]. Consequently, it notified to the Commission a measure for the support of DBIS. The recipient of the aid was the Czech Post [CP] because a corresponding public service obligation [PSO] was imposed on CP.
CP is the incumbent postal operator who is entrusted with a universal service obligation [USO]. CP also provides services outside its USO mission and PSO remit. CP is the sole operator of DBIS which is a public administration information service. DBIS is an advanced electronic communication channel for internal communication within the public administration and for secure communication between the public administration and citizens and companies. The notification concerned the operation of DBIS for the five-year period 2023-27.
The Commission approved the aid in decision SA.109072.[1]
Compensation
The compensation for the provision of DBIS services covers both its development and operation. With respect to the development of DBIS, the compensation is made up of a variable fee depending on a man/day rate and the number of necessary man/days needed for the development of the service. With respect to the operation of DBIS, the compensation is a combination of a fixed rate and a variable rate per data message depending on the size of the message. The estimated annual compensation for the period 2023-27 is about EUR 32 million.
Given the variable component of the compensation mechanism, it could not be excluded that the compensation could exceed that estimated average amount EUR 32 million. However, there was a commitment that “(38) the annual compensation would not exceed the sum of the accounting losses [incurred by CP] from operating DBIS plus the net cost of the actual ‘cannibalization’ of physical mail items, by electronic DBIS-communication over 2023-2024. Accounting losses are the difference between the accounting costs of DBIS minus DBIS revenues, while actual cannibalization net cost is regarded as the difference between the decrease in revenue and respective avoided costs of the actually cannibalized mail items.”
“(39) The volume of the cannibalized mail items is estimated on the basis of the mail items actually lost following the implementation of DBIS legislative changes put in effect as of 1 January 2023 (recital 20), by comparison to the estimated volume of the same items without DBIS legislative changes. The estimated volume of mail items without DBIS legislative changes is calculated on the basis of the respective volumes of 2022, taking into account an annual natural declining trend of […] % on mail items, estimated on the basis of Czech Post’s historical data.”
Furthermore, “(40) the volume of cannibalized postal items would be limited only to the messages involving the newly introduced categories of mandatory DBIS users, namely the Self-Employed Individuals and the Legal Entities Non-Commercial”. Those messages were “(41) taken into account because the use of DBIS became mandatory for the Self-Employed Individuals and the Legal Entities Non-Commercial as of 1 January 2023 by Czech law. Natural persons who are not Self-Employed Individuals may register into and use DBIS on a voluntary basis.”
Presence of State aid
The Commission found that CP was an undertaking while the measure was imputed and funded by the state, conferred a selective advantage to CP and was likely to affect trade and distort competition.
Compatibility with the internal market
The Commission assessed the compatibility of the measure on the basis of the 2012 SGEI Framework as the amount of compensation exceeded the threshold of EUR 15 million laid down in Commission Decision 2012/21 which functions as a block exemption regulation for the funding of PSO.
Genuine SGEI
“(83) The Commission recalls that, in the absence of specific Union rules defining the scope for the existence of an SGEI, Member States have a wide margin of discretion in defining a given service as an SGEI. The Commission’s competence is limited to checking whether the Member State has made a manifest error when defining the services as an SGEI.”
“(84) The Czech authorities have submitted that providing DBIS is SGEI, as it is a service operated in the public interest, in order to provide a free, guaranteed, secure, efficient and accessible system for electronic communication between the public administration and citizens and companies with a proof of delivery of the messages. For that reason, in their opinion, DBIS service cannot be implemented without the intervention of the State establishing a centralised system.” “(86) In particular, the Czech authorities are of the view that a free of charge (coupled with a voluntary paying system for communications between private parties) would not be commercially viable and, as such, no market operator would be interested in providing the service.”
“(89) In the present case, the Commission considers DBIS is a genuine and correctly defined SGEI, as it is a service operated in the public interest and there is sufficient justification for the intervention of the State in establishing a such system. Furthermore, the Czech authorities have sufficiently demonstrated that the definition of DBIS service as an SGEI is not vitiated by a manifest error.”
“(90) Moreover, paragraph 14 of the 2012 SGEI Framework requests Member States to show that they have “given proper consideration to the public service needs by means of a public consultation” to take the interests of users and providers into account.” “(91) To take account of those interests, […], the Czech authorities held a consultation open to the public at the premises of the Ministry of Interior.”
Act of entrustment specifying the PSO and the method of calculating compensation
The Commission found that the Czech measure conformed with paragraph 16 of the SGEI Framework. It specified:
- “The content and duration of the public service obligations;
- The undertaking and, where applicable, the territory concerned;
- The nature of the exclusive rights assigned to the undertaking by the granting authority;
- The description of the compensation mechanism and the parameters for calculating, monitoring and reviewing the compensation;
- The arrangements for avoiding and recovering any overcompensation.”
With respect to the method of determining the amount of compensation, the Commission confirmed that “(107) the net avoided cost [NAC] methodology will be used to calculate the net cost necessary to discharge the public service obligation”.
Furthermore, “(108-109) at the end of each calendar year, an evaluation of the compensation paid to avoid overcompensation will be carried out. In particular, […], Czech Post must control, at the end of each calendar year, that the compensation granted for the operation of DBIS service does not exceed the amount necessary to cover the net cost of discharging the public service obligation. […] the total compensation to be received by Czech Post over 2023-2027 for the provision (both operation and development) of DBIS will not exceed the sum of the accounting losses of DBIS over 2023-2027 plus the net cost of cannibalization of mail items over 2023-2024.”
Entrustment period
Because most the equipment that was to be used to provide the service would fully depreciate within 4-5 years, the Commission considered that the five-year period of entrustment was appropriate.
Application of the NAC methodology
The NAC methodology used by the Czech authorities to calculate the net cost of DBIS service was applied in two stages:
- Definition of the factual and counterfactual scenarios.
- Calculation of the net cost of DBIS, which is the difference in expected profit or loss of CP between the factual and counterfactual scenarios.
Since in the absence of the PSO, the operation of DBIS would be unprofitable, in the counterfactual scenario CP would not provide at all DBIS services. The Commission decision does not indicate the expected costs and revenue because they are deleted for being business secret.
Interestingly, no profit was added to the net cost of the provision of DBIS services. In other words CP would cover its directly incurred costs, but would not cover its cost of capital. Since the cost of capital is the discount factor that is used to derive the net present value of the financial deficit, and therefore the necessary compensation, of the investment and operation of the DBIS, it is unclear how the discounting was carried out.
More importantly, if future operating losses are not discounted, the derived financial deficit will necessarily be larger than if they were discounted.
Efficiency incentives
The Commission considered that the compensation mechanism incorporated efficiency incentives. “(184) The decreasing price per message over 2023-2027 has the effect of decreasing the compensation amount per message. This is considered an incentive for Czech Post to provide the service more efficiently.”
“(185) Furthermore, the Commission considers that the fact that the expected compensation amount is lower than the net cost means that Czech Post would have to cover the remaining net cost arising from the provision of DBIS that is not compensated by the Czech authorities.”
Given the absence of any discounting, as mentioned above, perhaps the burden on CP to cover the uncompensated costs would not be heavy.
[1] The full text of the Commission decision can be accessed at:
https://ec.europa.eu/competition/state_aid/cases1/202436/SA_109072_52.pdf
