Commission publishes study on the financing models for public services in the EU and their impact on competition

The content and duration of the public service obligations.

A description of the compensation mechanism.

The arrangements for avoiding and recovering any overcompensation.

Waste. The study focused on the main flow of (unsorted) municipal waste, which includes waste from households and small commercial (non-household) organisations.

It found that in all selected member states, the public authorities (mainly municipalities) are legally responsible for providing waste services, although clear differences exist:

Public production (public ownership) and direct financial payments are the main supporting mechanisms for the provision of public waste services. Public ownership is used in all fields of the value chain, but especially in relation to collection, incineration and landfilling. The direct financial payments mainly relate to the direct budget grants (public entities) and the remuneration of costs for tendered services (private entities). Other forms of direct payments exist, but are less important.

With regard to the efficiency and competition issues, the report states that specific attention needs to be paid to the risk of overcompensation and the balance between public and private provision of the public services. It finds that the risk of overcompensation seems limited as public tendering (via open contests) is the main mechanism to select a service provider of private (or sometimes public) origin. Given the widespread use of this mechanism and the limited contract duration (often one to five years), this should, in principle, lead to efficient outcomes in the market and thus a low risk of overcompensation of the service providers.

Nevertheless, the adequate design and set-up of the tender criteria is crucial in this respect, which in practice create some issues (Poland, Italy).

The study found no concrete evidence that the public entities (often financed via direct budget support) perform worse than private entities and thus receive higher revenues to perform similar tasks. However, the incentives for public entities to critically review their own costs or to operate a separate accounting system is often limited. Specific risks for overcompensation relate to the system of Extended Producer Responsibility (EPR) and originate from a lack of transparency regarding the selection procedure, the used conditions and the financing mechanism (Italy, Spain, France).

The study also found a tension between the public and private provision of the public service, which creates a risk for efficient competition. This tension exists at three different levels and mainly relates to the societal ‘view’ on the role of the government. First, experiences show that public provision is often the result of ‘tradition’ and not necessarily an explicit rational choice. Second, certain ‘traditional’ public services in the value chain can also be partly performed by private parties, such as incineration (The Netherlands, Poland) and recycling (Spain, the Netherlands). There also exists tension in those parts of the market where both public and private entities are active, such as in commercial waste (The Netherlands) and in recycling (Italy, France). Due to a combination of market power, an unclear scope of the public service and a general lack of attention for cost-based pricing, there are clear risks for/of distortion of competition in adjacent markets.

Telecoms. The study focused on the deployment and operation of both basic broadband networks and new generation access networks (NGAN), due to difference in coverage.

It found that for the deployment of broadband networks, public funding is made available for necessary construction works, civil engineering and deployment of passive infrastructure. Broadband communications services are covered by public service obligations (universal service) only in one country (Spain).

As a typical public funding model for the provision of (primarily fixed) broadband networks and services in six member states (France, Germany, Italy, the Netherlands, Poland, Spain) the study identified investment funding (coded as direct payments). National public funding schemes are designed taking into account the requirements of the EU rules on competition and state aid and based on the Commission’s guidelines on State aid for broadband. The study did not identify any national public funding schemes based on EU SGEI or public service rules.

Due to the recent adoption of national funding schemes and the even more recent (start of) implementation of broadband development projects, no actual efficiency or competition problems could be identified. In addition, public funding schemes employ an anticipatory approach and aim to minimise country-specific competition and efficiency risks by using a number of ex ante and ex post (contractual) tools.

Potentially, efficiency concerns may arise with regard to overcompensation of and cross-subsidisation within the undertaking that receives the subsidy..Overcompensation risks seem to be addressed in a more systematic manner across all countries than cross-subsidisation risks. These problems appear to be addressed to a sufficient extent by a number of ex ante mechanisms (subsidy caps, competitive selection procedures) and ex post contractual tools (clawback, requirement to pay back the subsidy, accounting separation).

Almost all contractual tools are designed on the basis of instruments used by national regulatory authorities for sector-specific regulation of electronic communications markets. To the universal service provider only the net costs (plus reasonable profit) of the universal service provision can be compensated and only if they represent an unfair burden for this particular provider.

While the effectiveness of some of these tools is contested (clawback), the study considers that a combination of them might be sufficient to reduce efficiency risks.

With regard to the deployment of broadband networks, the main adverse competition effect is crowding out private investments, a risk that is particularly high in the case of NGAN and when municipal companies are beneficiaries of public subsidies. Focusing public funding exclusively on white areas reduces this risk considerably, but does not eliminate it completely. However, three countries (Germany, Italy, Poland) allow public funding of projects in grey and black broadband areas. Considering the immaturity of the markets, such funding may have negative implications for the development of infrastructure competition.

Foreclosure of infrastructure markets is also less of a competition concern if public funding primarily targets white areas and if the awarding procedure is a competitive one, which is the case in all countries. Due to the current market structure and strong network effects, strengthening of the incumbent’s market power and leveraging into adjacent markets as well as foreclosure of retail markets are real risks linked to public funding. They can be adequately addressed ex ante by the appropriate design of tendering procedures and also by contractual provisions.

Awarding criteria combining price and quality assessments and a precise definition of smaller geographic areas (ex ante tools) are widely used in practice. Contractual obligations of open access and competitive pricing are used in all countries, but unbundling and functional separation of vertically integrated undertakings are only employed in a few member states. In the case of universal service, the requirement to calculate net cost (plus reasonable profit) by taking into account all possible benefits to the designated undertaking and to compensate only unfair burden appears to ensure a level playing field.

Health. The study focused on the provision of health care by hospitals. Where possible, it excluded non-clinical activities (e.g. research and education), as well as mental and long term care.

In all selected member states, the government takes responsibility for providing health services to their citizens. As such, almost all hospital care examined in the selected member states can be considered as a public service in the context of this study. However, there are substantial differences in the way governments ensure access to hospital services.

One of the major differences between countries is the purchaser of health care. In countries such as the Netherlands and the Czech Republic, the purchasing of health care is allocated to insurers, while in other countries, such as Spain and Poland, it is the government or a health fund controlled by the government that purchases care.

Even in countries with a major role for financing by insurers, there is still a substantial role for funding by the government. Most funding concerns a direct payment by the government. Governments use these direct payments to fund operational costs and/or investments of hospitals, to fund care of hospitals that cannot be provided cost-effectively based on standard tariffs/budgets or to fund the provision of specific hospital functions. In addition to direct funding, the ex post funding of deficits is a common phenomenon in all member states that were assessed with the exception of the Netherlands.

The main instrument that is used to avoid cross-subsidisation is an accounting separation obligation. It is often difficult to assess costs of hospitals, and accounting separation obligations can be difficult to apply in practice. This is especially the case if only certain areas of hospital care are publicly funded. Tenders to allocate public funding are rarely used.

As a result of efficiency issues, competition issues can arise. The study found that the number of (formal or informal) complaints regarding the anti-competitive effects of public funding to hospitals is limited.

Nevertheless some general conclusions can be drawn based on a theoretical analysis of potential competition problems. Direct payments can result in overcompensation, which might provide hospitals advantages in other markets (other hospital services or services to other market segments such as care for privately insured patients). Ex post deficit compensation could result in the same problems. From a theoretical perspective, ex post compensation can have negative effects on dynamic efficiency, for instance, as hospitals that do not operate efficiently are not forced to leave the market and there are limited incentives to increase efficiency. This is only the case if inefficiencies are the source of the deficit. If there are other factors that explain the difference between costs and revenues (e.g. too low ex ante budgets), deficit financing does not necessarily result in negative competition effects.

An analysis of the broader market environment is essential in the (economic) assessment of efficiency and competition issues due to public funding.

Wherever necessary, the various methods to further limit the risk for overcompensation can be strengthened (e.g. better definition of public services, improved use of existing safeguarding measures and the competitive selection procedure, if applicable).

The analytical framework developed in this report is a suitable instrument to carry out similar analyses for other countries within the three sectors studied.

Wherever necessary and possible, it would be worthwhile gathering information in a more structured way in order to facilitate future assessments of efficiency and competition issues as well as compliance with the state aid rules.