Failure to Satisfy Ex Post the Altmark Criteria, but Compliance with the 2014 Aviation Guidelines

Public service obligations must be entrusted by an official act and defined with sufficient precision. Imprecise definition of public service obligations makes it impossible to identify the costs which are caused by such obligations. Consequently, imprecise definition of public service obligations makes it impossible to grant compensation because subsidisation of non-eligible costs cannot be excluded. Compensation may not be granted after ex post definition of public service obligations. But, compensation that does not satisfy the Altmark criteria may still be compatible with the internal market.

Introduction

In its decision 2014/944 concerning SOGAS, the management company of the Italian Stretto airport, the Commission examined whether various capital injections totalling EUR 6.4 million to cover operating losses were State aid and, if yes, whether the aid was compatible with the internal market.^[1]

The main argument of the Italian authorities was that the capital injections did not constitute State aid because SOGAS provided a service of general economic interest [SGEI] and the public funding complied with the Altmark criteria. The Commission’s analysis of the Altmark criteria is instructive.

The Commission convincingly rejected the argumentation of the Italian authorities that the aid satisfied the Altmark criteria but accepted that the aid was compatible with the internal market on the basis of the new aviation guidelines.

The Altmark criteria

Compensation for the extra costs of public service obligations [PSO] is not State aid if it complies with the four Altmark criteria. In this case the Commission paid particular attention to the first and third Altmark criterion.

1^st Altmark

With respect to the first criterion of definition of the SGEI or PSO and entrustment, the Commission observed that “(69) […] an entrustment act is necessary in order to define the obligations of the undertaking and of the State. In the absence of such an official act, the specific task of the undertaking is not known, and it cannot be determined what might be fair compensation. The need for a clear definition of the SGEI is therefore inherent in and inseparable from the idea of entrustment, and thus derives directly from Article 106(2) TFEU. When a service is entrusted to an undertaking, logically, it also needs to be defined.”

Indeed, it is impossible to entrust any task to an undertaking unless the task is defined in the first place. As the Commission went on to note “(72)[…] Accordingly, in order to comply with the Altmark case-law, a public service assignment is necessary that defines the obligations of the undertakings in question and of the authority.” Therefore, the critical issue is whether the definition is precise enough.

In this respect the Italian authorities argued that “(74) […] the management of Stretto airport constitutes an SGEI, [which] can be inferred from several regional decisions making reference to the public interest attached to airport services and their instrumental role in the economic development of the region. But those regional decisions do not provide any explicit definition of the alleged SGEI entrusted to the airport manager or any rules governing compensation. In addition, the acts in question were adopted from 2007 onwards, and therefore came after the alleged inception of the services of general economic interest, i.e. after the airport’s activities in 2004–2006. Nor has Italy made available to the Commission any other document outlining the scope of the presumed public service obligations imposed on the recipient which predates 2004.”

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The fact that a service is important is not enough for its characterisation as an SGEI. Moreover, the SGEI provider must have an explicitly imposed obligation to provide the SGEI. An act of entrustment must be such that the SGEI provider cannot escape from it. The task imposed by the act of entrustment must also be precise enough so that it is not left to the discretion of the provider whether, when and how to offer the service.

Then the Italian authorities proposed that they could impose the PSO on an ex post basis. But this was rejected by the Commission. “(76) The Commission cannot accept the Italian authorities’ argument that an SGEI can be compensated legitimately even where the service has not been defined ex ante as an SGEI and entrusted to the recipient on that basis. If that were the case Member States would be left free to reconsider the need to impose public service obligations at their own discretion ex post. Once an undertaking incurred operational losses, Member States could entrust that undertaking with public service obligations and grant compensation, as a means to support the undertaking, irrespective of any ex ante assessment of the actual need to provide the service in the general interest. This approach cannot be reconciled with the requirement that SGEIs must be entrusted to the undertaking concerned by way of one or more official acts, setting out among other things the nature and duration of the public service obligations, the parameters for calculating, controlling and reviewing the compensation, and the necessary arrangements for avoiding and repaying any overcompensation. The Italian authorities’ claim that airport services are essential to the economic development of the region is not enough to show that the recipient was correctly entrusted with the SGEI, because the public service obligations and the rules governing compensation were not defined transparently in advance.”

2^nd Altmark

Given that there was no precise act of entrustment, not surprisingly, the Commission also concluded that there were no pre-determined parameters of compensation.

3^rd Altmark

The purpose of the capital injections was to cover operating losses. Consequently, the Italian authorities took the view that SOGAS did not benefit from over-compensation. However, “(82) the Commission cannot accept Italy’s argument that because the financing was confined to offsetting operating losses the airport received only the public financing required for the discharge of public service obligations. A fundamental principle of the assessment of proportionality of compensation is that only the net costs incurred by the public operator for the discharge of the public service obligations may give rise to compensation. In the absence of a clear definition of the obligations imposed on the recipient, the Commission cannot unequivocally determine what costs should have been taken into account in the calculation of the compensation.” The Commission is correct to conclude that, in the absence of a definition of the SGEI/PSO, over-compensation cannot be excluded.

The Commission went on to clarify that “(83) Even where the overall management of an airport can be considered an SGEI, some activities which are not directly linked to the basic activities, including the construction, financing, use and renting of land and buildings for offices, storage, hotels and industrial enterprises located within the airport, and for shops, restaurants and car parks, fall outside the SGEI, and consequently cannot be subsidised under the rules on SGEIs. The Italian authorities have not provided any evidence to show that there has been no subsidisation of activities not directly linked to the core activities of the airport, as required by paragraphs 34 and 53(iv) of the 2005 aviation guidelines.”

There is a similar exclusion in the 2014 aviation guidelines which make a distinction between aeronautical costs [e.g. luggage conveyors] and non-aeronautical costs [e.g. car parks, restaurants]. The former costs are eligible for compensation, while the latter costs are not.

4^th Altmark

SOGAS was not chosen competitively, nor was it shown to be efficient and well-equipped undertaking. Therefore, the 4^th Altmark criterion was not satisfied.

Compatibility with the internal market

Once the Commission found that the capital injections were State aid and, moreover, that they were operating aid, it had to assess their compatibility with the internal market. It did so on the basis of the new aviation guidelines that were published in April 2014.

According to the new aviation guidelines, operating aid granted before the entry into force of the guidelines may be declared compatible to the full extent of uncovered operating costs provided that the following conditions are met:

1. Contribution to a well-defined objective of common interest [this condition is fulfilled among other things if the aid increases the mobility of EU citizens and the connectivity of the regions or facilitates regional development].
2. Need for state intervention [the aid can bring about a material improvement that the market itself cannot deliver].
3. Existence of incentive effect [this condition is fulfilled if it is likely that, in the absence of operating aid, the level of economic activity of the airport concerned would be significantly reduced].
4. Proportionality of the aid amount [aid must be limited to the minimum necessary].
5. Avoidance of undue negative effects on competition and trade.

After applying the above criteria to the case at hand, the Commission concluded that the aid was compatible with the internal market because:

• The region of the Stretto airport faced critical difficulties caused by its outlying geographical position and underdeveloped freight mobility, largely as a result of the lack of adequate infrastructure.
• The aid enabled SOGAS to improve the infrastructure and the services offered by the airport, which in turn, improved access to the region.
• Paragraph 118 of the new aviation guidelines states that airports with annual passenger traffic below 700,000 passengers per annum may not be able to cover their operating costs to a substantial extent. Traffic at Stretto airport constantly remained below 700,000 passengers. Therefore, the aid was necessary, in that it allowed an improvement in the connectivity of the region that the market would not have delivered by itself.
• Without the aid the activity of the recipient would have been significantly reduced if not terminated altogether.
• The aid did not exceed the amount required to cover operating losses, and consequently did not exceed the minimum necessary for the aided activity to take place.
• There was no other airport located in the same catchment area. The closest airport was more than 130 km away.

Conclusions

This is an instructive case. It demonstrates that public funding does not have to satisfy the very strict Altmark criteria in order for a public authority to achieve its policy aims. State aid is also a legitimate tool for implementing public policy. The difference, of course, is that the granting authority has to ensure that the aid complies with the relevant regulation or guidelines – in this instance, the aviation guidelines.

The case is also illuminating because it reveals how the Commission will enforce the new aviation guidelines, especially with respect to operating aid.