12.10.2012   

EN

Official Journal of the European Union

L 279/1

(1)

By a complaint dated 4 October 2002, supplemented on 16 January 2003, the Commission received allegations that the French Republic had implemented aid in favour of France Télécom which reduced its financial charges in part, and notably those relating to the financing of retirement pensions. By letter dated 17 March 2004, the French Republic sent the Commission the information it had requested concerning the complaint.

(2)

By letters dated 2 April 2004 and 24 February 2006, the complainants supplied additional information relating to the complaint.

(3)

By letter dated 20 May 2008, the Commission informed the French Republic of its decision to initiate the procedure laid down in Article 108(2) of the Treaty on the Functioning of the European Union (TFEU) in respect of this aid.

(4)

The French Republic presented its comments on 18 July 2008.

(5)

The Commission’s decision to initiate the procedure was published in the Official Journal of the European Union  (4) and the Commission invited interested parties to submit their comments.

(6)

On 22 September 2008, the Commission received comments from France Télécom and, after extending the deadline, it received comments from the complainants and a telecommunications operator on 1 and 16 October 2008, respectively. The Commission forwarded these to the French Republic, giving it the opportunity to comment on them, and received comments from the French Republic by letter dated 13 February 2009.

(7)

On 16 February 2009, France Télécom presented comments drawing the Commission’s attention to a General Court judgment of 28 November 2008 (5) which, in its opinion, confirms its arguments. On 14 May 2009, the telecommunications operator referred to in recital 6 presented supplementary information in relation to its comments during the procedure, referring to a Commission decision dated 11 February 2009 (6) which, in its opinion, supports its comments.

(8)

Meetings were held between representatives of the Commission and France Télécom at the request of the latter on 17 December 2009, 23 September 2010 and 12 October 2010. France Télécom submitted additional comments on 18 October 2010.

(9)

On 18 March 2010, at the Commission’s request, the French Republic provided clarifications and an update of certain information contained in its initial observations, to which it attached an outline of the initial observations.

(10)

On 22 September 2010, the French authorities forwarded further comments to the Commission and requested a meeting, which was held on 22 October 2010. By letter of 28 October 2010, the Commission sent them the factual clarification referred to during the meeting together with the supplementary comments made by France Télécom and invited the French Republic to return any comments it may have. On 17 November 2010, the Commission sent the additional clarifications requested by the French authorities on 10 November 2010 to enable them to prepare their comments.

(11)

By letter of 9 December 2010, supplemented on 24 June 2011, the French Republic submitted its supplementary comments, together with an update of certain information contained in its initial comments. Meetings were held with the French authorities on 28 June and 4 July 2011. Further comments were presented on 7 October 2011.

(12)

The measures covered by the present procedure consist of the changes made in 1996 to France Télécom’s financing arrangements relating to the payment of the retirement pensions of its staff members with civil servant status. The previous arrangements were introduced in 1990 when France Télécom was founded as a separate entity from the State administration. In practice, the 1990 Law maintained the existing system for France Télécom’s social security contributions. A new scheme was introduced in 1996 when France Télécom was set up as a public limited company, listed on the stock exchange and opened up an increasing share of its capital on the one hand and exposed itself entirely to competition from the markets in which it operated in France and in the other Member States of the European Union on the other. For the most part, the scheme introduced in 1996 is still in force today.

(13)

Pursuant to Law No 90-568 of 2 July 1990 (hereinafter ‘the 1990 Law’) (7), France Télécom was set up as a public operator with legal personality. Previously it was a Directorate-General of the Ministry of Postal and Telecommunications Services. Through this same Law, full ownership of the State’s movable and immovable assets assigned to the departments within this Directorate-General was transferred automatically and free of charge to France Télécom.

(14)

Article 3 of the 1990 Law assigned France Télécom a mandate: (i) to provide all national and international public telecommunications services; (ii) to establish, develop and operate the public networks necessary for supplying these services and to ensure their connection to foreign networks; (iii) to provide all other telecommunications services, installations and networks, and to establish networks distributing radio and television broadcasting services by cable.

(15)

Pursuant to Article 29 of the 1990 Law, the staff of France Télécom has a special status, adopted in accordance with to the Law on the rights and obligations of civil servants (loi portant droits et obligations des fonctionnaires) and the Law laying down the Staff Regulations for the civil service (loi portant dispositions statutaires relatives à la fonction publique de l’Etat). The 1990 Law permitted the employment of contract staff under collective agreements in the framework defined by a planning contract concluded between the State and the undertaking. This provided for a 3 % cap on staff numbers for this type of recruitment.

(16)

Continuing the previous budgetary practice, Article 30 of the 1990 Law established the allocation of responsibilities relating to financing the employees’ social benefits between the French State and France Télécom as follows:

‘The active and retired staff of the Ministry of Postal and Telecommunication Services and those of the public operators covered by the Staff Regulations for civil servants, and their beneficiaries, shall be entitled to benefits in kind under sickness, maternity and invalidity insurance, through the Mutuelle Générale des P.T.T. [a French mutual benefit society], under the conditions stipulated in Book III and in Chapter II of Title I of Book VII of the Social Security Code. However, the part of the contribution for which the State is responsible under Article L. 712-9 shall be assumed by the public operators for their civil servants.

The payment and servicing of pensions granted under the Civilian and Military Retirement Pensions Code to civil servants at La Poste and France Télécom shall be effected by the State. In return, the public operators shall be required to pay to the Public Treasury:

The charges resulting from applying the provisions of Article L. 134-1 of the Social Security Code to civil servants at La Poste and France Télécom of are payable in full by the public operators.

A Council of State Decree shall determine, if necessary, the conditions for the application of these provisions.’

(17)

Between 1991 and 1996, pursuant to Article 30 of the 1990 Law, the employer’s contribution (i.e. the additional contribution referred to in Article 30, point (b), of the 1990 Law in its original wording), which was payable by France Télécom for the civil servants it employs was established by calculating the difference between the total amount of retirement pensions financed by the French State and the share deducted from the salaries of civil servants still in active service. France Télécom also participated in the ‘compensation’ and ‘over-compensation’ schemes, providing for transfers designed to ensure an equilibrium with the pension schemes for civil servants of other public bodies. The employee contribution to the funding of civil servants’ retirement pensions was determined, pursuant to Article L 61 of the Civilian and Military Retirement Pensions Code, by withholding a contribution from the civil servant’s salary, set at 7,85 % of the gross index-related salary.

(18)

The payments by France Télécom rose from EUR 920 million to EUR 1 151 million between 1991 and 1996 and were as follows:

Table 1

France Télécom employees’ and employer’s contributions 1991-96  (8)

(19)

France Télécom recorded the pension-related expenditure in the books on the basis of the contributions paid. On account of the certainty that this expenditure would increase, given the foreseeable trend in retirement pensions to be paid to its former civil servants, France Télécom also entered in its accounts an annual provision designed to spread the estimated effect of future increases in payments over a 30-year period. The total amount of the provision thus set aside up to 1996 was FRF 23,4 billion (EUR 3,6 billion). According to the French authorities, the French State, acting as its own insurer, for its part, did not set aside reserves for these pensions (9).

(20)

Law No 96-660 of 26 July 1996 (10) (hereinafter ‘the 1996 Law’) amended certain provisions of the 1990 Law. With effect from 31 December 1996, on the one hand it conferred on France Télécom the title of public company subject to the laws and regulations applicable to public limited companies, in so far as they are not contrary to the law, and on the other hand, it transferred, free of charge, the bulk of the assets, rights and obligations of the legal entity governed by public law France Télécom to the public company France Télécom.

(21)

The capital of the company France Télécom SA (‘France Télécom’) was established by decree at FRF 25 billion (EUR 3,8 billion) based on net assets recorded in the balance sheet at 31 December 1995. The France Télécom shares were admitted in October 1997 to the premier marché of the Paris Bourse and to the New York Stock Exchange (NYSE). According to the annual report for 1998, 63,6 % of France Télécom’s capital was held by the State, 31,2 % by private investors, 3,2 % by France Télécom staff and 2 % by Deutsche Telekom. From 7 September 2004, with the transfer of 10,85 % of the capital, the French State no longer held a majority stake. Subsequently, this share continued to fall to reach 26,65 % of the capital at 31 December 2008. However, with 26,65 % of the voting rights and in the absence of other significant shareholder groups, the French State appoints the Chief Executive Officer, remains the principal shareholder of France Télécom and in practice can determine the outcome of shareholder votes on questions requiring a simple majority (11).

(22)

The change of status of France Télécom provided for by the 1996 Law also included various provisions relating to its staff. According to this Law, the category of civil servants of France Télécom is attached to the national company France Télécom and comes under its management. The staff with civil servant status retained this status and the guarantees attaching to it. The conditions of employment of the civil servants working for France Télécom are identical to those of the civil service: they benefit from the guarantee of employment and may be dismissed only on serious grounds, in the cases defined by law. As regards the recruitment of new staff, the 1996 Law allowed France Télécom to recruit civil servants until 1 January 2002, whilst at the same time allowing it to recruit employees on a contract basis under collective agreements.

(23)

At 31 December 1996, France Télécom employed 165 200 persons, of whom 94,1 % were civil servants. In fact, without awaiting the deadline of 1 January 2002 established by the 1996 Law, France Télécom stopped recruiting civil servants from 1997. Consequently, the number of civil servants decreased by 47 % in 10 years, from 133 434 civil servants in 1997 to 69 892 in 2007. This decline is distinctly steeper than that of the total workforce of France Télécom (– 25 %), which stood at 124 166 employees at 31 December 2007.

(24)

Article 6 of the 1996 Law also amended Article 30 of the 1990 Law by adding two paragraphs c) and d) to the original text. The Law requires France Télécom to pay to the Public Treasury, in return for the payment and servicing by the State of pensions granted to civil servants working for France Télécom:

(25)

The 1996 Law also excluded France Télécom from the scope of the general and specific compensation for old-age provided for by the 1990 Law and resulting, for France Télécom, in the payment of compensation and over-compensation in addition to the employer’s contribution, as shown in Table 1. Between 1991 and 1996, the amounts paid in this respect accounted for 18 % of the pensions paid to the civil service staff.

(26)

The employer’s contribution in full discharge of liabilities, introduced by the 1996 Law, replaces the additional contribution provided for in point (b) of Article 30 of the 1990 Law. This contribution is based on a competitively fair rate based on equalisation of the levels of wage-related social security contributions and tax payments from equal net salary. The method of equalisation is based on a reconstruction of what the costs would be for a competitor with employees coming under the ordinary social security arrangements, including retirement pensions, providing them with a net wage equal to that of the civil servants of France Télécom with an identical employment structure.

(27)

The method excludes the contributions paid by competitors to insure against the risks not common to employees and civil servants, notably that of unemployment and the claims of employees in the event of the company going into receivership or compulsory liquidation (hereinafter ‘wage guarantee insurance’ or ‘WGI’). When the 1996 Law was passed, this difference between France Télécom and its competitors did not go unnoticed by the legislator, which pointed out that: ‘the combination of the provisions of Article 6 allows France Télécom to be relieved of the UNEDIC[French unemployment insurance scheme] contributions that its potential competitors, for their part, pay’ (12).

(28)

The employer’s contribution paid by France Télécom, recalculated each year, is expressed as a percentage of the gross index-related salaries of the civil servants still working. The rate of this employer’s contribution averaged […] (13) % between 1997 and 2010 and was as indicated in Table 2, according to the observations of the French Republic:

Table 2

Employer’s contribution in full discharge of liabilities paid by France Télécom between 1997 and 2010

(29)

The end to the recruitment of civil servants from 1997 capped the staff of civil servants working for France Télécom. Despite the retirement of a growing proportion of the staff of civil servants between 1991 and 2010, the table shows that the employer’s contribution of EUR 744 million paid by France Télécom in 2010 was EUR 407 million less than the retirement pension costs that the company paid to the French State before the entry into force of the reform in 1996 and was equivalent to the only employer’s contribution that France Télécom paid 20 years previously in 1991 (EUR 1 151 million and EUR 743 million respectively, see Table 1).

(30)

The effect therefore of the reform introduced by the 1996 Law is that the amount of France Télécom’s contribution is falling in absolute value and is no longer linked to the number of retired civil servants. The transfer of costs to the State introduced by the 1996 Law occurred when the forecasts used by the Senate showed a significant increase in retirement costs from 2005, rising from FRF 13 billion (EUR 1,98 billion) in 2007, to FRF 21,5 billion (EUR 3,3 billion) in 2017 and FRF 34 billion (EUR 6,1 billion) in 2027 (14).

(31)

The debates on the draft law at the National Assembly and the Senate report a transfer of FRF 250 billion of retirement costs to the State budget, that would not be covered by FRF 100 billion in annual contributions and an exceptional contribution of FRF 40 billion, even with the addition of the proceeds from the sale of a percentage of the company’s shares. The same debates indicate a maximum estimated exceptional contribution of FRF 40 billion to reduce the new, heavy burden for the State. This amount was determined with the advice of bankers so as to be compatible with a debt-to-equity ratio of 150 % and to correspond to the retirement pension provisions made by the company and to the additional cost for the State, over 10 years, and no more than 10 years, resulting from the difference between the pensions paid and the contribution in full discharge of liabilities levied henceforth (15).

(32)

The aim of compensating the State is recalled, not only in the wording of Article 30 of the Law adopted by the legislator and during the debates on the draft 1996 Law, but also in the Annual Report of France Télécom for 1997, which reports on the ‘payment to the French State of an exceptional contribution of 37,5 billion francs relating to the future retirement of former civil servants’ (16). The provisions made by France Télécom enabled France Télécom to reduce the net financial effort to be made, since it confined itself to paying, in a single year, the additional cost of the reform to the State for 10 years.

(33)

In this way, it appears that the provision intended to spread the effect of future increases in contributions resulting from the 1990 Law, set aside each year by France Télécom for a total amount of FRF 23,4 billion (EUR 3,6 billion) in 1996, was taken into consideration when calculating the amount of the exceptional contribution (or compensating balance). The part of this contribution which did not correspond to the provisions set aside would cover this additional cost for a period of 10 years. Its amount was established taking into account the amount already set aside by the company as clearly emerges from the discussions at the time.

(34)

In fact, since the employer’s annual contribution introduced by the 1996 Law is in full discharge of liabilities, France Télécom’s obligation has since been confined to the payment of this contribution, without any other commitment to cover any future deficits either from the retirement pension scheme of its civil servant staff or from other civil service schemes. The accounting provision therefore was rendered redundant by the 1996 Law. The provision was credited to the profit and loss account of France Télécom at 31 December 1996, at a value of FRF 17,5 billion (EUR 2,7 billion) in the net result (17).

(35)

In addition, the amount of the exceptional flat-rate contribution provided for by the 1996 Law in return for the payment and servicing by the State of the pensions awarded to the civil servant staff of France Télécom was fixed at FRF 37,5 billion (EUR 5,71 billion) by the Finance Act 1997. It was financed by an increase in the company’s short-term and long-term debts (18) and paid in several instalments between January and October 1997. The revenue from this exceptional contribution allowed the deficit of the French public administrations to be reduced to EUR 41,8 billion in 1997. Without it, the deficit would have represented 3,7 % of GDP that year.

(36)

The revenue from this contribution was allocated to the public body managing the exceptional contribution from France Télécom (Etablissement Public de Gestion de la Contribution Exceptionnelle de France Télécom) established by the Finance Act 1997. The exceptional contribution, together with any financial income it generates, constitutes the sole income of this body. Its expenditure takes the form of an annual transfer to the State budget, which has been allocated as revenue since 2006 to the account earmarked for State civilian and military pensions. This payment was set at FRF 1 billion (EUR 152,4 million) for 1997, and subsequently increased by 10 % per year, in the absence of a specific provision to the contrary in the Finance Act. The public body will be wound up after the payment of its revenue in full to the State (19).

(37)

The application of the provisions of the Finance Act 1997 establishing the annual payments resulted in the life-span of the public body being estimated at 17 years in 1999, without further contributions to its funds (20). However, on account of the annual payments larger than provided for by the Finance Act 1997, this period was shortened. As shown in Table 3, the cumulative amount of the annual payments by the public body already amounted to EUR 5,47 billion in 2010. The winding-up of the public body as a result of the transfer in full of the available resources was scheduled for 31 December 2011 (21). The Finance Act 2011 therefore provides for a payment of EUR 243 million to the earmarked account for pensions for that year, which should clear the revenue of the public body (22).

(38)

In any event, the amount of the exceptional contribution of FRF 37,5 billion allocated to the public body managing the exceptional contribution from France Télécom in 1997 corresponds to the amount of the contribution, below FRF 40 billion, mentioned during the discussion of the draft of the 1996 Law. Although it was paid to the State budget in 1997 and fed it each year for the payment of civilian and military pensions, the amount of this contribution was set in order to offset the additional cost to the State resulting from the application of the 1996 Law.

(39)

The wage share of the financing of the pension liabilities for the civil servants, established pursuant to Article L 61 of the Civilian and Military Retirement Pensions Code since the foundation of the public operator France Télécom in 1991, was not changed by the 1996 Law. Moreover, the 1990 and 1996 Laws did not change the pension arrangements for the ordinary employees of France Télécom, which are those of the ordinary social security rules for pension insurance, supplemented by the complementary pension schemes AGIRC for executives and ARRCO for non-executives. Under this arrangement, France Télécom and its ordinary employees assume equivalent obligations to those of competing undertakings with regard in particular to the payment of contributions in full discharge of liabilities by the employer.

(40)

In connection with the reform introduced by the 1996 Law, the firm of actuaries appointed as adviser to the French State estimated that the payment and servicing by the State of the pensions granted to the civil service staff working for and retired from France Télécom would amount to FRF 242 billion (EUR 36,9 billion (23)) in expected value at 1 January 1997 (24). This figure is close to the rounded amount of FRF 250 billion mentioned at the Senate. The employer’s contribution in full discharge of liabilities that France Télécom would pay in exchange was estimated, on the basis of the same actuarial assumptions, at EUR 15,2 billion, to which must be added the compensating balance or exceptional contribution of EUR 5,7 billion paid in full in October 1997. The French authorities estimate the value of the future employees’ contributions at EUR […] billion, at the time of the entry into force of the reform. The value of the net cost transferred by France Télécom to the French State, as estimated in 1996, therefore amounted to EUR […] billion.

(41)

For the 10-year period (1997 to 2006) mentioned during the debates on the draft 1996 Law, the cumulated amount of benefits to be paid estimated by the firm of actuaries appointed as adviser to the French State was EUR […] billion. During this period, the total amount of benefits actually paid was almost identical, EUR […] billion, i.e. a forecast difference of less than 0,83 % (25). This confirms ex post the accuracy of the forecasts informing the discussions on the Law.

(42)

On the basis of these figures, it can be concluded that the amounts and their justification debated at the National Assembly and the Senate to set the amount of the compensating balance or exceptional contribution from France Télécom correspond to the proportions verified ex post during the 10-year period mentioned in the debates on the draft law. Indeed, the maximum amount of the exceptional contribution announced, EUR 6 billion (FRF 40 billion) corresponds to the forecasts drawn up by the public body until 1996 to meet the future retirement costs forecasted at that time, i.e. EUR 3,6 billion (FRF 23,4 billion) plus the difference of EUR 2,4 billion payable by the State between the employer’s and employees’ contributions levied between 1997 and 2006, on the one hand, and the benefits to be paid, estimated in 1996 for the same 10-year period, on the other.

(43)

Furthermore, the information communicated by the French Republic and shown in Table 3 shows that, for the period 1997 to 2010, the cumulated cost of pensions for the civil servant staff of France Télécom to be financed by the French State as a result of the 1996 reform reached EUR […] billion. The costs to be financed by the State are defined as the balance between the annual contributions of France Télécom and the civil servants working there and the pensions paid to the retired civil servant staff, year-on-year, with the deduction of the annual payments from the public body managing the exceptional contribution from France Télécom. Between 1997 and 2010, the trend in the costs was as follows:

Table 3

Costs to the French State resulting from the 1996 reform (1997-2010)

(44)

On account of the provisions of the Finance Act 1997 which governs them, the amounts of the annual payments of the public body managing the exceptional contribution from France Télécom paid in 1997 did not correspond to the amounts of the benefits estimated or actually paid to the retired staff of France Télécom or to the amounts of the remaining costs to be financed by the State and were not determined on the basis of these amounts. Examination of the amounts actually transferred confirms this dissociation. Despite the exceptional contribution paid by France Télécom in 1997, Table 3 shows that the amounts of the benefits paid to retired civil servant staff of France Télécom exceeded annual resources from 2004, with the exception of the year 2006.

(45)

Therefore the payments of annual contributions by France Télécom and the annual payments of the public body managing the exceptional contribution are not allocated separately and ex ante to the benefits paid to the retired staff of France Télécom in the earmarked account for pensions. In fact, the allocation of the exceptional contribution solely to the financing of the benefits in question since 1997, if it had been applied instead of the system of payment of the amount plus 10 % per year provided for in the Finance Act 1997, would have led to the public body being wound up at the end of 2008, rather than at the end of 2011 as planned, in view of the amount not covered by the annual contributions, shown in Table 3. In any event, in either case, the amount of the exceptional contribution would have been used up at 31 December 2011.

(46)

The reform of the financing of pensions of the civil servant staff of France Télécom took place against the backdrop of the total opening-up to competition of the services markets on which France Télécom was operating. From 1988, the telecommunications sector has been gradually liberalised by Commission Directive 88/301/EEC of 16 May 1988 on competition in the markets in telecommunications terminal equipment (26) and by Commission Directive 90/388/EEC of 28 June 1990 on competition in the markets for telecommunications services (27). Directive 90/388/EEC provided for liberalisation measures to be implemented by 31 December 1990 regarding data communication and voice telephony and data services for corporate networks and closed user groups. Commission Directive 96/19/EC of 13 March 1996 amending Directive 90/388/EEC with regard to the implementation of full competition in telecommunications markets (28) aimed for full liberalisation of the telecommunications sector from 1 January 1998.

(47)

Law No 96-659 of 26 July 1996 on the regulation of telecommunications (loi no 96-659 du 26 juillet 1996 relative à la réglementation des télécommunications) laid down the conditions allowing full effect to be given to the liberalisation of the sector by ending France Télécom’s monopoly in fixed line telephony and data transmission and organising charges and connections with competitors. Even in other sectors, which are not subject to exclusive rights and have therefore been competitive since 1987, such as the mobile telephony market, France Télécom had clear leadership, with a market share falling from 53,3 % to 49,8 % between 1997 and 2002 (29). Law No 96-659 also assigned general economic interest tasks to France Télécom and provided for the introduction of a fund to finance the associated obligations, with contributions from its competitors.

(48)

Pursuant to the provisions cited in recitals 46 and 47, since 1988, France Télécom has had to cope with the arrival of competitors — some partially owned by international groups — on the goods and services markets on which it was operating in France, some of which, such as mobile telephony or international communications, have a trans-border element. This movement gathered pace when the markets were liberalised from 1998. Moreover, France Télécom entered into alliances with foreign operators, such as Deutsche Telekom and Sprint in 1996 (Global One), whilst multiplying its partnerships and participating interests from 1997 in Italy (Wind), the Netherlands (Casema) or by obtaining mobile licences in Denmark and Portugal (30).

(49)

The reform of the financing of the France Télécom retirement pensions therefore took place at the same time as the liberalisation of the market at European Union level. It therefore took effect on a market fully open to competition where, moreover, France Télécom entered into alliances and took significant stakes in other Member States. In fact, the desire to promote the expansion of France Télécom on the European markets outside France is the a backdrop to the 1996 Law and the opening of the undertaking to private capital, as shown in declarations during the discussion of the draft, which report ‘the ambitions nurtured by the French Government for its national champion, France Télécom’ (31).

(50)

At present, France Télécom claims to be the leading provider of broadband internet access and the third largest mobile operator in Europe and among the world leaders for telecommunications services to multinationals. Outside France, France Télécom is significantly active via its subsidiaries, with prominent market positions in Spain, the United Kingdom, Poland, Slovakia, Belgium and Austria (32).

(51)

In its decision initiating the investigation procedure, the Commission set out its preliminary assessment of the measures introduced by the 1996 Law, comparing them with the reference framework for France Télécom’s social security contributions and tax payments established by the 1990 Law. It considered that these measures would seem to confer, through State resources, a selective advantage on France Télécom liable to distort competition and affect trade between Member States and potentially constituting State aid within the meaning of Article 107(1) of the TFEU.

(52)

The Commission also noted that, insofar as these measures constitute State aid, this aid was not notified to the Commission prior to its implementation although it was to be regarded as new aid according to case-law. The French Republic had thus not complied with its notification obligation under the Treaty and the measure was therefore to be considered unlawful.

(53)

The Commission concluded that on the basis of Article 107(3)(c) of the TFEU that it was able to examine whether the aid was compatible with the internal market. The Commission also noted that the same provision had permitted it to conclude that the aid granted to La Poste on the reform of the arrangements for financing the retirement pensions of its civil servants was compatible with the internal market (33) and that in view of the similarities between these two cases, it seemed appropriate in this case to carry out a similar analysis.

(54)

In its preliminary analysis of the compatibility of the aid with the internal market, and notwithstanding the similarity with the reform of the arrangements for financing the retirement pensions of La Poste, the Commission informed the French Republic of the following doubts:

(55)

The comments presented by interested parties are summarised in Sections 4.1 to 4.3.

(56)

In its comments, which it considers to be supplementary to those submitted by the French Republic, France Télécom considers that it suffering from chronic overstaffing linked to its former status as a public administration and that, for the population concerned, it does not have the same potential for fluidity of employment as its competitors. France Télécom has to bear very heavy training costs amounting to EUR 180 million, equivalent to 4,5 % of the total wage bill, compared to 2,9 % on average for French companies. France Télécom also alleges that its wage bill is about […] % higher, excluding surcharges and bonuses. In addition, since it cannot implement social plans, France Télécom financed the cost of measures associated with the departures of civil servants, such as end-of-career leave, to an amount exceeding EUR 8 billion between 1996 and 2006.

(57)

Secondly, France Télécom considers that the retirement pension costs borne between 1990 and 1996 were abnormal and placed it at a structural disadvantage in relation to its private-sector competitors, as referred to in the Combus judgment (36), the reference framework for assessing whether these charges were normal or abnormal being the ordinary law arrangements applicable to competitors. The principles laid down in the Combus judgment would appear to have been confirmed since by the Court in its Hotel Cipriani judgment (37). France Télécom disputes that the situation of a single operator, in this case itself, before and after the reform introduced by the 1996 Law, constitutes an appropriate comparison for assessing whether there is an economic advantage within the meaning of the case-law. In any event, if the reference framework were to be reduced to France Télécom before and after the 1996 reform, the measure could not be classified as selective since it would be applied homogeneously within that framework.

(58)

As a result, the measures in question would either not constitute State aid within the meaning of the Treaty in that they release France Télécom from an abnormal structural disadvantage or cannot be classified as a selective advantage constituting State aid.

(59)

Alternatively, France Télécom considers that State aid, if it were confirmed, would be compatible with the internal market in accordance with the criteria established by the Commission in its decision on the retirement pension arrangements of La Poste (hereinafter: ‘La Poste decision’) (38). In this regard, the specific nature of its arrangements, in that it pays a contribution calculated on the basis solely of the common risks, does not mean that France Télécom has been placed in a favourable situation in relation to its competitors since 1996: apart from the structural disadvantages associated with the status of the civil servants it employs, France Télécom has had to pay a considerable amount associated with the 1996 reform, the compatibility of which with the internal market needs to be analysed and, of EUR 5,7 billion, which far exceeds that which France Télécom would have had to pay if its contribution had been subject to the risks that are not common.

(60)

France Télécom considers that, in its La Poste decision (39), the Commission accepted that the amount of an exceptional one-off contribution (EUR 2 billion), in the context of a reform which came into effect after the notification but before the Commission decision, offsets the contributions corresponding to the non-common risks, until the amount of the one-off contribution has been exhausted. According to France Télécom, there is nothing to justify the Commission departing from this principle, since it cannot be assumed from the policy declarations at the time of the debate on the draft 1996 Law that the amount of the flat-rate contribution of France Télécom was set by the French legislature so as to maintain the status quo for 10 years.

(61)

Furthermore, the figures available in 1996 would seem to contradict the argument that the amount of EUR 5,7 billion was estimated at the time to correspond precisely with the additional cost to the State of the applying the 1996 Law by compensating, year after year, the lower annual costs paid by the public body, even taking into account the charges to compensate between retirement pension schemes from which France Télécom was discharged in 1996 (40). The amount of the exceptional contribution was intended as overall compensation for the French State on account of the reform. It therefore needs to be taken into account when analysing the level playing field since its entry into force in 1997.

(62)

Finally, France Télécom considers that, since without the 1996 reform, it would have suffered a significant competitive handicap on the markets which the Union aimed to liberalise and that the French authorities have now complied in full with the decision on the application of business tax to France Télécom (41), the measure does not have a negative impact on competition.

(63)

The complainants share the Commission’s view in the decision to initiate the procedure concerning the existence of State aid as defined in the Treaty in the reduction of the retirement pension costs to be paid by France Télécom, introduced by the 1996 Law. According to the reasoning followed in that decision, concerning which the complainants regret the lack of quantification, the amount of aid is EUR 12,3 billion and under no circumstances less than EUR 9,9 billion (42). The complainants consider that it is the effects of the measure, i.e. the reduction in the social security contributions normally assumed in the undertaking’s budget, and not its object, i.e. the compensation of an alleged disadvantage, that mean it is State aid. For that matter, there is no disadvantage in the employment of civil servants by France Télécom, since the undertaking pays unemployment contributions and wage costs which are 13 % lower than those paid by its competitors and has at its disposal a stable and flexible staff, with regard to reducing the total wage bill through early retirement and reorientation to the civil service.

(64)

According to the complainants, State aid thus defined would be incompatible with the internal market. In fact, the considerable competitive advantage procured by France Télécom was all the more detrimental as the reduction in costs was unnecessary to avoid jeopardising its financial structure: relieved of a pension debt with a net value of EUR 9,9 billion at least in 1996 and no longer having to enter this cost in its balance sheet or the notes to the accounts, France Télécom then increased its debt considerably, with a net financial debt of EUR 44 billion on average between 1997 and 2007. Then, the aid releasing France Télécom from retirement pension costs inherited from the monopoly enabled the international expansion of the undertaking to be financed, whilst strengthening its position in France, where it benefited from substantial advantages as a monopoly, of which the costs were merely fair compensation..

(65)

Moreover, the unlawful and incompatible aid not repaid in the past would preclude the operating aid at issue from being declared compatible, in view of their cumulative effect. Finally, the absence of a level playing field from the 1996 reform on account of the non-payment of contributions corresponding to the risks of unemployment and non-payment of wages in the event of the firm going into receivership makes it impossible for the reform to be compatible with the rules of the Treaty. The pension liability of France Télécom should be calculated by an independent expert and France should undertake to ensure the financial neutrality of the arrangements, in particular by providing mechanisms for adjusting the employer’s contribution and the compensation balance of EUR 5,7 billion in the event of variation in the costs.

(66)

The telecommunications operator endorses and supports the preliminary analysis set out in the Commission’s decision initiating the procedure, regarding as new, unlawful State aid the amendments introduced by the 1996 Law with a view to substituting the annual contributions in full discharge of liabilities by France Télécom for the payments of pensions actually made by the State, with the deduction of the contributions paid by the employees still working with the status of civil servant. The same would also apply, according to this operator, to the social security contributions corresponding to the risks not common with the ordinary employees paid by France Télécom’s competitors but which France Télécom has not paid at least since 1996 for its civil service staff and for its staff governed by ordinary law. Moreover, contrary to the case which was the subject of the La Poste decision (43), the calculation of the employer’s contribution from France Télécom did not, and still does not, include these contributions, which would make it impossible to declare the aid compatible.

(67)

As regards the aid resulting from the disappearance of the repayment to the State of the pensions granted, the operator considers that the analysis of the competitive balance carried out by the Commission in its La Poste decision should lead it to conclude, on the contrary, that it is incompatible. This analysis should be based on the facts that have occurred since 1996 and not, as in the La Poste decision, hypothetically for the future.

(68)

According to this operator, on several of the markets on which it operates, France Télécom holds market power which can be assimilated to a dominant position. As a result, it is subject to ex-ante regulatory obligations on the wholesale markets for high and very high speed broadband and for the origin and termination of calls on fixed lines. In its decision of 16 July 2003 relating to proceedings under Article 82 of the EC Treaty in the case COMP-38.233, the Commission established and imposed a penalty for an infringement of Article 102 of the TFEU on the part of France Télécom via its subsidiary Wanadoo (44). Since the undertaking is financially sound in particular through the acquisition of Orange, Retevisión and AMENA.

(69)

Finally, the operator asks the Commission to quantify precisely the amount of aid at issue and, pursuant to the Deggendorf case-law (45), to refuse to accept the compatibility of the measures in question with the internal market until the unlawful aid from the past has been repaid.

(70)

The French Republic considers that the changes made in 1996 to the arrangements for financing the retirement pensions of civil servants of the French State working for France Télécom do not contain any elements of State aid. In any event, the 1996 reform is compatible with the internal market, in particular, through the transposition to this case of the reasoning followed by the Commission in its La Poste decision (46).

(71)

According to the French Republic, the 1990 Law placed France Télécom in an abnormal situation departing from the ordinary arrangements according to which undertakings pay an employer’s contribution in full discharge of liabilities, proportional to the total wage bill and not linked to the level of pensions granted. The cost assumed by France Télécom is in this way abnormal, since the financial deficit from the arrangements for the population concerned was certain and set to become intolerable, given the inevitable reduction in the number of civil servants still working and the associated increase in the number of pensioners.

(72)

The 1996 reform is claimed to have aligned the financing of the pensions with ordinary law, without having the effect of placing the undertaking in a more favourable competitive situation, since the contribution of France Télécom is calculated annually so as to align the level of social security contributions and tax payments with those of its competitors in the telecommunications sector. However, not taking into account contributions corresponding to the risks not common to ordinary employees and civil servants in the calculation of the contribution in accordance with the competitively fair rate is justified on account of the status of the latter, which rules out, for example the risk of unemployment apart from in exceptional cases of dismissal or removal from post.

(73)

The French Republic considers that the situation of the competitors of the undertaking in France must constitute the reference framework for determining whether the costs payable by France Télécom are normal or abnormal. In the present case, taking account of the exorbitant, derogating from ordinary law, inequitable and unsustainable burden imposed on France Télécom by the 1990 Law, its abolition and the alignment with the situation of competitors provided for in the 1996 reform simply re-established the normal conditions of competition. For that matter, France Télécom has not been compensated for the disadvantages suffered under these arrangements, whereas, as emphasised in its comments, it still has to cope with structural disadvantages, additional costs and inflexibilities on account of the status applicable to the civil servants it employs as regards financial measures associated with departure or return to the public administration, vocational training measures or higher wage cost. Consequently, the current arrangements resulting from the reform confer no advantage on France Télécom and therefore contain no element of State aid within the meaning of the Treaty.

(74)

This interpretation is based on the general principles derived by the Union courts according to which, since only measures which lighten the burdens normally assumed in an undertaking’s budget constitute State aid, a law which makes it possible to prevent an undertaking’s budget being burdened by a cost which, under normal circumstances, would not have existed, does not constitute State aid (47). This would also be the case of measures relieving a public competitor from a structural disadvantage in relation to its private competitors (48). This interpretation is also regarded as being in conformity with the Commission’s practice (49).

(75)

Finally, more generally, the French Republic does not consider it relevant to include in the present procedure the compensation and over-compensation mechanisms under which France Télécom paid the costs between 1991 and 1996 (see Table 1) to determine the existence of aid or the date on which an advantage resulting from the reform introduced by the 1996 Law, which contains no provision to this effect, arose. The payment of such costs also resulted from a scheme departing from the ordinary arrangements in which the pensions scheme applicable to France Télécom was considered as an autonomous scheme, which was no longer the case from 1997.

(76)

With this reservation, the French Republic has refined the estimate, supplied by France Télécom and referred to under recital 61, of the costs which the undertaking has no longer paid from 1997. On the basis of a real reconstruction for 2008 to 2010, retropolated by applying a conversion factor, the French Republic considers that the costs that would have been paid by France Télécom in this capacity are EUR 165 million less than those calculated by the undertaking.

(77)

In any event, the French Republic considers that if the 1996 reform relating to France Télécom were to constitute State aid, this should be declared compatible with the internal market, in accordance with the analysis followed by the Commission in its La Poste decision (50). The 1996 reform releases France Télécom from a structural burden which was affecting its competitiveness in a market in the process of liberalisation and its contributions are henceforth calculated on the basis of a competitively fair rate for the common risks.

(78)

The fact that the contribution paid by France Télécom since 1997 does not include the risks not common to private sector employees would not preclude compatibility with the internal market. In this regard, Table 4, derived from information provided by the French Republic, illustrates the difference between the contribution paid by France Télécom and what it would have paid if the non-common risks had been included in the calculation, minus the benefits self-insured by France Télécom and other levies that put more of a strain on it than its competitors.

Table 4

Employer’s contribution from France Télécom between 1997 and 2010 calculated on the basis of the competitively fair rate applied (TEC) and a competitively fair rate adjusted to integrate the non-common risks (TEC*)

(79)

The French Republic considers that, since 1997 and until 2043, the discounted value of the contributions actually paid and to be paid by France Télécom is EUR 13,5 billion. A competitively fair rate adjusted to take into account the non-common risks in the calculation, minus the contributions imposed on France Télécom and not on its competitors, would lead to a higher annual contribution for the same period, i.e. EUR 16,7 billion. Whilst considering the inclusion of these risks as irrelevant, the French authorities calculated that the difference (EUR 3,2 billion) would be largely offset by the exceptional flat-rate contribution of EUR 5,7 billion paid by France Télécom in 1997.

(80)

In the French Republic’s opinion, it can be considered, as in the La Poste decision (51), that this flat-rate contribution can be assimilated to a balance compensation that could offset the payment of the contributions associated with an adjusted rate including the contributions for non-common risks. In this case, it appears that the amount of this balance compensation currently exceeds the amount resulting from the difference between the rate set by the 1996 reform and the adjusted rate indicated in Table 4 and that the amount of the balance compensation will never be used up in full by the divergence in rates. Under these circumstances, the doubts expressed by the Commission in its decision initiating the procedure regarding the absence of a true level playing field between France Télécom and its competitors would be resolved.

(81)

For the French Republic, the reform of the arrangements for financing the retirement pensions of civil servants working for La Poste, introduced in 2006 and inspired by that of France Télécom in 1996, is perfectly comparable with the latter, with regard to the key aspects. In view of this parallelism, there is no justification for the Commission to diverge from the precedent set with La Poste. In particular, the Commission should accept that the exceptional flat-rate contribution imposed on France Télécom is taken into consideration in the analysis of the level playing field arising from the reform, considering it de facto as an advance on the payment of the contributions associated with the non-common risks.

(82)

On the other hand, the debates at the National Assembly and the Senate referring at the time to a 10-year period of financial cover for the reform apparently arose from ad hoc statements. Such reasoning is not to be found in either the explanatory memorandums to the draft laws or the acts in question or the texts adopted to implement them. The legislature’s intention in 1996 was apparently to set the costs for France Télécom retirement pensions at a level equivalent to that of the competitors and not to render the reform void for a 10-year period, as would appear from the reasoning that the Commission could adopt if it relies on out-of-context declarations.

(83)

The parliamentary work seems to indicate unequivocally that the amount of the contribution was fixed as a flat rate, without any link to the burden that the State will in fact have to assume. Likewise, in its Decision No 96-385 DC of 30 December 1996, the Constitutional Council pointed out that the flat-rate contribution of FRF 37,5 billion was justified by the State financing of the retirement pensions of the civil servants, without constituting compensation, whereas, on the other hand, the payments to the State budget would not be earmarked for a specific expenditure and would contribute to the general conditions for the balance of this budget, in accordance with Article 18 of the Ordinance of 2 January 1959 on the Organic Law relating to Finance Bills (ordonnance organique du 2 janvier 1959 relative aux lois de finances).

(84)

For the French Republic, the precise amount of the exceptional contribution was established by the Finance Act 1997, taking account not of a 10-year period during which this contribution would be used to ‘repay’ the State, but on the contrary, depending on the effect on the balance-sheet structure of France Télécom, which was to remain tolerable. Its amount would not be gauged using the logic of compensation of costs to the State, but taking account of the contributive capacity of the undertaking.

(85)

The way in which this contribution was managed dissociated from the retirement benefits actually paid since 1997 confirms its flat-rate nature. In this way, the figures supplied by the French Republic show that, between 1997 and 2006, the pensions paid to the civil servants of France Télécom via the account earmarked for pensions amounted to EUR […] billion, while the public body managing the exceptional contribution of France Télécom transferred an amount of EUR 3,4 billion to that account. For the same period, the balance not financed by contributions paid amounted to EUR 1,2 billion. Moreover, in 1997, it was estimated that this fund would exist for 17 to 25 years, without any relation to the 10-year period on which the Commission bases the reasoning that it appears to wish to adopt.

(86)

The French Republic considers that France Télécom would have been evicted from the market without the reform, with contribution rates reaching 77 % of the gross index-related salary in 2010 and provisioning in its accounts for retirement liabilities for the civil servants working for it. The reform was therefore a decisive stage in adapting to the liberalisation of the market, in accordance with a Union objective, adapted to this and limited to the minimum necessary. Without this reform, France Télécom would have left the market and could not have made the necessary investments, in particular to allow unbundled access to the local loop, without ruling out a potential risk of bankruptcy, so the reform would not have had a negative impact on competitors.

(87)

In addition, according to the French Republic, the reform of the arrangements for financing the retirement pensions of France Télécom and, in particular, the imposition of the payment of an exceptional contribution, did not cost the State between 1997 and 2006 but in fact generated net revenue exceeding EUR 9,1 billion for the French State, according to the estimates of the French authorities (52). If a calculation of the return on the exceptional contribution were to be made, the French Republic considers that a discount rate of 7 % should be applied. Hence, the principle of an exceptional contribution was established as early as 1996. The investment horizon should be long since the expected differences between benefits to be paid and anticipated contributions did not exceed EUR 500 million until 2005, i.e. 9 years later and EUR 1 billion 12 years later. On average for 1996, the rate on 15-year fungible French Treasury bonds (hereinafter ‘OATs’) stood at 6,9 %. For its part, France Télécom floated bond issues between November 1991 and November 1997 at the comparable average rate of 7 %.

(88)

Finally, the sequestration of the amounts demanded by the Commission in application of its decision on the application of business tax to France Télécom (53), then the payment of these amounts, should lead to the Commission to consider its decision to have been executed, in accordance with its 2007 Notice on the subject (54). Consequently, there is no cause to examine the cumulated effect of these aids.

(89)

Article 107(1) of the TFEU provides that: ‘Save as otherwise provided in the Treaties, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market.’

(90)

The application of the cumulative conditions of this Article to the facts of the case is examined in Sections 6.1.1 to 6.1.5.

(91)

The 1990 Law and the 1996 Law originate from the French State. They provide for the measure by which France Télécom pays the Public Treasury compensation for the payment and servicing of the pensions granted to the civil servants of France Télécom made by the State. Since, pursuant to the 1996 Law, the compensation paid by France Télécom to the Public Treasury is less than in the original wording of the 1990 Law, the aid is granted to France Télécom with the resources of the French State.

(92)

The provisions of the 1990 Law defined the arrangements applicable to France Télécom, a public operator with legal personality. The 1996 Law on the national company France Télécom amends these arrangements with provisions applicable to France Télécom in accordance with the conditions it defines only for this company.

(93)

The object of the arrangements introduced by the 1990 Law is to determine a specific compensation for the principles and amounts of the employer’s contribution for the pensions paid by France Télécom to the French State. Therefore the compensation payable by France Télécom in accordance with the 1990 Law in its original wording, which was applied between 1991 and 1996, in the same way as the different compensation introduced by the 1996 Law, which has been applied since 1997, is a specific measure which concerns only France Télécom, thereby fulfilling the condition of selectivity, contrary France Télécom’s argument.

(94)

It should be determined whether the measures establishing the amount of compensation in question favour France Télécom. The question of whether the amendments introduced in Article 30 of the 1990 Law by the 1996 Law constitute aid because they confer an economic advantage on France Télécom must be seen in the light of the nature and the overall structure of the pensions arrangements in question and the effects this has had on France Télécom, and not the causes or objectives of the amendments. The objective pursued by amending the 1990 Law is not therefore relevant, in principle, for assessing its effects, contrary to the French Republic’s argument.

(95)

The funding by the State of the payment and servicing of the pensions granted to the civil servants of France Télécom results from the application of the Civilian and Military Retirement Pensions Code, which alone applies to the former civil servants in question. Neither the 1990 Law nor the 1996 Law changed the status of these civil servants or the principle of the State funding the payment of their pension. This funding seems to arise from the principle whereby employees with civil servant status serve the common good independently and in the public interest. This is not the case where these civil servants work for an undertaking providing a paid-for service, with the aim of serving the interests and benefit of this undertaking, in competition with other undertakings which provide the same services.

(96)

In this perspective, the payment of compensation to the State, provided for by the 1990 Law, both in its original wording and after the amendments introduced by the 1996 Law, constitutes an exception to the principle of funding by the French State. This exception is justified by the nature and overall structure of the arrangements applicable to the pensions of the civil servants employed by France Télécom. In fact, the French State is obliged to effect the payment and servicing of the pensions granted, under the Civilian and Military Retirement Pensions Code, to the civil servants of France Télécom, who are covered by the general status of civil servants of the French State and not by the ordinary law on social security benefits.

(97)

Even in the absence of the payment of compensation by France Télécom, the French State would still be bound to honour its pension commitments to the civil servant staff concerned, unless it amended these commitments unilaterally. On the contrary, making available State-trained civil servants to France Télécom with no compensation for pensions paid or to be paid would confer a clear advantage on the latter.

(98)

Since France Télécom’s competitors do not employ staff with civil servant status for whom the French State would be under a similar financial obligation, the logic of the arrangements for funding pensions and the payment of compensation for France Télécom introduced by the law is not transferable to them. This is shown by the fact that, since the status of the staff employed by the competitors differs with regard to the risks of non-payment of wages covered by the ordinary law on social security benefits, the French authorities appear to consider that the payment of social security contributions to cover the risk is justified in their case. However, it is precisely this status that the French Republic is using to consider that the inclusion of the risks not common to the civil servants and the ordinary employees in the calculation of the compensation paid by France Télécom to the State pursuant to the 1996 Law is not justified.

(99)

Therefore, as regards the costs paid on account of the employment of their ordinary staff, these undertakings are not in a comparable situation in fact or in law to that of France Télécom as regards its civil servant staff, contrary to the arguments of the French Republic and France Télécom presented in their comments.

(100)

Likewise, the compensation arrangements applied to France Télécom cannot be compared with the arrangements defined for other public bodies with employees with civil servant status, such as the Paris Mint or the National Forestry Office, which can be categorised as undertakings for some of their activities within the meaning of Article 107(1) of the TFEU, or other public industrial and commercial undertakings, such as EDF or GDF in the past. EDF or GDF had specific retirement pension schemes, which were not aligned with the civil service scheme. Moreover, EDF and GDF have since been affiliated to the general scheme, even though it should be emphasised that the Commission concluded that no State aid existed solely on condition that affiliation is financially neutral for the State (55), which is not so regarding the 1996 reform in the present case.

(101)

On the other hand, the compensation scheme in favour of the State for the payment of the pensions of civil servants working at La Poste, before the amendments described and approved under certain conditions by the Commission in its La Poste decision, was also that of a national company comparable to a public industrial and commercial undertaking and remained, pursuant to the 1990 Law in its original wording, similar to that of France Télécom, in that it provided for the annual repayment to the State of the pensions granted to the retired civil servants and the payment of the costs provided for in Article L-134 of the Social Security Code.

(102)

Even if it seems that La Poste is not in competition with France Télécom, which the advantages granted to the latter could distort or threaten to distort, the fact remains that the logic and provisions of the retirement scheme for the civil servants of France Télécom before the 1996 reform were the same as those of the comparable scheme applied to La Poste at the same time. Moreover, the Commission considered in its La Poste decision that the reform of the scheme applicable to La Poste constituted State aid, contrary to the arguments put forward by the French Republic in respect of France Télécom. More generally, to assess the situation of France Télécom, the reference situation is that of a public or private undertaking employing civil servant staff who have retained their status. Such undertakings would be in the same reference situation as France Télécom. It is therefore in terms of this reference scheme that the existence of State aid in favour of France Télécom can be assessed.

(103)

Likewise, it cannot be argued that a measure does not confer an advantage on an undertaking, France Télécom in the present case, through the mere fact that it is in compensation for a certain disadvantage that this undertaking allegedly suffered in the past, contrary to the assertions of the French Republic and France Télécom. The Commission also recently dismissed the argument of a historic telecommunications operator, a competitor of France Télécom, according to which specific social benefits in the form of pensions comparable to those of the civil service inherited from the past and different from those under ordinary law for part of the staff justify measures for the reduction of the social security costs associated with the pensions for this category of staff incurred by the operator (56). In this respect, as the French authorities emphasised during the discussions on the draft, the 1996 Law imposed a new, substantial burden on the French State for the payment and servicing of the pensions granted to the civil servants of France Télécom. At the same time, the 1996 Law therefore had the effect of reducing the compensation that France Télécom had always paid.

(104)

On account of the detailed rules for calculating the rate of the employer’s contribution provided for by the Law, since 31 December 1996, France Télécom pays the State less compensation than it would have paid if the Law had not been passed. In addition, on account of the fact that the employer’s contribution introduced by this Law is in full discharge of liabilities, France Télécom immediately wrote back at 31 December 1996 the provision earmarked in these accounts for the payment of its future liabilities. Hence the burden from which France Télécom was released was neither new, since the 1990 Law adopted the previous budgetary practice, nor unforeseeable, since the undertaking set aside provisions for this purpose, nor did it derogate from ordinary social security arrangements since these do not apply to the compensation paid by France Télécom.

(105)

From its entry into force, the 1996 Law transferred to the French State liability for the annual contribution ultimately covering in full the cost of funding the pensions of the staff concerned. The amount of aid granted in this way by the 1996 Law can be calculated, since its entry into force, by the annual difference between the compensation consisting of the contribution in full discharge of liabilities paid by France Télécom to the French State and the costs that it would have paid pursuant to the 1990 Law, indicated in Table 1, if this Law had not been amended, minus the amount of the flat-rate contribution paid in 1997.

(106)

It can be seen from the estimates supplied by the French Republic and set out in recital 40 that, at the time of the 1996 reform and until the foreseen expiry of the financial liabilities resulting from the burden assumed by the French State, the French authorities were able to estimate this total amount of net new costs until 2043, the date on which the financial liabilities of the State in relation to the retired civil servants or their beneficiaries would end, at EUR […] billion. The present value of the net cost amounted to EUR […] billion in 1996, after deduction of the annual contributions by France Télécom (EUR 15,2 billion), those of the employees (EUR […] billion) and the exceptional flat-rate contribution of EUR 5,7 billion.

(107)

Moreover, it should be noted that the amounts estimated at the time of the 1996 reform represent an approximation of the actual amount (57). The amounts of compensation provided for which are payable by France Télécom in the form of annual contributions, like the balance compensation of EUR 5,7 billion paid in 1997, had neither the object or the effect of seeking budgetary neutrality for the French State. If that had been the case, subject to the appropriate nature of the actuarial calculation assumptions, the costs and receipts would have been equal for the period as a whole and, consequently, there would have been no economic advantage for France Télécom.

(108)

The French authorities were aware that the ‘transfer of the pension costs for the civil servants of France Télécom to the general State budget’ was ‘a new and heavy burden for the State’ that the exceptional flat-rate contribution or the proceeds of the sale of part of the shares in the undertaking held by the State would only cover in part. The debates mentioned in recital 31 show that the French State did not seek in 1996 to offset in full the new burden it was assuming for the future but, on the contrary, sought to assume a new burden and for ‘the interests of the undertaking to be taken into account first in this matter’.

(109)

It is obvious that, even with different actuarial assumptions from those used by the French State to estimate the new burden it was assuming and notwithstanding the exceptional flat-rate contribution paid in 1997, the reform granted a substantial economic advantage in the form of lower employer pension contributions. Since the flat-rate contribution or balance compensation did not allow the charges transferred to the French State to be covered in full but, at the very most, to be reduced, and in view of the proportions in question, the actuarial calculation used at the time and the accuracy of the estimates resulting from it for the period up to 2043 as a whole cannot be confirmed as appropriate.

(110)

Moreover, the financial advantages resulting from the lower contributions by France Télécom cannot be compared with the alleged disadvantages arising from the employment of civil service staff, as France Télécom argues, supported by the French Republic. In fact, the 1996 Law did not, in any case, increase these alleged disadvantages, since it did not lead to the recruitment of additional civil servants. In addition, by discharging France Télécom from a part of its financial liabilities, the objective of the 1996 Law was not to compensate for an alleged disadvantage associated with wages or, according to the words of France Télécom, the lesser fluidity of employment of civil service staff.

(111)

It is therefore for the sake of completeness that it is necessary to respond to the arguments concerning the alleged disadvantages caused by the employment of civil servants, invoked by the French Republic and France Télécom.

(112)

In the absence of a link to the question of whether or not an economic advantage exists resulting from the measures in question, taking into consideration competitive advantages drawn by France Télécom from its former monopoly, invoked by the complainants, would appear to be equally baseless. The alleged advantages and disadvantages are in fact unrelated to the question of levelling the conditions of competition on the telecommunications markets with regard to social security costs.

(113)

Only the exceptional flat-rate contribution provided for by the 1996 Law immediately placed a cost burden on France Télécom in relation to the reference situation already identified. The payment of the flat-rate contribution reduced the amount of aid from which France Télécom has benefited and will benefit until the expiry of the financial burden assumed by the French State in the place of France Télécom pursuant to the 1996 Law. Without prejudice to the accuracy of the actuarial methods used by the French Government at the time, without this flat-rate contribution, the amount of the burden from which France Télécom would have been relieved would have amounted to EUR 18,9 billion and not EUR […] billion, in 1996 net value.

(114)

The 1996 Law therefore permitted and still permits France Télécom to have increased financial resources at its disposal to operate on the markets in which it is active. On account of the 1996 Law, these resources were therefore greater than those at France Télécom’s disposal under the 1990 Law in its original wording. The telecommunications services markets on which France Télécom operated and operates throughout French territory and in other Member States have been gradually opened up to competition through the progressive disappearance of exclusive or special rights from 1988, then, with the exception of specific derogations, totally from 1998. There was total opening-up to competition in France in 2002. The removal of the legal barriers was accompanied by the entry of other operators with which France Télécom was and is in competition, even before the legislative measures of 1990 and 1996 which are the subject of the present decision.

(115)

Released from the obligation to set aside provisions for the future retirement costs of its civil service staff and subject to a lower annual contribution level, France Télécom’s balance sheet was relieved of liabilities and costs, thereby increasing its attractiveness to raise capital, which placed it in a more favourable situation than before the 1996 reform. Released from a burden incurred from its historical French market, France Télécom was in this way able to develop more easily on the markets of other Member States newly opened to competition, which it in fact did, as shown in recitals 48 to 50.

(116)

As a result, relieving the burden of France Télécom arising from the method of calculating the compensation to pay to the French State for funding the pensions of the civil service staff distorts or threatens to distort competition between France Télécom and these new operators in France and in the other Member States where France Télécom is present.

(117)

The markets on which France Télécom operates in France have been opened up gradually to competition since 1988 and, as a result, are largely open to trade between Member States. Directive 96/19/EC aimed for total liberalisation of the telecommunications sector from 1 January 1998. Operators whose capital is held in part by undertakings of Member States other than France have in this way become established there. Some of these markets concern international communications between Member States. Likewise, via subsidiaries, France Télécom provides electronic communications services in other Member States, and notably Spain, Belgium and the United Kingdom.

(118)

Under these conditions, a measure which reduces the general operating costs of France Télécom, and thereby releases resources which become available to that undertaking to invest or to improve its commercial offers in France or to establish in other Member States, could affect trade between Member States.

(119)

It ensues from the above that, by reducing the compensation consisting of the employer’s contribution to be paid to the State for the retirement pension expenses provided for by the 1990 Law in its original wording and by substituting for this the compensation provided for by the 1996 Law, in so far as the latter compensation is lower than that previously applied, the French Republic, through its resources, has granted aid to France Télécom which distorts or threatens to distort competition and affects trade between Member States within the meaning of Article 107(1) of the TFEU at the time of the transfer of the costs instituted by the 1996 Law.

(120)

Consequently, it is necessary to examine whether this aid can be declared compatible with the internal market.

(121)

The Commission notes that France did not refer to Article 106(2) of the TFEU as a basis for the compatibility of the measures en question.

(122)

The derogations provided for in Article 107(2) of the TFEU concerning aid having a social character, granted to individual consumers, aid to make good the damage caused by natural disasters or exceptional occurrences and aid granted to certain areas of the Federal Republic of Germany, are obviously irrelevant in the present case.

(123)

As for the derogations provided for in Article 107(3) of the TFEU, the Commission finds that the aid in question is not intended to promote the economic development of areas where the standard of living is abnormally low or where there is serious underemployment, that it is not a project of common European interest and does not aim to remedy a serious disturbance in the French economy. It is not intended either to promote culture and heritage conservation.

(124)

It therefore appears that only Article 107(3)(c) of the TFEU could be applied to assess the compatibility of this measure.

(125)

Under Article 107(3)(c) of the TFEU: ‘The following may be considered to be compatible with the internal market: […] aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest […]’.

(126)

For aid to be considered compatible with the internal market on the grounds that it facilitates the development of economic activities or certain economic areas, it must improve the way in which the economic activity is carried out. Aid is compatible within the meaning of Article 107(3)(c) only if it does not adversely affect trading conditions to an extent contrary to the common interest. In its assessment, the Commission puts particular emphasis on the criteria of necessity and proportionality (58).

(127)

By way of a preliminary remark and in view of the doubts raised by the Commission in its decision to initiate the procedure, it should be noted that the French Republic collected from France Télécom a satisfactory amount corresponding to the recovery of the aid required by the Commission in its decision on application of the business tax to France Télécom (59). The Commission considers, after confirmation of the judgment of the General Court dismissing the action for annulment of this decision by the Court of Justice (60), that the French Republic has taken the necessary measures to fulfil the obligations arising from this decision. Since the due recovery of the aid paid through the application of the business tax eliminates the economic advantage enjoyed by France Télécom in this respect, there is no need to examine the effects of any cumulation with the aid which is the subject of the present procedure.

(128)

For the rest, it should be noted straight away that, contrary to investment costs, the social costs of an undertaking are recurrent operating costs and that aid reducing them is aid for the operation of the undertaking, the compatibility of which with the internal market must, according to the Court of Justice case-law, be assessed very restrictively by the Commission.

(129)

In the present case, the aid implemented since 1997 can be considered as being intended to facilitate the development of the economic activity of supplying electronic communications services, in the context of the full liberalisation of these markets. In fact, the 1996 Law was adopted hand in hand with Law No 96-659 of 26 July 1996 on the regulation of telecommunications (loi no 96-659 du 26 juillet 1996 de réglementation des télécommunications), which transposed the obligations arising for France from Union law and, in particular from Directive 96/19/EC.

(130)

In this respect, the general objective aimed for by the 1996 Law regarding the payment of financial compensation to the French State is to align the levels of wage-related social security contributions and tax payments, between France Télécom and the other undertakings in the telecommunications sector coming under the ordinary social security arrangements. The means used, i.e. an aid measure targeting directly and exclusively the way in which the employer’s contributions of France Télécom are established seems an appropriate way of achieving the objective.

(131)

An aid measure which aims to reduce the current social security costs of France Télécom, assumed at a time when the bulk of its activities were covered by a monopoly and the provision of a service did not require efficient economic behaviour, may contribute, in a different competitive environment, to improving the way in which the services formerly covered by the monopoly are supplied, provided that the allocation of the financial resources by the competing undertakings to their respective social security costs does not introduce any bias in a merit-based competition process. Admittedly, reservations are expressed below on the appropriateness of certain provisions of the Law to achieve the objective it sets. However, neither its legitimacy nor its conformity with the common interest objective of developing competitive electronic communications services markets, thereby contributing to technological progress and rapid economic growth in this activity, could be doubted.

(132)

The capping of the civil service staff working for France Télécom, brought about by the ban on recruitment after 1 January 2002 provided for by the 1996 Law, would have had the inevitable consequence of a considerable increase in the burden of retirement pensions imposed on France Télécom in proportion to the civil servant staff still working. Deprived in this way of the possibility of recruiting civil servants, which is understandable for that matter given the henceforth competitive nature of the provision of the services in question, France Télécom would have had to shoulder an excessive burden to pay the retirement pensions for the staff concerned in relation to that which its competitors had and still have to pay. It should therefore be noted that the commitments in exchange to be paid to the French State provided for by the original provisions of the 1990 Law concerned not only the civil servant staff working on competitive markets in 1990 and afterwards, but also the civil servants of the Directorate-General of the Ministry of Postal and Telecommunications Services who had retired in 1990.

(133)

For illustration, the contribution rate which would have resulted for France Télécom from retaining the provisions of the 1990 Law would have been 77 % of the gross index-related salaries of the civil service staff working in 2010, according to the French Republic. This rate is to be compared to a rate of […] % which would allow a totally level playing field for the common and non-common risks between France Télécom and its competitors. In absolute value, the difference would represent an additional cost of about EUR […] million per year in relation to the contribution rate ensuring the level playing field. In addition, in the absence of including in the Law the fact that the employer’s contributions are henceforth in full discharge of liabilities, France Télécom would have had to continue to meet significantly higher provisioning needs in relation to the provisions of EUR 3,6 billion already set aside in 1996.

(134)

In this respect, the considerations of the complainants concerning the fact that France Télécom was able to assume a far larger financial debt from 1996 than the burden from which the French State had relieved it are not relevant as they are unrelated to the question examined. Even if the increase in the financial debt assumed by France Télécom since 1996 and the amounts in question now seem to rule out the risk of bankruptcy of the undertaking referred to by the French Republic if the arrangements provided for by the 1990 Law had continued, the aid measure seems to be necessary in the future to allow France Télécom to be able to compete on the markets concerned on the basis of merit, without being handicapped by the burden of social security costs inherited from the past which its competitors do not have to bear.

(135)

The considerations of the complainants and the telecommunications operator on the relevance of an overall balance with a view to assessing the need for aid in the light of the other advantages derived by France Télécom from its past monopoly are unfounded in this case. It is true that, since 1996, France Télécom’s position on a number of the services markets in which it operates in France remains dominant, especially on account of network effects inherent in the communications markets. Likewise, France Télécom has increased its presence on the markets of other Member States by acquiring significant positions there, especially in Poland and Spain. The fact remains that, as emphasised indirectly by the telecommunications operator in its comments, as a result of its dominant position within the meaning of Article 102 of the TFEU or its significant market power within the meaning of the regulations applicable to electronic communications in the Union (61), France Télécom is subject to specific asymmetric obligations which are not imposed on the competing undertakings with lesser market power.

(136)

These obligations, for example regarding access to its network, cost-orientation of prices or refraining from commercial behaviour which would be permitted to a non-dominant undertaking, have as their object precisely to ensure that the position of France Télécom inherited from its former monopoly is not more damaging to competition. These ad hoc regulatory instruments, designed and applied consistently by the national regulatory and competition authorities and by the Commission (62), are a more targeted and effective remedy to the persisting effects of the advantages derived by France Télécom from its former monopoly, invoked by the complainants.

(137)

Consequently the State aid which is the subject of the present procedure appears, in principle, necessary to attain an objective of common interest by improving the conditions of competition relating to the retirement costs and, therefore, the provision of electronic communications services.

(138)

It must be concluded that the financial compensation in favour of the State introduced by the 1990 Law for the payment and servicing of the pensions is specific to France Télécom and sui generis. The principle of total repayment provided for by the original 1990 Law has been replaced by different arrangements for determining the amount of the compensation to be paid to the State from 1996. Several options for determining the amount of the employer’s contribution to be paid by France Télécom, ranging to full funding by the State without repayment, were theoretically possible. This compensation has been calculated since 1997 by referring to certain costs borne by the competing undertakings in the sector. For the purposes of determining whether the aid is proportionate for achieving the objective, it is therefore appropriate to examine the objective and justified nature of the reference to establish the amount of the compensation adopted in the 1996 Law.

(139)

It should be noted straight away that, in the procedures relating to reductions in retirement costs for civil servant staff of former monopoly operators in the telecommunications sector, OTE in Greece and BT Plc in the United Kingdom, the Commission checked in particular whether these undertakings were subject to equivalent social security costs to those of their competitors to decide the respective compatibility and incompatibility with the internal market pursuant to Article 107(3)(c) of the TFEU of the State aid granted to the operators in question (63). The Commission finds that in the present case, the contributions in full discharge of liabilities paid each year by France Télécom and provided for by the 1996 Law do not enable it to be ensured that the social charges levied are equivalent to those of its competitors. The competitively fair rate (hereinafter: ‘TEC’) is not achieved.

(140)

However, the French Republic and France Télécom rely on the exceptional flat-rate contribution of EUR 5,7 billion paid in 1997 by France Télécom under the 1996 Law. The amount of this flat-rate contribution was established in 1996 so as to compensate, for a period of 10 years of application of the 1996 Law, the additional cost foreseen at the time for the State, also taking into account the accounting provisions that France Télécom had set aside and that the undertaking could write back in the financial year 1996-97. The exceptional flat-rate contribution is subdivided into two components:

(141)

The flat-rate sum of EUR 5,7 billion was never intended to compensate for the absence of the competitively fair rate between France Télécom and its competitors, so it would not be justified to weigh this sum against the annual contributions in full discharge of liabilities which were not paid by France Télécom when they would have been necessary to attain a competitively fair rate.

(142)

On the other hand, an examination of the parliamentary debates shows that the additional amount of EUR 2,1 billion was intended to cover this transfer of costs from 1997 to 2006 and, in fact, to eliminate the effects of aid for a 10-year period. In this way, the net financial effort by France Télécom corresponding to this additional amount consisted in financing, for a 10-year period, the additional cost of the reform for the French State.

(143)

Moreover, the exceptional contribution includes the write-back of the accounting provisions set aside until 1996 and which had become redundant. The provisions written back by the State had been set aside by France Télécom to defray the cost of future retirements and this write-back eliminates the effects of aid for the period of payment of the retirements which they are intended to cover.

(144)

However, the 1996 Law refers to a one-off exceptional contribution, without the applicable provisions, either of the Finance Law or of the subsequent Decrees, determining an amount arising from the provisions, which should have been deducted from the burden transferred to the State for the duration of this period. Article 6 of the 1996 Law clearly specifies that the exceptional flat-rate contribution is paid in return for the funding by the State of the pensions granted to the civil service staff. The amount of this exceptional contribution must therefore be included in its entirety in the analysis of the reform.

(145)

As France Télécom, through the payment of this exceptional flat-rate contribution, covered the cost of the retirement pensions of the civil servants in telecommunications and the cost of the compensation between arrangements for a period of about 15 years, the effects of the aid were neutralised. France Télécom, by paying this exceptional contribution, therefore neutralised the effects of the aid during this period. Consequently, it is justified that, during this period, France Télécom is not obliged to fulfil the conditions of compatibility of this aid, and therefore that it does not pay the annual contribution necessary to ensure a competitively fair rate including the non-common risks in respect of the private-law employees.

(146)

It is appropriate to return in detail to the stages of this reasoning.

(147)

The fact remains that the annual levies in full discharge of liabilities paid by France Télécom since the 1996 reform do not permit a competitively fair rate to be achieved, as emphasised in the decision to initiate the procedure. This results from the fact that the rate applied to France Télécom includes only the contributions corresponding to the common risks of private-sector employees and civil servants and, as a result, excludes the contributions corresponding to the non-common risks, such as unemployment or non-payment of wages in the event of the firm going into receivership or compulsory liquidation.

(148)

It therefore results from Table 4 that not taking the non-common risks into account in the calculation of the contribution to be paid by France Télécom is reflected in a considerable difference between the compensation paid by France Télécom to the State and what it would pay if the contribution rate were calculated to ensure an entirely level playing field with the bases for the calculation of the costs paid by competitors. Consequently, the aid measure resulting from the Law does not comply with the principle of proportionality. For it to comply with this principle and in order to attain the legitimate objective stated of improving the conditions of competition by equalising the calculation methods relating to the costs borne by the undertakings operating on the telecommunications markets concerned in France, the aid granted to France Télécom pursuant to the 1996 Law should have equalised, and should effectively in future equalise, these costs by including those relating to the risks not common to the two categories of staff.

(149)

In this respect, France’s argument that the civil servants are not exposed to certain risks and, that as a result, it is not justified to pay a contribution for these risks, cannot be accepted. Firstly, it is pursuant to State measures that these risks would not arise, so there is no justification for France Télécom to draw a pecuniary advantage. For example, it is by virtue of the commitment by the French State to the civil servants still working at France Télécom and on account of the fact that the French State is its own insurer that the risk of non-payment of wages in the event of the firm going into receivership would not arise. However, the possibility of France Télécom filing for bankruptcy, just like a competitor, cannot be ruled out. In both cases, it is not a matter of an advantage supplied to the undertaking, but directly to its employees. The guarantee of the payment of wages takes effect after the undertaking has ceased to exist. However, a competing undertaking will have to pay contributions to guarantee the risk of non-payment of wages after its disappearance, in contrast to France Télécom. It is therefore not justified to give the latter an advantage, in the form of a lower contribution or, in fact, an exclusion of this risk from the method of calculating the contributions of France Télécom.

(150)

Then, more fundamentally, the objective itself of the reform introduced in 1996, which does not seem to have been brought to its logical conclusion, is to equalise the conditions of competition with regard to tax and social security payments between all the competitors of the sector, irrespective of the status of their staff and the existence of an actual obligation for France Télécom to affiliate with and subscribe to the competent management bodies. It is precisely this logic of equalisation of the conditions of competition which would be liable to make the measure examined compatible with the internal market. Whether or not the staff of France Télécom are exposed to such risks is not therefore relevant under this logic.

(151)

In conclusion, a reduction in the funding of the pensions with a transfer of the net burden to the State would respect the principle of proportionality only if it allowed a level playing field. However, France Télécom has not been placed in a situation which is fully equivalent to that of the undertakings in the sector as regards wage-based social security contributions, since certain social security contributions and tax payments have not been integrated into the basis of assessment for calculating the annual contribution.

(152)

Likewise, contrary to the claims of the French Republic and France Télécom, it is not justified to take into consideration the amount of the exceptional flat-rate contribution of EUR 5,7 billion already paid by France Télécom in 1997 to compare it with the insufficiency of the rate of the contribution in full discharge of liabilities applied to France Télécom.

(153)

As a preliminary point, the Commission wishes to recall that, in each situation, it has to establish whether the conditions of application of the derogation provided for in Article 107(3)(c) of the TFEU have been fulfilled, without being bound by its earlier decision-making practice, assuming that is established (64).

(154)

In any event, the reform examined here displays clear differences, in several respects, from the reform referred to in the La Poste decision (65), which the French authorities attempt to rely on.

(155)

In fact, contrary to the reform as foreseen by the La Poste decision invoked by the French Republic and France Télécom, the reform of the arrangements for financing the retirement pensions of the civil servant staff of France Télécom occurred on the eve of the opening-up, at Union level, of the markets where France Télécom could operate.

(156)

Moreover, it appears that France Télécom took advantage of this liberalisation by establishing itself in the markets of other Member States, thanks not only to its change of status into a public limited company, but also, in part, from the elimination of retirement pension commitments from its balance sheet and the lower future potential charges resulting from the reform. This reduction in its balance-sheet commitments enabled France Télécom to boost its solvency and borrowing capacity. The debt figures, supplied by the complainants in their comments and not contested by the French Republic regarding the amounts, show that the net financial debt of France Télécom rose from EUR 19,2 billion in 1997 to EUR 83 billion in 2002.

(157)

It is true that a dedicated investment policy for expansion on the markets of other Member States, made possible by the liberalisation, may be at the origin of this very substantial increase in financial debt. Nonetheless, raising the necessary funds was rendered possible in part by reduction in retirement costs for a net amount of EUR […] billion transferred to the French State in 1996. As a result, the comments of the telecommunications operator claiming that the aid enabled France Télécom to finance its international expansion (comments set out in recital 68), albeit indirectly, are not without foundation.

(158)

On the other hand, the group of postal markets on which the French La Poste can operate in the Union is not yet entirely open to competition and would only have to be in 2012, i.e. six years after the reform of financing the pensions of La Poste (66). The effect of restricting competition of the aid granted to France Télécom on markets which have been fully opened up is therefore greater than that of the aid to La Poste. Complete parallelism in the conditions necessary for compatibility of the aid is not therefore required, since the competitive situations are separate on markets for which the priority in opening-up at Union level and the contribution to the competitiveness of its economy were also different. As a result, the common interest criterion referred to in Article 107(3)(c) of the TFEU need not necessarily be assessed in an identical fashion in the two cases in point.

(159)

In addition, the financial situation of La Poste and, consequently, its capacity for expansion on external markets or for reinforcement on the French market were not comparable to those of France Télécom. As emphasised in the La Poste decision, without the reform of 2006, on account of the changeover to new accounting standards, La Poste had to enter into its accounts a provision for the State liability which it hitherto entered as an off-balance-sheet item for an amount of EUR 76 billion (67). However, unlike La Poste, France Télécom set aside accounting provisions in its accounts to meet its future liabilities in the absence of the reform, which means that the financial situations of each undertaking were objectively different.

(160)

Likewise, the absence of reform for France Télécom and the continuation of the arrangements introduced by the 1990 Law would have been reflected in an increase in the retirement pension costs which would become significant from 2005-07 according to the forecasts of the time set out in recital 30, which is corroborated ex post by the results shown in Table 3. At the time of the reform, the continuation of the arrangements established by the Law applicable to La Poste was reflected immediately in an additional annual cost of approximately EUR […] million for La Poste (68).

(161)

It has not therefore been established that the situation of the two undertakings under the effect of the law applicable before the respective reforms and, consequently, the competitive impact of these reforms, was similar. The facts point to the contrary. As a result, an examination coming to similar conclusions in both cases is not justified.

(162)

Furthermore, in the case of the La Poste decision, there were sufficient reasons to consider that the exceptional flat-rate contribution could be reallocated in the future as an advance on the payment of the contributions linked to the adjusted competitively fair rate. Such reasons are lacking in the present case. In fact, the condition imposing the reallocation of the exceptional contribution by La Poste was established after the Commission had initiated the formal investigation procedure, calling into question the underestimation of the contribution in full discharge of liabilities necessary to attain a competitively fair rate.

(163)

To a large extent, and even though the French authorities did not recognise it explicitly, the allocation of the exceptional flat-rate contribution in question in the La Poste decision was therefore the result of negotiations between the Commission and the Member State with a view to ensuring the payment of a contribution in full discharge of liabilities ensuring a competitively fair rate. In these negotiations, the starting point of the French authorities expressed in their notification of 23 June 2006, after the first contacts on the file in December 2005, was that the exceptional contribution for La Poste provided for was not necessary from the point of view of the level playing field, contrary to the envisaged draft reform of the annual contribution.

(164)

In this way, the Commission decision did not confirm a reform which had entered into force, as France Télécom seems to maintain. In fact, the notification and the decision to initiate the procedure of 12 October 2006 preceded the establishment of the amount of the exceptional contribution by Law No 2006-1771 of 30 December 2006 (Amending Finance Act 2006). These negotiations concerned several aspects of the reform and in particular, the taking into account of the advantage which the notified reform could have represented in the past, the scope of the contribution rate envisaged and the terms for taking into account the specific nature of the La Banque Postale in relation to the postal activities and the staff allocated. These negotiations continued and it is only in their comments of 8 June 2007 that the French authorities accepted the terms of allocation of the exceptional contribution under an overall agreement relating to the reform, in this way going back on their position notified on the subject of the exceptional contribution and the method of calculating the future annual contributions.

(165)

On the other hand, contrary to the provisions of the Finance Act 1997 setting up the public body managing the contribution of France Télécom, which provided for inflexible rules concerning the annual repayments to the State, the public body managing the contribution of La Poste did not have specific rules imposed on it (69). Since it was an exceptional contribution to be paid and was not earmarked, the Commission was able to consider that the French Republic could have reduced the amount and at the same time increased the annual contribution rate of La Poste.

(166)

Moreover, it must be noted that the terms of the 1996 Law define the parameters for the calculation of the annual contribution paid regularly to the State in return for the pensions of the civil service staff, without there being any question of taking into account the risks not common to civil servants and ordinary employees. In this respect, the Court and the Court of Justice specified, with regard to the business tax payable by France Télécom, that a reduction in charges could not be offset by a different specific charge, in particular where the Member State, the French Republic in this case, has failed to demonstrate that earlier charges were introduced in anticipation of a reduced tax burden in the future under different arrangements (70).

(167)

The Commission cannot disregard the fact that the purpose of the specific flat-rate contribution already paid in 1997 was, as expressly established by Article 6 of the 1996 Law, to compensate the French State in part for the financial burden it was assuming on account of the 1996 Law.

(168)

In addition, it is inferred from the content of the Senate report cited in recital 27 that, in adopting the principle of the exceptional contribution, the legislator did not seek to take into consideration, and still less to compensate for, the difference between the annual contributions of France Télécom and the relatively higher contributions of the competitors. On the contrary, the legislator deliberately imposed on France Télécom the payment of annual costs not covering the risks which are not common to the two categories of staff (civil servant and non-civil servant) and did not establish a link between this choice and the levying of the exceptional contribution paid in 1997.

(169)

The burden for France Télécom represented by the flat-rate contribution was paid as general revenue to the State budget, assigned to the public body responsible for its management and used. Under these circumstances, the Commission cannot therefore, in whole or in part, reallocate fictitiously and retrospectively the exceptional flat-rate contribution already used for a purpose totally divorced from that assigned to it by the French authorities and not provided for by the Law, i.e. compensation of not taking into account risks not common to ordinary employees and civil servants. This flat-rate contribution was not therefore introduced in anticipation of full equalisation, under different legislative and regulatory arrangements, of the annual charges of France Télécom with those of its competitors.

(170)

For the same reasons, on account of the rules for the management and repayment to the budget provided for in the Finance Law since 1997 and implemented up to now, the allegations and calculations of the French Republic intended to show that the 1996 reform has ended now with considerable surplus revenue for the State cannot be accepted.

(171)

In fact, taking into account the terms for the management and use of France Télécom’s exceptional flat-rate contribution by the competent public body, as laid down in a Finance Act and the figures for the actual repayments since 1997 forwarded by the French Republic, described in recitals 36 and 37 and in Table 3, it has to be concluded that the revenue which the French Republic tries to claim, with an investment producing interest at the rate of 7 %, has never existed.

[…]. In addition, the allegation does not reflect the actual behaviour of the French authorities. In view of the management rules established in the Finance Acts passed since it was set up, this public body has not generated such revenue, which for that matter was not foreseen and did not generate interest. On the contrary, the resources of the body were to have been drawn down in full as at 31 December 2011. They would have been drawn down earlier if they had been allocated to financing the 1996 reform — which the French Republic challenges incidentally — even by including in them the higher revenues from corporation tax, as argued by the French authorities. Also, taking into account higher revenue from corporation tax is unlawful, as it leads to confusion of the different roles of the State. The combination of these different roles proposed by the French authorities cannot be accepted and a distinction should be maintained between on the one hand the State granting aid to France Télécom by financing the payment of the retirement pensions of the civil servants, in order to develop a merit-based competition process, and on the other hand, the State as shareholder of France Télécom and, ultimately, the State as a public authority exercising its power to raise taxes.

(172)

In addition, it should be noted that the application made by the French Republic and France Télécom to take into consideration the exceptional contribution when examining the compatibility of the reform is in contradiction with the comments the French Republic made in its letter of 17 March 2004, according to which ‘the exceptional flat-rate contribution provided for by Article 6 of the Law of 26 July 1996 could not therefore be seen as compensation for an alleged ‘advantage’. The analysis of its amount is all the less relevant in the light of the State aid rules’ since this amount was ‘an extraordinary contribution in favour of its sole shareholder [the French State], which can be assimilated to an extraordinary dividend distributed before any opening-up of the capital to private investors’.

(173)

The reasoning underlying the argument put forward at the time by the French Republic shows a certain economic and financial logic. It is reasonable, for a sole shareholder, on the eve of the opening-up of the capital to other investors, to absorb, for its benefit alone and as far as possible, the funds available in the undertaking before the opening-up of the capital, provided that this does not compromise the attractiveness of the investment. This last aspect was taken into consideration in the financial parameters imposed on the opening balance of France Télécom, from which the exceptional flat-rate contribution results indirectly, as mentioned before Parliament in 1996. Consequently, it was perfectly consistent on the part of a prudent single shareholder State to draw out the largest possible amount in extraordinary dividend, according to the terms of the French Republic, rather than to leave the funds in the undertaking, from which after opening-up the capital in 1997, it would draw at most its pro rata in the capital maintained.

(174)

The validity of this reasoning put forward at the time by the French Republic, which called for the analysis of the amount of the balance compensation of EUR 5,7 billion not to be taken into account in any way for the assessment of the reform in the light of the State aid rules, is also corroborated by its comments during the procedure. In fact, by declaring that the gauging of the amount of the balance compensation was undertaken in terms not of the estimated cost of the reform for the State or the advantages which France Télécom would draw, but of the contributive capacity of the undertaking, the French Republic points out that the imposition of a balance compensation would result more from the behaviour of a prudent single shareholder than that of a regulatory State concerned about the balance of the retirement pension costs it was assuming under the reform.

(175)

If such reasoning were to be accepted, the Commission should not, as requested at the time by the French Republic, take into account the exceptional flat-rate contribution in the analysis of the compatibility of the reform with the State aid rules. As a result, only the reduction in the annual contributions of France Télécom to below the level of those of the competitors, called for by the reform since 1997, should be taken into account.

(176)

For the same reasons, the Commission cannot accept the complainants’ comments calling for the introduction of mechanisms to adjust the exceptional flat-rate contribution paid in 1997 and the annual employer’s contribution from France Télécom to ensure the financial neutrality of the reform. This would also amount to a new calculation and a retrospective fictitious reallocation in whole or in part of the exceptional flat-rate contribution paid to the State budget in 1997. Likewise, the mechanism proposed would amount to introducing an ex-post control, year after year, the purpose of which would not be to ensure the proportionality of the aid granted, although reduced by the exceptional flat-rate contribution, in 1997, but to eliminate any aid under the reform.

(177)

On the other hand, it is worth examining whether the payment of the exceptional contribution can be taken into account in the assessment of the compatibility of the aid measure with the internal market by retaining the justification of this payment as established by the 1996 Law.

(178)

Under the 1996 Law, the exceptional flat-rate contribution in 1997 was paid in return for the financing of the pensions by the French State. Under these conditions, the effects of its imposition on the overall financial equilibrium of the reform introduced by the 1996 Law as applied so far must be taken into consideration. It is appropriate to take into account the time during which the cost of the retirement pensions was covered by the exceptional flat-rate contribution.

(179)

Since it is a matter of comparing financial flows for France Télécom spread over a period of time, i.e. the payment of the exceptional contribution in 1997 and the reduced annual charges resulting from the 1996 Law since then, discounting to present value is necessary. During 1997, several exceptional contribution payments were staggered up to October 1997, even though the financing of this by the loan in fact postponed the financial burden for France Télécom. On the other hand, payments of the contribution in full discharge of liabilities were made from the start of 1997. The discount rate must in principle be that resulting from the Commission notice applicable on the subject (71), a rate which, for illustration, amounted to 5,53 % in October 1997. It should be examined whether it is appropriate in this case to use a different rate from that in the applicable notice and in this way to depart from the rules, communicated to the Member States, that the Commission has set itself and that it must apply save in properly justified circumstances.

(180)

In this respect, the choice of the rate of 7 % used by the actuary of the French Government to discount the financial flows from the 1996 reform until 2043 would not be justified, […], on account of the fact that the present analysis covers a shorter period owing to the schedule of financial payments established. The rate of 7 % is also far above the average of 4,4 % of annual discount rates for the period 1997-2010 applied by the French Republic in its comments on the decision to initiate the procedure or at the discount rate of […] % adopted for 1998 in the reform of the arrangements for financing retirement pensions of La Poste (72).

(181)

The rates of around 7 % for 15-year OATs for 1996 put forward by the French Republic cannot be accepted either. The rate needs to be established in 1997 and not for the average of 1996. In addition, a term of 15 years is too long in the light of the scale of the annual payment flows which the exceptional flat-rate contribution should theoretically have had to cover during the period, for which the interest alone would not have sufficed. Alternatively, the choice of a composite rate constructed on the basis of different rates for optimisation of the investment of the exceptional flat-rate contribution to comply with the schedule of flows brought about by the 1996 reform from the point of view of the French State could be considered. Apart from the fact that such a rate, at around 5,50 %, would not differ significantly from the Commission’s reference rate for October 1997, the choice would not take account of the fact that the analysis is being carried out from the point of view of France Télécom (73).

(182)

Finally, in this regard, the reference rate of 7 % for the bond loans of France Télécom between 1991 and 1997 put forward by the French Republic covers a six-year period well before the facts. In this case, the fact is that France Télécom financed the exceptional flat-rate contribution in 1996 through mainly short-term issues and, to a far lesser extent, through bond issues. A discount rate resulting from the interest rates paid by France Télécom on the new debts contracted in 1996 would amount to 4,8 % on the basis of its balance sheet at 31 December 1996 (74). Such a rate is adjusted to the materiality of the real financial costs incurred by France Télécom at the time to finance the exceptional contribution. However, it seems appropriate not to make the discount rate depend on the choice made by the undertaking at the time, but to use the objective reference rate adopted by the Commission in its Notice on discount rates (75).

(183)

All in all, it is not appropriate in this case to use a different reference rate to that resulting from the Commission notice applicable on the subject and in this way to depart from the rules, communicated to the Member States, that the Commission has set itself.

Table 5

Financial flows resulting from the 1996 reform for France Télécom (1997-2011)

(184)

Capitalised at the discount rate of 5,53 %, taking into consideration the balance compensation should compensate up to the 1st quarter of 2012 (78) the reduction in annual costs from which France Télécom benefited as a result of the implementation of the 1996 reform.

(185)

Furthermore, the schedule for this compensation, which neutralises the effects of the reform, coincided furthermore, to within a few months, with the resources of the public body responsible for managing the exceptional contribution of France Télécom actually being exhausted, which was scheduled for 31 December 2011. The flow analysis is supported by the fact that, in any case, the exceptional contribution will have been in fact drawn down in full. As a result, no amounts would remain that were not repaid to the State budget that it would be possible to reallocate otherwise than as provided for by the Finance Law applicable.

(186)

It is therefore justified that, on account of the payment of this exceptional contribution in 1997, France Télécom is not required to pay an annual contribution supplement for the period between 1 January 1997 and a date after 31 December 2010 which still has to be determined precisely. In fact, in so far as, in Table 5, the figures for 2011 and those for the cost of compensation and over-compensation result from estimates, in particular, it is appropriate for the precise date to be decided by the French Republic on the basis of the final dates for the payments made, the final amounts of the benefits paid and the lower contributions and other advantages for France Télécom resulting from the 1996 Law, following the calculation principles indicated in Table 5.

(187)

On the other hand, after neutralisation of the effects of the exceptional contribution and the drawdown in full of the resources paid to the State, the aid granted in 1996 to France Telecom will have full effect by conferring an advantage on France Télécom in relation to its competitors. The aid will then be justifiable only by subjecting France Télécom to the payment of a contribution in full discharge of liabilities, calculated at a rate ensuring a true level playing field. Hence, if the provisions of the 1990 Law, as amended by the 1996 Law and the secondary regulatory provisions applicable, in that they provide that the rate of the contribution in full discharge of liabilities is calculated so as to equalise the levels of wage-based social security contributions and tax payments between France Télécom and the other undertakings in the telecommunications sector subject to the ordinary social security arrangements, by limiting the calculation to the risks which are common to the ordinary employees and the State civil servants, were to remain unchanged, the aid granted to France Télécom until the expiry of the financial obligations assumed by the French State instead of France Télécom pursuant to the 1996 Law would not comply with the principle of proportionality.

(188)

To fulfil the criterion of conformity with the common interest provided for in Article 107(3)(c) of the TFEU, the compatibility of the aid therefore requires compliance with the conditions accompanying the present decision.

(189)

Consequently, it is necessary for the French Republic to amend the legislative and regulatory provisions applicable for establishing, calculating and levying the contribution in full discharge of liabilities to be paid by France Télécom so as to equalise the levels of wage-based social security contributions and tax payments between France Télécom and the other undertakings of the telecommunications sector subject to the ordinary social security arrangements. In addition, it is appropriate that the calculation methods and parameters are established transparently and objectively and can be subject to control and appeals.

(190)

The French Republic should also, when calculating the rate of the contribution in full discharge of liabilities, equalise in fact the levels of wage-based social security contributions and tax payments between France Télécom and the other undertakings of the telecommunications sector subject to the ordinary social security arrangements, also taking account of the risks not common to the ordinary employees and the civil servants employed by France Télécom.

(191)

In the comments of the French Republic, set out in further detail in its updated Annexes III and V, the French authorities have produced estimates of what the rate of the contribution in full discharge of liabilities to be paid by France Télécom from 1997 (see Table 4) would be if the non-common risks had been integrated into the calculation method (hereinafter: the ‘adjusted rate’). The adjusted rate includes both the contributions for unemployment and insurance guaranteeing wage claims, which are added to it, and the specific contributions which the competitors of France Télécom do not pay, such as the 1 % solidarity and the cash benefits for absence from work self-insured by France Télécom, which are subtracted from it. The result is a rate about 7 % higher than the rate in fact applied at present.

(192)

Such a rate ensures a genuine level playing field compared to the only partial equality introduced by the 1996 Law, whilst taking account of the specific social costs of France Télécom. The Commission does not therefore dispute the principles, assessment basis and methods of calculation applied by the French Republic to establish a rate of contribution in full discharge of liabilities adjusted to equalise the levels of wage-based social security contributions and tax payments between France Télécom and the other undertakings of the telecommunications sector subject to the ordinary social security arrangements, as indicated in the updated comments of the French Republic and described and detailed in Annexes III and V to these comments.

(193)

Consequently, the annual determination of the rate creating a level playing field by the French Republic will have to follow the principles, assessment basis and methods of calculation of the contribution in full discharge of liabilities which appear in the comments referred to in recital 191. In particular, the adjusted rate will integrate both the unemployment contributions and the insurance guaranteeing wage claims and the contributions or specific charges not paid by the competitors of France Télécom, such as the 1 % solidarity and the cash benefits for absence from work self-insured by France Télécom.

(194)

This de facto equalisation will ensure a level playing field between France Télécom and its competitors and will guarantee proportionality and compatibility with the internal market of aid implemented in 1996.

(195)

The Commission concludes that the French Republic unlawfully implemented State aid introduced by the 1996 reform of the arrangements for financing retirement pensions of the civil servants working for France Télécom in breach, since its entry into force, of Article 108(3) of the TFEU.

(196)

The implementation of this aid since 1997 has allowed a reduction in the annual social security costs incurred by France Télécom. However, this effect was neutralised, at least until 2010, by the payment of the exceptional flat-rate contribution provided for by that reform. This neutralisation justifies the fact that the conditions which would create a genuine level playing field for France Télécom and its competitors regarding these charges and which would render this aid compatible with the internal market should be applied from a date after 31 December 2010 still to be set.

(197)

Consequently, in so far as and provided that the French Republic takes into consideration, in the calculation of the contribution in full discharge of liabilities payable by France Télécom, the levels of wage-based social security contributions and tax payments between France Télécom and the other undertakings of the telecommunications sector covered by the ordinary social security arrangements, taking into account the risks which are common and not common to ordinary employees and civil servants, the reform introduced by the 1996 Law can be declared compatible with the internal market pursuant to Article 107(3)(c) of the TFEU. The French Republic is therefore required to take the measures, notably of a legislative and regulatory nature, necessary to fulfil the condition mentioned in the present recital,

(a)

shall amend Article 30 of Law No 90-568 of 2 July 1990 on the organisation of the public postal and telecommunications service and the regulatory or other texts adopted to implement it so that the bases for calculating and levying the employer’s contribution in full discharge of liabilities, payable by France Télécom, are not confined solely to the risks common to ordinary employees and civil servants, but also include the non-common risks;

(b)

shall levy on France Télécom, from the day on which the amounts of the exceptional contribution introduced by Law No 96-660 of 26 July 1996 capitalised at the discount rate resulting from the application of the Commission notice on the method for setting the reference and discount rates applicable in this case equal the amount of the contributions and costs that France Télécom would have continued to pay under Article 30 of Law No 90-568 of 2 July 1990 in its initial wording, an employer’s contribution with full discharge of liabilities calculated according to the terms specified in point (a), taking into account the risks that are common and not common to ordinary employees and civil servants.

(a)

of the state of progress in the amendments to the legislative and regulatory provisions referred to in Article 2;

(b)

of the final amounts of compensation and contributions for the year 2011 and of those provided for, where appropriate, for 2012, in the light, in particular, of any balance from the capitalised amounts of the exceptional contribution;

(c)

of the amounts of the employer’s contribution in full discharge of liabilities, calculated in accordance with the terms specified in Article 2 for the future instalments, pending the amendment of the legislation;

(d)

of the payments of the employer’s contribution made after the amounts of the exceptional contribution introduced by Law No 96-660 of 26 July 1996 capitalised at the discount rate resulting from the application of the Commission notice on the method for setting the reference and discount rates applicable in this case have ceased to neutralise the effects of the 1996 reform.

12.10.2012   

EN

Official Journal of the European Union

L 279/30

(1)

Following information that Greece planned to grant a State guarantee for new loans of EUR 35 million to finance United Textiles, the Commission asked the Greek authorities to comment on the specific measure by letters dated 11 September, 14 October, 20 October, 18 November and 4 December 2008. The Greek authorities provided incomplete answers by letters of 15 October and 10 November 2008.

(2)

For that reason, on 3 March 2009 the Commission issued an information injunction under Article 10(3) of Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 93 (2) of the EC Treaty (3), requesting Greece to submit all information necessary to assess whether United Textiles had received State aid and to assess if that aid would be compatible with the internal market. Greece submitted the requested information by letter of 11 March 2009.

(3)

The Commission requested further information, regarding the State measure mentioned in recital 1 and also several additional ones, in favour of United Textiles and its lending banks, by letters of 20 March 2009 and 8 February, 17 March, 19 July and 23 August 2010. The Greek authorities answered by letters of 7 April 2009 and 25 February, 26 March, 13 August and 30 August 2010.

(4)

At the request of the Greek authorities, a meeting was held on 7 July 2010. At that occasion, a draft new restructuring concept of United Textiles was submitted. The company acknowledged that the latter was not linked with previous restructuring actions taken in 2007, which had failed.

(5)

By letter dated 27 October 2010 the Commission informed Greece that it had decided to initiate the procedure laid down in Article 108(2) of the Treaty on the Functioning of the European Union (‘TFEU’) in respect of the following measures:

(6)

Greece submitted its comments to the Commission’s opening decision on 31 December 2010.

(7)

The Commission decision to initiate the procedure was published in the Official Journal of the European Union  (4). The Commission invited interested parties to submit their comments on the measures.

(8)

The Commission received comments from United Textiles on 7 and 9 February 2011. The comments were transmitted to Greece which was given the opportunity to comment on them. Its comments were received on 4 May 2011.

(9)

The Commission requested additional information from the Greek authorities on 28 July 2011, to which Greece replied by letter of 30 August 2011.

(10)

At the request of the Greek authorities, a meeting was held on 4 April 2011. In that meeting, the Greek authorities presented arguments as regards the alleged aid measures.

(11)

United Textiles is a large Greek textile company listed on the Athens Stock Exchange. It realised 45 % of its 2008 sales in Greece (38 % in 2007), 54 % in other EU countries (60 % in 2007) and 1 % to non-EU countries (2 % in 2007).

(12)

In 2009 it had total assets of EUR 201,7 million and a turnover of EUR 4,5 million (limited sales of stock). Previous years’ sales were EUR 30,6 million in 2008 and EUR 74,7 million in 2007. At the end of 2009 it had 839 employees. The company has four subsidiaries in three countries: Albania, Bulgaria and the former Yugoslav Republic of Macedonia. Its main shareholder is an off-shore company named European Textiles Investments Ltd (Mauritius).

(13)

United Textiles’ business is production of clothing, fibre and fabric. Its sales are realised in both wholesale and retail markets. It has 12 plants in several districts of Greece. The plants in question, as well as those of the subsidiaries mentioned in recital 12, have not been operating since 2008, because of lack of working capital.

(14)

The company’s situation has constantly deteriorated at least since 2004, with gradually decreasing sales, negative Earnings Before Taxes and negative own equity since 2008. Because of the latter, the company could be dissolved, according to Greek Legislation (5).

(15)

According to the company’s annual report’s, since 2001 lending banks’ support to the company has been limited, with reduced credit lines and loans. Since June 2008, a large part of its operations has been stopped. Since March 2009, production has almost completely stopped. In July 2008, the company’s main shareholder decided not to participate in a scheduled capital increase. Since 2008, almost all its bank loans have been overdue. Since February 2010, trading of its shares in the Athens Stock Exchange has been suspended. According to the company’s announcements, as published in its webpage (6) as well the webpage of the Athens Stock Exchange (7), its financial statements for 2010 were not published because of a work retention which was ongoing until 29 August 2011 (the last available announcement).

(16)

The lending Greek banks of United Textiles, which are involved in the State aid measures under scrutiny, are the National Bank of Greece, Emporiki Bank, Agricultural Bank of Greece, Alpha Bank and Eurobank. They are all commercial banks, active in providing a full range of financial products and services. They all have presence, through subsidiaries, in other EU countries, in particular Bulgaria, Germany, France, Cyprus, Luxembourg, Netherlands, Poland, Romania and the United Kingdom (8).

(17)

In the period 2007-10, three State measures were taken in favour of the company United Textiles that could involve State aid elements, as follows in recitals 18 to 23.

(18)

On 30 May 2007, the National Bank of Greece, lending bank of United Textiles, was granted a State guarantee for a new loan to include: (a) a rescheduling of an existing loan of EUR 7,5 million; and (b) a new loan of EUR 12,5 million. The State guarantee covered 80 % the loan. This new loan had an interest rate of six-month EURIBOR, plus spread of 1,85 % (9), equal to a total interest rate of 6,10 % on 30 May 2007. There was no premium for the State guarantee. According to the submitted rescheduling contract, the original existing loan was covered with a mortgage on a fixed asset. Also, according to the annual reports of United Textiles for 2007, 2008 and 2009, the above new loan was covered with the guarantee of the main shareholder and also envisaged to be covered with pledges on assets, however there is no reference to any realisation of the latter pledge.

(19)

The guarantee was based on a Ministerial decision of 26 January 2007 (Decision 2/75172/0025/26.01.2007). The decision foresaw that State guarantees could be issued to existing loans of industrial, mining, livestock farming and hotel companies, located in the district of Imathia, Northern Greece (where part of United Textiles’ operations is located). The scheme did not exclude firms in difficulty and did not foresee a premium for the State guarantee. The scheme did not foresee any kind of objective criteria for the selection of beneficiary companies. The Commission notes that the scheme has not been notified, in line with Article 108 TFEU, therefore the Commission reserves the right to investigate other State measures possibly granted on the basis of the scheme.

(20)

On the basis of the guarantee, the loan agreements were signed on 11 October 2007.

(21)

On 25 May 2009 the Greek authorities rescheduled the company’s overdue social insurance debts of the period 2004-09, amounting to EUR 14,57 million, to 96 monthly payments of EUR 0,19 million each. The rescheduling took place in the context of Law No 3762/2009 (10). The rescheduled amount partly included debts already arranged in previous reschedulings, which had not been respected. In addition, on the basis of the information submitted, it does not seem that United Textiles has paid any contributions so far.

(22)

On 30 June 2010, with ministerial decision 2/35129/0025, the Greek State granted a guarantee to the lending banks of United Textiles. Those banks are the National Bank of Greece, Emporiki Bank, Agricultural Bank of Greece, Alpha Bank and Eurobank. The guarantee covered a new planned syndicated loan of EUR 63,6 million, separated in three sub-amounts for the purpose of the following:

(23)

The underlying planned syndicated loan had duration of nine years. The ministerial decision 2/35129/0025 granting the guarantee did not specify any interest rate for the loans to be covered. It merely specified that the loans have to be at ‘market’ rate. The State guarantee covers 80 % of the loan. A yearly premium of 2 % on the loan’s yearly average outstanding amount is foreseen for the State. Lending banks receive, in addition to the State guarantee, securities for the new loan in the form of pledged shares of the company for at least 25,9 % of its total shareholding and first rank mortgages on real estate assets of the company. The State does not receive any security for its guarantee; however, in case the guarantee is called, the securities will be transferred to the State.

(24)

The guarantee granted in June 2010 under ministerial decision 2/35129/0025 replaced (by revoking it) a previously granted one of 2 October 2009 (ministerial decision 2/71055/0025). The latter was granted for a new loan of EUR 40 million, also aiming at financing the rescheduling of the loans granted to the company in the period August 2008-February 2009 (see recital 22(a)). The loan of EUR 40 million, however, was never issued and therefore the October 2009 guarantee was not activated. Instead, the latter was replaced with the new guarantee of June 2010, which covered the syndicated loan of EUR 63,6 million. According to the Greek authorities, the reason for that replacement was that the extent of the loan of EUR 40 million was not sufficient anymore to cover the company’s liquidity needs.

(25)

Despite the guarantee, the underlying loan has never been granted. In view of the company’s acute difficulties, the banks refrained from signing the loan agreement and never paid out the loan.

(26)

In the opening decision of 27 October 2010, the Commission questioned whether the terms of the State guarantees of 2007 (Measure 1) and 2010 (Measure 3) were market conform and in line with the Commission Notice on the application of Articles 87 and 88 of the EC Treaty to State aid in the form of guarantees (11) (‘the Guarantee Notice’).

(27)

As regards the measure of the rescheduling of overdue social insurance obligations (Measure 2), in the opening decision of 27 October 2010, the Commission questioned whether a private creditor in the given circumstances would have accepted any type of rescheduling of debts. Indeed, the possibility of obtaining a late repayment of the debt appeared restricted, since United Textiles was already in serious financial difficulties and had stopped most of its production.

(28)

The Commission thus questioned whether the measures under investigation constituted illegal State aid in the meaning of Article 107(1) TFEU and whether the measures were compatible with the TFEU.

(29)

The information submitted by the Greek authorities and United Textiles (the beneficiary) on the measures in question can be summarised as follows:

(30)

With regard to Measure 1, the comments of Greece and the beneficiary overlap to a large extent, therefore the Commission will expose them together, as follows:

(31)

Greece and the beneficiary acknowledge that at the time of the 2007 guarantee the company was in difficulty, allegedly due to international competition of lower cost countries. Greece also acknowledges having granted the above guarantees.

(32)

Greece and the beneficiary also support that the 2007 guarantee does not constitute aid, as it was not selective to United Textiles: it was granted on the basis of a ministerial decision not only for United Textiles but also for other companies.

(33)

Apart from the above, Greece and the beneficiary argue that the 2007 guarantee was granted pursuant to Greek Law No 2322/1995, which allowed the Minister of Finance to grant State guarantees to banking institutions for loans that reschedule debts or grant new working capital.

(34)

Furthermore, Greece and the beneficiary claim that before having been granted the guarantee, the company had submitted to the Greek authorities a restructuring plan with financing from banks and without any State guarantee. Such a restructuring plan was never formally submitted to the Commission.

(35)

Greece also argues that the 2007 guarantee was granted in line with the State aid rules in force in the EU. According to Greece’s allegations, the guarantee had a maximum coverage of 80 % and was granted for loans with market interest rates. Also, Greece supports that the loan was properly securitised with pledged commodities and personal guarantees of shareholders and that it was granted for a specific transaction and duration.

(36)

Moreover, Greece and the beneficiary support that the latter is one of the most significant textile companies in Greece, employing a significant number of staff and operating mainly in regions close to the border.

(37)

Greece and the beneficiary also claim that the National Bank of Greece (the lending bank) has accepted to decline the State guarantee and in its place to inscribe a mortgage on real estate assets of United Textiles, which will inactivate the guarantee.

(38)

Finally, Greece and the beneficiary argue that the guarantee was incorporated in the guarantee of 2010, therefore there is a continuum in the settlement of the company’s lending.

(39)

Greece and the beneficiary argue that the measure is based on Law No 3762/2009, which is a general law, applicable to all companies with overdue or unpaid public insurance obligations, therefore the measure in question is not selective.

(40)

Greece acknowledges having granted the 2010 guarantee and argues that the latter was granted because the extent of the previous guarantee of 2009 (which has never been implemented) was not sufficient anymore to cover the company’s liquidity needs, therefore the 2009 guarantee was incorporated into the 2010 guarantee.

(41)

Greece argues that the 2010 guarantee is in line with the communication from the Commission — community guidelines on State aid for rescuing and restructuring firms in difficulty (12) (‘Rescue and restructuring guidelines’) and that it does not confer an advantage to United Textiles. Moreover, it claims that there is no infringement of the ‘one time last time’ principle as enshrined in the Rescue and restructuring guidelines, since the 2010 guarantee replaces the 2009 guarantee and changes several provisions of the 2007 guarantee (see Measure 1 in recital 18). Therefore, the 2010 guarantee embodies the totality of the clauses of the company’s loans in a single text with unified provisions. Greece also states that the guarantee is not valid yet, because the Ministry’s competent service has not approved it yet.

(42)

Finally, Greece informed the Commission that the 2010 guarantee has not yet been activated, as the company has not signed any loan contract with any bank and no loan payment has taken place. Also, the Greek authorities have drawn the Commission’s attention to the fact that the granting ministerial decision 2/35129/0025/28.06.2010 foresees that the loan’s first two sub-loans (EUR 36,6 million + EUR 15 million) had to be paid until 28 July 2010 and this date has expired, therefore the guarantee actually cannot be activated.

(43)

United Textiles argues that the underlying loan contract has not been signed yet, therefore there is no interest rate defined yet. When this is done, the interest rate will be market conform.

(44)

Regarding the restructuring plan of 2010 (see recital 4), United Textiles supports that it foresees a drastic reduction of production, therefore the forecasted return to viability does not distort competition.

(45)

On the basis of the above facts and also of the arguments of Greece and United Textiles, the Commission will assess the measures in question in this section. First, the Commission will assess the status of United Textiles at the time of the measures under scrutiny, in order to conclude if the company was in difficulty or not (Section V(a)). Secondly, the Commission will assess the presence of aid in the measures under scrutiny, in order to conclude if there is aid or not (Section V(b)). Thirdly, where a measure indeed involves aid, the Commission will assess its compatibility with the internal market (Section V(c)).

(46)

As shown in recitals 14 and 15 and set out in more detail in Table 1 below, the company’s operating and financial performance deteriorated significantly in the period 2004-09.

Table 1

United Textiles’ key financial data (million EUR)

(47)

On the basis of these financial figures, the Commission concludes that the company has been in difficulty in the meaning of point 10 of the Rescue and restructuring guidelines at the time of the granting of the measures under scrutiny (the period 2007-10). The Commission equally considers that the company is in difficulties at present.

(48)

More specifically, with regard to point 10(a) of the Rescue and restructuring guidelines, the company’s registered capital, as appearing in its financial statements of years 2004-09, was not lost but increased in the period 2004-09. However, the Commission notices that in the same period the company’s own equity was reduced to minimal (2007) or negative level (2008 and 2009). At the same time, the company did not adopt appropriate measures in order to tackle the decrease of its own equity, as foreseen by Greek legislation (15). If adopted, those measures would be either the increase of capital or the capitalisation of losses, which would wipe out the registered capital. It appears that only the latter case would be feasible for United Textiles, due to its critical financial situation (see Table 1) and its difficult access to finance (see recital 15). On the basis of the above, the Commission considers that the company lost more than half of its registered capital.

(49)

Furthermore, concerning point 10(c) of the Rescue and restructuring guidelines, since 2008 the company fulfilled the criteria under Greek law for being the subject of collective insolvency proceedings (16).

(50)

Finally, as regards point 11 of the of the Rescue and restructuring guidelines, the usual signs of a firm being in difficulty, such as increasing losses, diminishing turnover and mounting debt, have been present since at least 2004.

(51)

Article 107(1) TFEU states that ‘Save as otherwise provided in the Treaties, any aid granted by Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market’.

(52)

The Commission will assess whether the measures under scrutiny in favour of United Textiles constitute State aid in the sense of Article 107(1) TFEU.

(53)

The Commission notes that the State guarantee in question indeed involves State resources, as it has been granted directly by the State. The decision has been made by the responsible minister; therefore, the measure is also imputable to the State. Thus, the criterion of State resources is fulfilled.

(54)

Greece and the beneficiary claim that the National Bank of Greece (the lending bank) has accepted to decline the State guarantee and in its place to inscribe a mortgage on real estate assets of United Textiles, which will deactivate the guarantee. To demonstrate their claim, Greece and the beneficiary submit a letter of the National Bank of Greece, dated 24 December 2010 (replying to a letter of United Textiles dated 23 December 2010).

(55)

The Commission cannot accept the above. Indeed, in the submitted letter of the National Bank of Greece, it is only stated that the bank would be willing to examine the proposed exchange of securities, mainly under the conditions that the bank would choose the assets to be pledged and that the exchange would be accepted by all concerned parties. Thus, the Commission considers that the National Bank of Greece has not actually accepted the proposed exchange of securities.

(56)

Greece also argues that the 2007 guarantee was granted in line with the State aid rules that are in force in the EU. According to Greece’s allegations, the guarantee had a maximum coverage of 80 % and that it was granted for loans with market interest rates.

(57)

The Commission cannot accept the above argumentation and considers that the 2007 guarantee has indeed procured an undue advantage to United Textiles. According to the Guarantee Notice, points 2.2 and 3.2, when the borrower does not pay a market-oriented price for the guarantee, it obtains an advantage. In some cases, the borrower, as a firm in financial difficulty, would not find a financial institution prepared to lend on any terms, without a State guarantee.

(58)

In the case at hand, the 2007 guarantee was granted for loans of a firm in difficulty and did not foresee a premium for the guarantor (State). In the light of points 3.2 and 4.2 of the Guarantee notice, the Commission notes the significant deterioration of the company’s financial situation in the period 2004-07, the overdue situation of its loans and the fact that already since 2001 its lending banks’ support had been limited, with reduced credit lines and loans. The Commission considers that, since at the time that the measure was taken United Textiles was in serious difficulty, it must be classified in the credit category ‘bad’.

(59)

In addition to the above, the Commission notes that, according to the company’s annual reports of 2007, 2008 and 2009, the guaranteed loan was still envisaged to be securitised with assets of the company, therefore that securitisation was apparently not realised yet (see recital 18). In addition, the Commission notes that the National Bank of Greece (the lending bank) was proposed in December 2010 to decline the State guarantee and in its place to inscribe a mortgage on real estate assets of United Textiles (see recital 37). The Commission considers this proposal to be a clear indication that indeed the securitisation in question was not realised. On this issue, the Greek authorities submit that the 2007 guarantee was securitised with commodities of the company and personal guarantees of its shareholders (see recital 35), however the facts of the case only verify the shareholders’ personal guarantees. Thus, the Commission considers that the underlying loan was not securitised.

(60)

On the basis of the above, the Commission doubts that any private guarantor would have offered such a guarantee and that any private bank would have accepted to finance the company without a State guarantee at all, as in a similar situation it would appear extremely difficult for such company to be able to repay the loan and for the guarantor to avoid to honour the guarantee. Thus, the Commission considers that the aid amount stemming from the 2007 guarantee amounts up to the whole amount of the guaranteed loan, i.e. EUR 16 million (80 % of EUR 20 million).

(61)

Greece and the beneficiary also support that the 2007 guarantee does not constitute aid, as it was not selective to United Textiles: it was granted on the basis of ministerial decision 2/75172/0025/26.01.2007 which concerned not only United Textiles but also other companies.

(62)

The Commission notes that the ministerial decision on which the guarantee was based targeted certain sectors of a specific geographical area, i.e. the Imathia district. In addition, in the case at hand, the Greek authorities had a wide range of manoeuvre in granting a guarantee in favour of United Textiles, as there were no objective criteria set for deciding whether to grant the guarantee or not. In the absence of such objective criteria, the measure was indeed selective, because the authorities applied it individually on a discretionary basis (17). According to established case-law (18), where the public body granting financial assistance enjoys a degree of latitude which enables it to choose the beneficiaries or the conditions under which the financial assistance is provided, that assistance cannot be considered to be general in nature. Thus, the criterion of selectivity is indeed fulfilled.

(63)

United Textiles is active in a sector whose products are widely traded among Member States and who is subject to intense competition. At the time of the granting of the aid measures, United Textiles was an undertaking which realised most of its sales to other Member States (see recital 11). Also, the aid measure in question granted United Textiles an advantage over its competitors (see recitals 45, 46 and 47). According to established case-law (19), when State aid strengthens the position of an undertaking compared with other undertakings competing in trade between Member States, those other undertakings must be regarded as affected by that aid. Thus, the criterion of distortion of competition and affectation of trade between Member States is indeed fulfilled.

(64)

Regarding the bank lending the underlying loan of the 2007 guarantee (the National Bank of Greece), the investigation has shown that it did not benefit from the guarantee in question. Indeed, the guarantee was granted in the context of a new loan contract, with a new duration of 10 years. According to point 2.3.1 of the Guarantee Notice, if a State guarantee is given ex post in respect of a loan, without the terms of this loan being adjusted, then there may also be aid to the lender; in the case at hand, however, the terms of the existing loan were changed, through the change of the loan’s duration. Therefore the Commission considers that the 2007 guarantee did not constitute aid to the lender.

(65)

At the same time, the 2007 guarantee merely resulted in the bank not seeking immediately to collect its loan. However, the bank would be able to recover the existing loan through liquidation procedures. In this regard, the Commission notes that the 2007 loan was already covered with a mortgage on a fixed asset (20).

(66)

On the basis of the above, it is concluded that the State guarantee of May 2007 (Measure 1) constitutes unlawful State aid in favour of United Textiles in the meaning of Article 107(1) TFEU.

(67)

The Commission considers that the State guarantee of May 2007 did not constitute State aid in favour of the lending bank the National Bank of Greece in the meaning of Article 107(1) TFEU.

(68)

The Commission notes that the aim of social insurance contributions is to finance the budget of Social Security Organisations, which constitute public legal entities under the State’s supervision. Therefore the non-collection of such contributions deprives the State of resources. Thus, this criterion is fulfilled.

(69)

The Commission notes that United Textiles was effectively granted a delay of eight years to the payment of a financial obligation, at the time of severe financial difficulty and high probability of default. According to well-established case-law (21), in order to establish whether a selective advantage is conferred by non-enforcement of debts and whether the advantage could be classified as State aid for the purposes of Article 107(1) TFEU, it must still be established that United Textiles could not have obtained such an advantage under normal market conditions. In this regard the essential question to be asked is whether the behaviour of the State as creditor in the given circumstances could be compared to the behaviour of a diligent private creditor.

(70)

According to the Greek authorities, previous rescheduling agreements had not been respected by United Textiles. At the same time, the company was effectively granted an extension of eight years for the payment of a financial obligation of EUR 14,57 million (see recital 16), at the time of severe financial difficulty and high probability of default. Such an extension would not have been granted by a market economy creditor, especially since previous reschedulings had already failed.

(71)

For the above-stated reasons, the Commission considers that the behaviour of the Greek authorities could not be compared to that of a diligent private creditor, since the rescheduling of 2009 was applied in spite of previous failed rescheduling agreements and the company was already in serious financial difficulties and had stopped most of its production, thus the perspective of obtaining a repayment of the debt appeared unlikely.

(72)

Thus, the Commission considers that the 2009 rescheduling of the company’s public insurance debts has conferred an advantage within the meaning of Article 107(1) TFEU on the company.

(73)

The Greek authorities and the beneficiary claim that the rescheduling was based on a general national law (22), applicable to all companies in Greece, therefore the measure was not selective.

(74)

The Commission cannot accept the above argument. Indeed, in the case at hand, the Greek authorities had a wide range of manoeuvre in the treatment of United Textiles’ social insurance debts, as there were no objective criteria set for deciding whether to grant the rescheduling or not. In the absence of such objective criteria, the measure was indeed selective, because the authorities applied it individually on a discretionary basis (23). Also, according to established case-law, where the public body granting financial assistance enjoys a degree of latitude which enables it to choose the beneficiaries or the conditions under which the financial assistance is provided, that assistance cannot be considered to be general in nature (24). Thus, the criterion of selectivity is indeed fulfilled.

(75)

Finally, the criterion of distortion of competition and effect on trade between Member States is fulfilled in the same way as in recital 63.

(76)

On the basis of the above, the Commission concludes that the 2009 rescheduling of overdue social insurance obligations constitutes State aid in favour of United Textiles in the meaning of Article 107(1) TFEU.

(77)

The amount of aid equals to EUR 14,57 million, granted to the company at the moment of the overdue debts’ rescheduling on 25 May 2009, as the total amount of the rescheduled debts.

(78)

The Commission notes that the company stopped operations already in 2009 and did not even publish financial statements since then (see recital 15). The guarantee was not sufficient to obtain any fresh funding and the undertaking did not resume its activities while it was valid. Under these circumstances, the Commission considers that the guarantee did not distort or threaten to distort competition. Therefore, it does not constitute State aid.

(79)

Inasmuch as Measures 1 and 2 constitute State aid within the meaning of Article 107(1) TFEU, their compatibility must be assessed in the light of the exceptions laid down in paragraphs 2 and 3 of that Article.

(80)

As shown in recitals 46 to 50, the company’s operating and financial performance deteriorated significantly in the period 2004-09. On this basis, the Commission concludes that the company has been in difficulty in the meaning of points 10 and 11 of the Rescue and restructuring guidelines at the time of the granting of the measures under scrutiny (the period 2007-10), as also acknowledged by Greece and the beneficiary. The Commission equally considers that the company is in difficulties at present because the situation has not improved since.

(81)

The derogations laid down in Article 107(2) and Article 107(3), points (d) and (e), are clearly not applicable and have not been invoked by the Greek authorities.

(82)

Article 107(3)(a) states that ‘aid to promote the economic development of areas where the standard of living is abnormally low or where there is serious underemployment’ may be declared compatible with the internal market. United Textiles is located in an assisted area under Article 107(3)(a), therefore it could potentially be eligible for regional aid.

(83)

The Guidelines on regional aid 2007-2013 (25) (‘Regional aid guidelines’), which were applicable at the time of application of the 2007 guarantee and the 2009 debt rescheduling (Measures 1 and 2), set out the conditions for the approval of regional investment aid.

(84)

The Regional aid guidelines clearly exclude firms in difficulty from their scope. United Textiles was already in difficulty at the time when Measures 1 and 2 were granted, therefore it was not eligible for regional aid. On this basis, the Commission concludes that the aid cannot be declared compatible on the basis of the Regional aid guidelines.

(85)

The Commission will also assess the compatibility of the measures in question under the Commission Regulation (EC) No 800/2008 of 6 August 2008 declaring certain categories of aid compatible with the common market in application of Articles 87 and 88 of the EC Treaty (General block exemption Regulation) (26). The Commission notes that aid to firms in difficulty is excluded from the scope of the general block exemption Regulation. United Textiles was already in difficulty at the time when Measures 1 and 2 were granted, therefore the aid granted to United Textiles is not compatible under the general block exemption Regulation.

(86)

The Commission has also to assess whether any of the measures concerned could be compatible under the crisis rules enshrined in the Communication from the Commission — Temporary Community framework for State aid measures to support access to finance in the current financial and economic crisis (27) (hereinafter ‘Temporary Framework’). However, the Commission notes that United Textiles was clearly a company in difficulties before 1 July 2008 and therefore not eligible for aid under the Temporary Framework.

(87)

Since United Textiles was a firm in difficulty at the time of the granting of the measures, the compatibility of the aid measures can only be assessed in the light of the Rescue and restructuring guidelines, i.e. under Article 107(3)(c) TFEU.

(88)

First, the Commission considers that the measures in question cannot be found compatible as rescue aid. Indeed, the guarantee does not have a limited duration of six months, as foreseen in point 25(c) of the Rescue and restructuring guidelines, and the debt rescheduling, which could be comparable to a loan, also goes beyond a six-month period admissible as rescue aid. Also, the measures are not restricted to the minimum necessary amount, as foreseen in point 25(d) of the Rescue and restructuring guidelines and stemming from the formula set out in the Annex to those guidelines.

(89)

Second, none of the measures could be found compatible as restructuring aid either. Greece and the beneficiary claim that before having been granted the 2007 guarantee, the company had submitted to the Greek authorities a restructuring plan with financing from banks and without any State guarantee. However, such a restructuring plan was never officially submitted to the Commission, therefore, the grant of these measures was made in the absence of a restructuring plan; however, such a restructuring plan is the condition for ensuring the restoration of a firm’s long-term viability. In fact, based on the evidence of the investigation, no such plan existed, and all restructuring efforts in this period have failed, to the point that the company practically ceased to operate and was taken off the stock exchange. Despite this failure to restructure, the State continued to provide working capital to United Textiles, through the 2007 State guarantee. Thus, the Commission considers that Measures 1 and 2 constituted mere operating aid without any underlying credible restructuring.

(90)

Finally, no compensatory measures in the sense of points 38 to 42 of the Rescue and restructuring guidelines have been officially submitted.

(91)

As regards United Textiles’ eligibility to receive restructuring aid, the Commission notes that the company has been granted operating aid since at least 2007, at a time when it was already in difficulty. The Commission considers that the above fact is an infringement of the ‘one time last time’ principle, as it demonstrates that the company’s difficulties are of a recurrent nature and that the aid measures in the company’s favour have distorted competition contrary to the common interest. In addition, the beneficiary argues that the 2007 guarantee was incorporated in the guarantee of 2010, therefore there is a continuum in the settlement of the company’s lending. However, the Commission considers that there are no elements suggesting that the restructuring should be considered to form a continuum, as the aid measures of 2007, 2009 and 2010 were granted over several years and were not granted on the basis of a single restructuring project or concept capable of restoring the company’s viability.

(92)

On the basis of the above, the Commission considers that the ‘one time last time’ principle is not respected.

(93)

Finally, as United Textiles was in difficulty at the time of the granting of the measures, the Commission cannot conceive of another set of State aid rules that could make the alleged aid measures compatible with TFEU.

(94)

In the view of the above, the Commission concludes that Measures 1 and 2 are incompatible with TFEU.

(95)

On the basis of the foregoing, the Commission concludes that the 2007 State guarantee and the 2009 rescheduling of overdue social insurance obligations constitute State aid which is incompatible with the internal market. The Commission has also come to the conclusion that the 2010 State guarantee does not constitute State aid.

(96)

Article 14 of Regulation (EC) No 659/1999 lays down that ‘where negative decisions are taken in respect of unlawful aid, the Commission shall decide that the Member State concerned shall take all necessary measures to recover the aid from the beneficiary’.

(97)

Thus, given that the measures at hand are to be considered as unlawful and incompatible aid, the amount of aid must be recovered in order to re-establish the situation that existed on the market prior to the granting of the aid. Recovery shall be hence affected from the time when the advantage occurred to the beneficiary, i.e. when the aid was put at the disposal of the beneficiary and shall bear recovery interest until effective recovery.

(98)

The incompatible aid element of the 2007 State guarantee (Measure 1) is calculated as amounting up to the total of the guaranteed loan. The Commission estimates that the aid thus granted to United Textiles amounts up to EUR 16 million.

(99)

The incompatible aid element of Measure 2 is calculated as the total amount of the rescheduled debts, thus the amount of aid granted to United Textiles is EUR 14,57 million. Payments made other than the amounts paid under the agreement may be deducted from the sum to be recovered as unlawful and incompatible aid.

(100)

The exact recovery amount and the recovery interest to be applied on these amounts have to be calculated by Greece,

(a)

the total amount (principal and recovery interests) to be recovered from the beneficiary;

(b)

a detailed description of the measures already taken and planned to comply with this Decision;

(c)

documents demonstrating that the beneficiary has been ordered to repay the aid.

12.10.2012   

EN

Official Journal of the European Union

L 279/40

(1)

On 10 June 2011, after informal (pre-notification) contacts with the Commission, the United Kingdom of Great Britain and Northern Ireland (the ‘United Kingdom’) notified a series of measures (see section 2.3) in favour of Royal Mail Group (‘RMG’).

(2)

By letter dated 29 July 2011, the Commission informed the United Kingdom that it had decided to initiate the procedure laid down in Article 108(2) of the Treaty in respect of the notified measures in question.

(3)

The Commission Decision to initiate the procedure was published in the Official Journal of the European Union  (2). The Commission called on interested parties to submit their comments.

(4)

By letter dated 9 August 2011 the United Kingdom requested an extension of the deadline to respond until 14 September 2011, which was granted by the Commission by letter of 11 August 2011. The United Kingdom transmitted its observations on 8 September 2011.

(5)

The Commission received the following comments from interested parties:

(6)

The comments received from interested parties were forwarded to the United Kingdom on 12 October 2011. The United Kingdom submitted its observations on the comments by letter registered on 16 November 2011.

(7)

On 22 August 2011 the Commission sent an information request to the United Kingdom, to which it replied by letter of 14 September 2011.

(8)

A meeting with UK authorities, RMG and its bankers took place on 20 September 2011 in which the latter provided more detailed information on the notified restructuring plan.

(9)

The Commission held several other meetings with the UK authorities on 12 October 2011, 10 and 23 November 2011 and 12 January 2012 to discuss the case. The United Kingdom submitted several pieces of additional information by e-mail or letter dated 30 September 2011, 20 October 2011, 7, 11, 18, 20, 28 and 30 November 2011, 6 December 2011 and 14 February 2012.

(10)

The United Kingdom authorities submitted final updates to the notification and clarifications on the restructuring plan on 17 February 2012.

(11)

The United Kingdom places the notified measures in the context of its wider policy for postal services and underlines the strategic importance of RMG to ensure the permanent provision of universal postal services.

(12)

The United Kingdom Government’s policy is set out in the Postal Services Act (3) (‘Postal Services Act 2011’), which received Royal Assent on 13 June 2011. The Act implements the recommendations of an independent review led by Richard Hooper (‘Hooper Reports’) (4) and, in summary:

(13)

RMG is 100 % State-owned through the Royal Mail Holdings plc (‘RMH’). RMG is the United Kingdom’s main postal operator and had a legal monopoly over certain basic letter services until the end of 2005 when the postal markets in the United Kingdom were fully liberalised. RMG is providing the collection, sorting, transportation and delivery of mail (letters, packets and parcels), using the ‘Royal Mail’ and ‘Parcelforce Worldwide’ brands.

(14)

The post office network is operated by POL, which is currently wholly owned by RMG (and hence by the UK Government). RMG and POL are separate legal entities though they are part of the same group. Consistent with the recommendations of the Hooper Reports, it is proposed that POL will remain in full public ownership after the reform and will become a sister company of RMG under RMH.

(15)

RMG has also other subsidiaries, notably General Logistics System BV (‘GLS’) which is RMG’s European parcels business, providing parcel services, logistics and express services throughout Europe. The GLS network comprises subsidiary companies and network partners covering 36 European countries.

Chart 1:   current organisational structure of RMG

(16)

RMG has held a license to provide letter services in the United Kingdom under the Postal Services Act 2000 since 23 March 2001. Under the terms of its license, it is required to discharge the universal service obligation (‘USO’). These arrangements implement the requirements of Directive 97/67/EC of the European Parliament and of the Council of 15 December 1997 on common rules for the development of the internal market of Community postal services and the improvement of quality of service (5) (‘Postal Services Directive’). RMG is required by its license to negotiate commercial agreements with any interested operator for access to its national network. New operators have tended to enter the market through such access agreements with RMG.

(17)

RMG is the only licensee in the United Kingdom postal market with universal service obligations. The main aspects of the current USO are (i) the delivery of postal packets (letters, packets and parcels) up to 20 kg every working day to the home or premises of every individual or other person in the United Kingdom (Mon-Sat delivery obligations for letters), (ii) at least one collection every working day from each access point, and a service of conveying, receiving, collecting, sorting and delivering postal packets at affordable prices determined in accordance with a uniform tariff, and (iii) the provision of a registered post service at prices determined in accordance with a uniform tariff.

(18)

RMG’s license imposes price controls in relation to the provision of regulated services. The current price control was set in April 2006 for a four-year period, but has been extended to March 2012.

(19)

Furthermore, RMG is required by its license to allow customers and other postal companies access to its national network on a non-discriminatory basis and in practice most of the competitors to RMG have entered the market by using third party access to RMG’s downstream network (for example final sorting of mail and delivery on the ‘last mile’ to customers).

(20)

Downstream access competition involves the third party operator collecting and processing the mail through its own network until delivered to RMG’s sorting centres, where it is injected into RMG’s network for final sorting and delivery to receiving customers. Under equivalent agreements known as ‘customer direct access’ agreements, high-volume customers may deliver their pre-sorted mail to RMG’s mail centres for downstream delivery.

(21)

Competition in the United Kingdom’s letter mail services has arisen through downstream access to RMG’s network and not end-to-end competition between RMG and new entrants. Since the market opening in 2006, the letter volumes that other UK postal operators inject into RMG’s downstream network have grown on average by more than 1 000 million items per annum and now account for over 45 % of the United Kingdom addressed inland mail market. RMG expects to lose even more market shares to its competitors in the coming years. For certain high volume markets, competitors are expected to achieve market shares of […] (6).

(22)

POL, the so-called retail arm of RMG, is responsible for the network of around 11 500 Post Office branches. Just fewer than 400 of these are directly owned and managed by POL. All others are privately owned and operated by subpostmasters or franchise partners. POL is entrusted to maintain a network meeting certain access criteria for the UK population (99 % of the population to be within 3 miles (4,8 km) of an outlet, etc.).

(23)

POL does not currently have any employees as all personnel currently working for POL (except those who are self-employed) are seconded from RMG. Approximately 9 000 RMG employees are seconded and work wholly for POL.

(24)

POL provides retail counter services to RMG, whilst RMG provides shared back-office support services to POL. Furthermore, there are a number of shared services in place between RMG and POL (for example vehicle services, building security etc.) which are currently provided at cost by RMG. The provision of these services is currently subject to a service agreement between RMG and POL that will be replaced by a series of new service agreements when POL becomes a sister company of RMG.

(25)

In addition to being a provider of services of general economic interest (‘SGEIs’), POL carries out some ‘commercial’ activities (such as selling telephony and insurance products) through its network and also through a direct internet sales channel.

(26)

On 23 March 2011, the Commission authorised GBP 180 million of public assistance to POL for the funding of its network of post offices during one year starting 1 April 2011 (7). The Commission also authorised the continuation, over the same period, of existing loan facilities funding the provision of cash services at post office counters. The Commission concluded that the aid is compatible with Union rules because it does not overcompensate the net costs of the public service tasks entrusted to POL.

(27)

On 24 January 2012, the United Kingdom has notified a package of measures in support of the SGEIs provided by POL, broadly similar to the measures authorised in 2011.

(28)

The United Kingdom considers RMG to be a firm in difficulty because it is currently facing severe financial difficulties (the reported financial figures refer to the consolidated results of RMG including all subsidiaries, if not stated otherwise):

(29)

RMG’s balance sheet shows that the company had serious financial difficulties at the end of the 2010/11 financial year; both its working capital and net operating assets were negative.

(30)

According to the projections provided by the United Kingdom, RMG will have negative cash headroom […], that is to say, it will not have sufficient funds to pay for its day-to-day operations, if the notified measures are not implemented. Consequently, RMG will also be unable to repay its existing loan facilities when they fall due in […].

(31)

On the basis of these factors, RMG will face severe difficulty in meeting its payment obligations by […] and subsequently will be unable to undertake a restructuring program and return to viability out of its own resources, leaving the firm in a situation where it must rely on State aid in order to ensure a return to economic viability and the uninterrupted availability of the public service.

(32)

The Postal Services Act 2011 envisages that the United Kingdom will assume responsibility for certain of the accrued liabilities under the Royal Mail Pension Plan (‘RMPP’). The proposed measure will relieve RMG of the obligation to make good the deficit that has arisen under that scheme, thus relieving RMG of a significant financial burden.

(33)

According to the United Kingdom, the size and volatility of the RMPP is out of all proportion to RMG’s current business and has proved to be a severe handicap to RMG’s ability to compete on its own merits in the liberalised United Kingdom postal market. The United Kingdom believes that by taking certain liabilities over from the RMPP and thereby contributing to the restoration of RMG’s viability, RMG will, as the sole universal service provider in the United Kingdom, have the ability to adapt to the liberalised industry environment through modernisation. The pension relief, as a consequence, will remove one of the principal obstacles to attracting private sector capital to RMG.

(34)

Besides the RMPP, RMG currently sponsors 3 other pension plans: the Royal Mail Senior Executives Pension Plan (‘RMSEPP’), the Royal Mail Retirement Savings Plan (‘RMRSP’) and the Royal Mail Defined Contribution Pension Plan (‘RMDCPP’). The notified measure concerns only the RMPP and will not affect members of the RMSEPP, the RMRSP or the RMDCPP.

(35)

The RMPP is an occupational pension scheme for RMG’s employees, including those employees seconded to and working wholly for POL (8). It is a private sector scheme in the sense that it operates under normal UK pensions law as applied to private sector companies. As at 31 March 2011, the RMPP had approximately 436 000 members, of which approximately 130 000 were current employees accruing benefits in the scheme (active members), approximately 118 000 were former employees who had left service before retirement age and not yet drawn pension benefits (deferred members) and approximately 188 000 were pensioners.

(36)

The RMPP is governed by the Third Principal Trust Deed and Rules dated 21 December 2009, as subsequently amended (the ‘Trust Deed’). The principal employer in relation to the scheme is RMG and the trustee is a company, Royal Mail Pensions Trustees Limited (‘the Trustee’). In addition to the Trust Deed, the obligations of the Trustee and RMG under the RMPP are governed by legislation introduced by the Department for Work and Pensions applying to occupational schemes, set out, principally, in the Pension Schemes Act 1993, the Pensions Act 1995 and the Pensions Act 2004. The RMPP falls within the jurisdiction of the UK Pensions Regulator.

(37)

The RMPP is a defined benefit scheme, that is, benefits are determined by reference to a pension of a target amount at normal retirement age, related to the amount of the member’s annual pay and length of service with the employer. This is in contrast to defined contribution schemes under which only the level of the contributions required from the employer/employee is specified. The contributions are invested and when a member retires, the value of the accumulated fund is used to provide the member with an income for life.

(38)

There are two main types of defined benefit scheme, known as final salary and career average. A final salary scheme provides a pension based on a stated fraction or percentage of the employee’s final pensionable salary for each year of pensionable service. In contrast, a career average scheme provides a pension based on a stated percentage of the employee’s average pay over the whole period of pensionable service (usually adjusted in some way to take account of inflation) for each year of pensionable service.

(39)

Until April 2008, benefits accrued by members of the RMPP were calculated on the basis of a final salary method. However, in April 2008 RMG implemented pension reforms by amendment of the RMPP rules which included changes to benefits accrued in respect of service from 1 April 2008, such that they are now calculated on the basis of a career average salary method rather than a final salary method (although benefits accrued in respect of service prior to that date will continue to be linked to a member’s salary at the date of leaving service). Other reforms implemented on 1 April 2008 included raising the retirement age to 65 for service accrued from 1 April 2010 (benefits built up before that date can still be taken at age 60 without an early retirement reduction being applied) and closure of the RMPP to new members and joiners with effect from 1 April 2008. The RMPP was replaced with a defined contribution scheme for new members and joiners after 1 April 2008, the RMDCPP.

(40)

The United Kingdom points out that RMG’s ability to amend the RMPP over time has been materially constrained. These constraints derive from general UK pensions law and from specific features of the RMPP scheme.

(41)

Under UK law RMG has no power of veto over its contribution rate to the RMPP. The contribution rate is normally agreed between the sponsoring employer and the trustee of a pension scheme, but against a background where a failure to reach agreement within 15 months of the effective date of a valuation will lead to contributions being determined by the UK Pensions Regulator, which was established on 6 April 2005 by the Pensions Act 2004 and which enforces compliance with pensions legislation. The Pensions Regulator has made clear, among other things, that it expects schemes to have a certain level of solvency and that it expects trustees to seek recovery of any deficit as against that technical provisions funding target from the sponsoring employer ‘as quickly as the employer can reasonably afford’.

(42)

In that context, RMG agreed a memorandum of understanding with the Trustee in June 2006 to fund the RMPP deficit over 17 years, in addition to the annual payments RMG makes to the RMPP to fund the cost of the accrued benefits. Conditions included the establishment of the escrow accounts totalling GBP 1 billion secured in favour of the RMPP that were the subject of Commission Decision 2009/613/EC (9).

(43)

On 30 June 2010, RMG agreed on a further recovery plan with the Trustee aiming to fund the RMPP deficit by March 2047, by paying the following annual contributions:

(44)

POL contributes a 7 % share of the deficit payments. The share is calculated on the basis of the number of employees seconded to POL in relation to RMG’s total number of employees. POL’s annual contribution to the pension deficit in the 2010-11 financial year was GBP 21 million.

(45)

The United Kingdom authorities propose to set up a new statutory pension scheme which will be a liability of the UK Government and will have no legal connection to RMG or the RMPP. Certain part of accrued liabilities and assets held by RMPP will be transferred to the new scheme. It is intended that pension benefits accrued up to 31 March 2012 will be transferred to the scheme. The persons to whom this proposal applies include current pensioners, deferred members and active members of the RMPP.

(46)

In broad terms, it is estimated that the new pension scheme will be taking over GBP 32 200 million of liabilities and associated assets of GBP 27 700 million (based on the 31 March 2011 actuarial valuation figures) and hence a deficit of GBP 4 500 million. After the pension relief on 1 April 2012, RMG will continue paying only the normal pension contributions for all members of the RMPP, who still work for RMG, and consequently only remain liable for new pension rights acquired after March 2012 (hereafter referred to as on-going RMPP scheme).

(47)

The on-going RMPP scheme will immediately after the pension relief consist of approximately GBP 2 100 million (10) of liabilities and a matching amount of assets remaining with RMG. RMG will continue to bear all future service costs, including liability for any current obligations under the RMPP to maintain a continuing final salary link together with certain enhancements (for example on early retirement) in respect of the historic pension benefits. This means that after the pension relief, RMG will continue to bear the risk that the historic liabilities for deferred members may increase by reason of any salary increases, which exceed price inflation, as the pension benefits have to be linked to the current final salary level. RMG would also retain responsibility for the existing RMSEPP which shows liabilities of GBP 300 million and a deficit of approximately GBP 30 million (as valued at 31 March 2011).

(48)

To address its financial difficulties, in June 2011 RMG drew up a restructuring plan covering the period 2008-2016.

(49)

RMG’s plans, which are focused primarily on reduction of costs and revenue diversification, build on the significant restructuring measures that RMG has taken since 2002 (including implementing significant changes to the RMPP) to modernise its business and drive costs down. RMG’s plan of June 2011 for restoring the company to viability is split into five key areas:

(50)

The restructuring plan aims to restore long-term viability of RMG. According to the United Kingdom, the ability to take structurally high levels of fixed cost out, enhance the overall regulatory environment and diversify revenues to replace lost revenues from declining mails volumes will promote a viable RMG capable of attracting private sector investment to ensure its long term future.

(51)

The United Kingdom claims that the restoration of RMG’s long term viability is a central policy objective in order to achieve universal availability and effective discharge of the USO. According to the United Kingdom, the pension relief alone will not be sufficient to secure RMG’s long term viability: even after the relief of the deficit RMG cannot overcome its financial difficulties with its own resources or with funds obtained from market sources.

(52)

Therefore, in addition to the pension relief, the United Kingdom also notified certain measures to strengthen RMG’s balance sheet, consisting of:

(53)

The United Kingdom contended in its notification that the pension relief could be found compatible with the internal market as legacy costs from the pre-liberalisation period, based on the Commission practice. Furthermore, it claimed that the proposed measures are in line with the Guidelines on State aid for rescuing and restructuring firms in difficulty (12) (‘the R&R Guidelines’). The United Kingdom did not invoke Article 106(2) of the Treaty as justification for the notified measures during the procedure.

(54)

In its Decision to initiate the formal investigation, the Commission questioned whether the pension relief could be found compatible as compensation for an exceptional burden resulting from RMG’s past status as public sector monopoly. In 2007, the Commission indeed approved a French reform regarding the financing of the current and future pensions of the employees of La Poste with a civil servant status (13). However, while the 2007 decision ensured that La Poste’s effective social security costs were comparable to those of competitors; it seemed that relieving RMG from its whole pension deficit would put it in a better position than an average UK company. The Commission wondered therefore whether the charges of which RMG was relieved correspond entirely to legacy costs within the meaning of the case-law of the Court of Justice of the European Union and whether there indeed would be a level playing field once the relief was implemented.

(55)

Furthermore, the Commission also expressed reservations about the restructuring plan’s compatibility with the R&R Guidelines, notably regarding the prospect of a return to viability, the extent of RMG’s contribution, and the level of compensatory measures.

(56)

According to the Commission, the United Kingdom did not convincingly demonstrate that the originally submitted restructuring plan would comply with the R&R Guidelines. In particular, the Commission doubted that RMG’s role as the sole universal service provider and the liabilities resulting from its public sector monopoly legacy would justify mitigating the conditions of the R&R Guidelines and notably those ensuring that competition distortions are limited and that the cost of restructuring is shared by the required 50 % own contribution.

(57)

The Commission also considered that the duration of the original restructuring plan from 2008 to 2016 was particularly long and that the projections in the original restructuring plan were sensitive to changes in the assumptions such as total mail volumes. The Commission therefore expressed doubts as to the restoration of long-term viability of RMG by the implementation of the notified plan and to the robustness of the viability projections.

(58)

In the course of the discussions with the Commission during the formal investigation, the United Kingdom renounced part of the debt reduction of 1 700 million and reduced the notified debt reduction measures to GBP 1 089 million. Furthermore, the United Kingdom also renounced the notified GBP 200 million revolving credit facility. The Commission therefore no longer considers those measures to be notified but only the debt reduction measure amounting to GBP 1 089 million.

(59)

Furthermore, during the investigation, the United Kingdom provided an updated restructuring plan, covering a shorter restructuring period: 2010-2015. During that period RMG will undertake operational and industrial measures to restructure its business. The plan for restoring the viability of RMG can be split into the following key actions: labour related restructuring, structural restructuring to reduce its capacity and restructuring of IT systems.

(60)

Labour related restructuring is at the heart of the RMG’s changes to ensure that a financially sustainable universal service can be provided for the long term in the United Kingdom. RMG has already made progress and intends to significantly reduce its workforce further through a programme of voluntary redundancy and natural attrition over the period of the plan. This alone represents around one third of the total relevant restructuring costs from the plan, and will reduce significantly one of RMG’s core costs.

(61)

The restructuring plan envisages, over the course of the restructuring period, a reduction in RMG’s headcount in UK Letters & Parcels and International (UKLPI) from approximately 160 000 people at the start of the year ending in March 2011 to approximately […] people in March 2015. This represents a total reduction of approximately […] in UKLPI between March 2011 and March 2015, representing the equivalent of around […] a year. This labour-related restructuring includes a reduction of close to […] central managers (over 1 000 of whom had already left by March 2011). Labour cost savings of GBP […] million in real terms are forecast to be achieved between March 2010 and March 2015.

(62)

The labour changes proposed will impact virtually every part of the RMG’s business. For example:

(63)

The key elements of the labour restructuring cost included in the June 2011 restructuring plan are (i) redundancy payments, (ii) travel and outplacement costs and (iii) certain exceptional lump sum payments. Redundancy payments are expected to be approximately GBP […] million from March 2010 to March 2015. Travel and outplacement costs (which are paid to staff that have been retained but must now work at alternative facilities as part of the restructuring of RMG’s infrastructure, including the closure of various mail centres) will amount to a cost of approximately GBP […] million by 2014/15. Exceptional lump sum payments — which are required to sustain the pace and depth of change as they form a key part of the 2010 modernisation agreement with the Communication Workers Union amount to GBP […] million. Those payments would not have been required with a slower, more conventional, pace of modernisation.

(64)

Those key elements of labour restructuring together amount to approximately half of the total relevant restructuring costs during the period from March 2010 to March 2015.

(65)

In addition to the measures to address the labour force at RMG, the notified restructuring plan includes structural restructuring to reduce capacity in the business over the period. In total, the amount spent on structural restructuring represents approximately one third of the total relevant restructuring costs during the period from March 2010 to March 2015. In particular this element of the restructuring relates to the significant reduction of the mail centre network, which has a corresponding impact on labour.

(66)

Structural restructuring also consists of automation and, critically, new delivery methods to enable longer more flexible delivery spans. This again has significant implications for the workforce and forms a key part of restructuring.

(67)

The restructuring plan includes a one-off property rationalisation programme reducing the number of mail centres from 64 at the start of the financial year 2010/11 to […] by March 2015, significantly reducing the RMG’s footprint and streamlining its operations. The restructuring plan therefore envisages closure of […] mail centres between 2010/11 and 2014/15 which equates to a […] reduction across the network. During the year from March 2010 to March 2011 a total of 5 mail centres were closed.

(68)

In conjunction with this, RMG is introducing World Class Mail in all mail centres which will remain open. World Class Mail is a comprehensive system for improving safety, customer service, quality and productivity, and reducing breakdowns. World Class performance is achieved by involving all employees in attacking wasted time and resources caused by sub-standard reliability, and operating performance of processing systems. All mail centres will be part of World Class Mail by the end of financial year 2011/2012 and World Class Mail is also being introduced in delivery offices.

(69)

In addition, the deployment of intelligent letter sorting machines will bring about a change in automated sorting and reduce the costs associated with manual sorting. These machines are considerably faster than existing methods and equipment, which have been used by RMG for nearly 20 years.

(70)

Further to this, the deployment of walk sequencing, which automates the sorting of letters to the order of delivery is being implemented. This is a critical part of the restructuring and requires the acquisition and deployment of compact sorter sequencer machines and results in changes to working practices for postmen and women working in delivery in particular. Automated sequencing of letters reduces manual sorting in delivery offices (and associated costs), and therefore allows for more efficient scheduling of start and finish times for delivery staff. Walk sequencing is a structural change to mail processing for RMG that will increase its productivity. RMG sequenced 0 % of mail in 2008; 1 % of mail in 2009, and 50 % by August 2011.

(71)

RMG’s restructuring plan includes the automation of sorting of small parcels which is currently done manually. The company is determining the best solution to deploy during the restructuring period.

(72)

Finally, new delivery methods allow RMG to change from traditional delivery methods (on foot, by bicycle) to delivery mainly using secure trolleys (either manual or powered) and vans. These new methods represent a major change for RMG and the change being implemented, including the expenditure incurred, will facilitate longer, flexible delivery spans. This, in turn, allows RMG to reduce the number of delivery routes and outdoor delivery operating costs.

(73)

The restructuring includes business critical capital investment in IT over the period of the plan. To complement the labour changes, RMG is in the process of introducing handheld electronic devices to replace paper-based processes and therefore increase efficiency. One of their basic functions is to store customer signatures which confirm receipt of tracked items. The devices allow RMG to track items in real time. This removes the need for further processing of signatures and receipts on paper when the postman or woman has finished deliveries.

(74)

In addition, RMG will be making other investment in IT and operations — including significant investment in several critical areas:

(75)

The investment in systems and IT restructuring in total represents approximately one fifth of the total relevant restructuring costs during the period from March 2010 to March 2015.

(76)

According to the United Kingdom, after the implementation of the pensions’ measures and the completion of the restructuring measures, RMG is forecast to be in a position to:

(77)

This conclusion also applies on the basis of the reasonable downside scenario (an additional […] decline in volumes over the period of the restructuring plan) submitted to the Commission on 30 November 2011 as part of the sensitivity analysis. Under such a downside scenario, by March 2015 RMG would be in a position to:

(78)

These forecasts are claimed to prove the robustness and strength of the proposed restructuring.

(79)

Comments on the opening decision were received from a wide range of interested third parties including RMG’s smaller domestic competitors and their industry associations, its larger international peers, pressure groups and a workers union representing the majority of RMG staff.

(80)

As an industry association of smaller postal operators in the United Kingdom, the Mail Competition Forum (‘MCF’), places a great emphasis on the importance of a sound and viable RMG as the only company capable of fulfilling the universal service obligation in the United Kingdom, whilst at the same time voicing concerns that an artificially strengthened RMG could squeeze its smaller competitors out of an already difficult market by means of predatory pricing, margin squeeze and denial of access to essential facilities. In this context the MCF urges far reaching ex ante regulatory measures to protect smaller competitors and ensure that they have access to the Royal Mail network.

(81)

MCF agrees with the United Kingdom in its assessment that RMG is a firm in difficulty and agrees with the application of the R&R Guidelines as the appropriate framework to assess the proposed measures. Moreover, it notes that the United Kingdom does not seek to justify the aid on grounds that such aid is necessary to sustain an SGEI, but it records that in case that any SGEI compensation to RMG would be authorised by the Commission, it would need to be coupled with rigorous safeguards to protect competition.

(82)

The MCF believes that the measures should be confined to the strict minimum necessary and designed to deal with the pension deficit alone. MCF rejects any balance sheet repair measures or any other measures undertaken with a view to making the firm more attractive for a market economy investor. In this context MCF expresses scepticism about a privatisation of the firm.

(83)

With respect to the own contribution of 50 % required under the R&R Guidelines for large undertakings, MCF urges a strict adherence to the prescribed threshold and recommends the divestiture of assets and seizure of loss-making activities to finance this.

(84)

With regards to compensatory measures the MCF believes that a number of far reaching structural, fiscal and regulatory measures are necessary including a reform of the UK Postal Services Act with a view to preventing the RMG from getting additional aid for the same purpose in the future, a full structural separation of the retail and network aspects of the business, and an end to the VAT exemption enjoyed by RMG for services which are outside the universal service.

(85)

Secured Mail points to the importance of RMG for the discharge of the USO in the United Kingdom. At the same time Secured Mail urges the Commission to ensure that RMG will not gain the opportunity to exploit its new found strength in a way which would endanger the smaller competitor’s business model. Just as the Mail Competition Forum, Secured Mail emphasises the need for a sufficient own contribution financed through divestiture of assets, and seizure of loss-making activities. Furthermore Secured Mail would like to see regulatory action like a separation of the network and retail aspects of RMG businesses.

(86)

UK Mail, a small domestic competitor comments that whilst the firm generally welcomed State aid to RMG with a view to safeguarding the effective discharge of the USO, the measures should only be authorised under strict adherence to the R&R Guidelines.

(87)

DX, another small domestic competitor also expresses concerns about strengthening RMG’s position on the UK market in an unchecked fashion and advocates compensatory measures in order to make up for potential distortions of competition.

(88)

The Communication Workers Union (‘CWU’) places the measures in the context of the wider modernisation efforts of RMG over the past years. CWU welcomes the aid measures but voices concerns about the level of stress put on the workforce by the restructuring process and points to the profound and sustained changes in the general working condition of Royal Mail employees. CWU asks the Commission to confine restructuring to a minimum with a view to limit the adverse effects on the general working conditions. CWU rejects an appraisal under the R&R Guidelines and opines that the Commission should authorise the aid as compensation for a service of general economic interest instead. CWU believes that no own contribution should be required from RMG and advocates a generous appreciation of the aid measures with a view to making the transition process as smooth as possible for RMG’s workers.

(89)

The Free and Fair Postal Initiative (‘FFPI’), a pressure group, generally welcomes the State aid measures in favour of RMG and only voices some concern about RMGs return to viability according to the restructuring plan. In light of the current economic climate FFPI questions the sale prospects and bemoans the lack of a comprehensive privatisation plan.

(90)

Furthermore the FFPI is keen to point out that all requirements of the R&R Guidelines must be met, especially as regards the own contribution which FFPI would like to be substantial (50 %) in line with the R&R Guidelines. Furthermore FFPI considers that far reaching compensatory measures should necessarily, include the sale of assets which are not essential to the discharge of the USO and especially guarantees with regards to market access for competitors.

(91)

FFPI furthermore submits that it rejects the application of a legacy cost reasoning pursuant to the EDF  (14) and La Poste  (15) decisions in this case on the grounds of substantial dissimilarities with the facts in this case, especially in respect of the pension systems in France and the United Kingdom.

(92)

Deutsche Post places the aid requirement of RMG within the context of the liberalisation and process of the UK postal market and the consequential requirement for the incumbent ex- monopolist to adapt to the conditions of a competitive postal market and modernise its business practices accordingly. In this context Deutsche Post urges the Commission to ensure a uniform application of the law across all Member States in this regard. Subsequently Deutsche Post rejects the reasoning put forward by the United Kingdom that RMG presented an ‘exceptional case’ within the meaning of the R&R Guidelines and voices doubts about the applicability of the R&R Guidelines to the case.

(93)

In this context, Deutsche Post also argues on the basis of the judgment of the Court in Combus  (16) that, in the course of the privatisation of formerly State-owned universal service providers, the public compensation of pension costs — which go beyond the level normally assumed by private competitors — do not constitute aid. Deutsche Post claims that the relief of RMG’s pension deficit should escape the prohibition of Art 107 of the Treaty on the grounds that this measure is designed to rectify a structural disadvantage within the meaning of the Combus judgment.

(94)

Deutsche Post also considers that the Commission would be obliged to take into account that RMG has already received compensation for its pension deficit in the form of higher stamp prices.

(95)

TNT observes that the aid should be no more than the smallest amount strictly necessary to rescue RMG from its financial difficulties. At the same time TNT is concerned that RMG could use its new found strength to unduly restrict competition on the UK postal market in a bid to regain control of the market and recoup lost market shares.

(96)

In order to prevent such a move, TNT asks for far reaching measures as a compensation for State aid, including a guarantee of future network access, if possible by way of unbundling, and the end of the VAT exemption to strengthen the evolution of competition in the end to end delivery markets.

(97)

With respect to the proper legal framework, TNT agrees with the United Kingdom that the measures should be assessed as restructuring aid pursuant to the R&R Guidelines and rejects the notion of an analysis under Article 106(2) of the Treaty.

(98)

In its statement UPS opines that the proposed aid measures could have severe implications on the postal market and produce effects beyond the markets directly targeted — in the express service parcel markets in the United Kingdom and Europe. In this context UPS raises doubts about the way in which the advantages for RMG have been calculated and the applicability of the R&R Guidelines to this case.

(99)

Furthermore, UPS has doubts about the compatibility of the measures under Article 107(3) of the Treaty and the R&R Guidelines.

(100)

With regard to compensatory measures UPS contends that the required measures must be proportional to the distortions of competition. UPS thereby rejects the notion forwarded by the United Kingdom that the burden of discharging the public service obligation should be taken into account when assessing the measures under the R&R Guidelines. UPS places a particular emphasis on the need to analyse and account for potential spill- over effects into neighbouring markets, should the measures not only strengthen RMG but also its subsidiaries, especially GLS.

(101)

With respect to the amount of aid, UPS emphasises that the amount should be limited to the strict minimum necessary and that a substantial own contribution should be made by RMG. In this context UPS expresses doubts over the presence of exceptional circumstances which would allow for an own contribution below 50 %, as suggested by the United Kingdom. UPS furthermore believes in case that the Commission should accept the United Kingdom’s reasoning in this regard, the own contribution should under no circumstances be lower than 40 % based on the Commission’s decision practice in previous decisions.

(102)

With regards to the legacy cost reasoning under Article 107(3) of the Treaty, UPS points out that the measures could not be justified upon the basis of precedent (La Poste) or as a matter of principle, but require a comprehensive balancing test in which the positive effects of the measure are balanced against the way in which it distorts competition.

(103)

The United Kingdom accepts that the notified pension relief and debt reduction measures constitute State aid within the meaning of Article 107(1) of the Treaty.

(104)

The United Kingdom maintains that there is no aid involved in the tax treatment of the transfer of net liabilities from RMG to the United Kingdom since the pension liabilities currently in RMG’s accounts represent amounts which are as yet unpaid, and they are only tax deductible when payment is actually made. As such, RMG has not claimed tax relief for any of the liabilities in its accounts. According to the United Kingdom, it would be inequitable for RMG to be charged tax on the release of provisions, when it has not received tax relief on those provisions in the first place (17).

(105)

In response to the Commission’s assertion in the opening decision that it is unclear whether POL would benefit from the debt reduction measures, the United Kingdom claims that POL’s funding and accounting is ring-fenced from that of RMG. According to the United Kingdom, this is further assured by the fact that the businesses are legally separated.

(106)

The United Kingdom first of all maintains that there are significant parallels between the present case and the La Poste case. Although the United Kingdom acknowledges that the UK pension environment is different to that of France, and there is no UK specific comparator to RMG’s scheme, this does not mean that the La Poste precedent cannot be applied. The United Kingdom strongly believes that there are sufficient similarities between the two cases to merit a full application of the precedent, because both cases involve material economic risk and uncapped liabilities and because both cases involved inflexible schemes.

(107)

Furthermore, the United Kingdom considers that, whilst there are parallels between the cases, the proposed solution for RMG is not as extensive or material as that for La Poste because the United Kingdom is only relieving RMG of its past liabilities and because the pension liabilities assumed by the United Kingdom are accompanied by the majority of the RMPP pension assets, such that the aid concerned is limited to the deficit rather than the amount of the liabilities.

(108)

The United Kingdom also contends that the scale of RMG’s pension liabilities is unusual due to a combination of factors that include the scale of RMG’s employment costs, the indexation and early retirement arrangements, and the enhanced redundancy terms imposed by collective agreements with the unions. The United Kingdom submits that these liabilities can be regarded as ‘stranded costs’ within the meaning of previous Commission decisions on pension liabilities in the energy sector. This means that the pension deficit should be regarded as an irreversible (social) investment made before the liberalisation of the sector which turned unprofitable under the new conditions of sector liberalisation which could not be foreseen at the time when the decision was taken. The United Kingdom bases its stranded cost reasoning on the following factors:

(109)

During the course of the investigation, the United Kingdom has also provided further information on the abnormal nature of RMG’s pension liabilities, which would be relieved as part of the UK Government’s proposals. It further developed the initial analysis carried out by the expert Towers Watson who examined the level of abnormality inherent in the RMPP.

(110)

This additional analysis compared the RMPP to the average private sector defined benefit scheme and according to the United Kingdom demonstrates that approximately GBP 6 900 million of the RMPP’s pension liabilities relate to abnormally high costs when compared to the average scheme.

(111)

This exceeds the level of the RMPP’s pension deficit of GBP 4 500 million on an accounting basis at March 2011, which, according to the United Kingdom, suggests that all of RMPP’s pension deficit could be considered abnormal.

(112)

The United Kingdom first of all maintains that the Commission should apply the R&R Guidelines in such a way as to avoid a negative effect on the availability of the universal service in the United Kingdom. Consequently, the United Kingdom points out that RMG is indispensable to the availability of the universal service and argues that the difficulties of the firm endanger not only the survival of RMG as an undertaking but also the availability of the universal service in the United Kingdom. The United Kingdom therefore asks the Commission to take the legislative intent of Article 106(2) of the Treaty into account when assessing the measures under the R&R Guidelines. In support of its argument the United Kingdom points to case-law from the Court of Justice according to which the rules of the Treaty should be applied in consideration of the effective discharge and undistorted availability of the universal service in cases where an undertakings ability to deliver a core service is threatened, and in particular where the survival of the undertaking delivering this service is threatened (18).

(113)

Hereby, the United Kingdom submits that the compatibility criteria under the R&R Guidelines should be qualified to the extent required to allow the measures to be implemented as contemplated in the restructuring plan in order to ensure that the UK Government’s ability to meet its obligations under the Postal Services Directive is not jeopardised.

(114)

Furthermore, the United Kingdom maintains that RMG is to be considered as a firm in difficulty within the meaning of the R&R Guidelines i.e. a firm that — bar State intervention — would be unable to obtain the necessary capital to stem losses which endanger its very survival from either its shareholders or market sources. In this respect the United Kingdom points to the severe financial difficulties of the firm caused by diminishing revenues, the considerable size of the pension deficit which causes a deeply troublesome balance sheet, and projected shortages in its cash flow positions.

(115)

In its submissions, the United Kingdom provided much more information on the restructuring plan. In particular it presented:

(116)

As regards the length of the restructuring plan, the United Kingdom contends that the Commission should take into account the pace at which it is possible to roll out the scale of operational restructuring required having regard to the scale of RMG’s operations, its industrial relations environment and its obligation to continue providing the universal service to specified quality standards throughout the process.

(117)

As regards the restoration of the long-term viability and the deliverability of the restructuring plan, according to the United Kingdom it has been sufficiently demonstrated in the restructuring plan that RMG will return to viability by the end of the restructuring period in accordance with the R&R Guidelines.

(118)

The United Kingdom believes, based on the assessment of its financial advisors, that the delivery of the restructuring plan will restore RMG to viability by the end of financial year 2014/15 (that is to say by the end of March 2015). In practice this means that after the implementation of the pension relief and the completion of the restructuring measures which are relevant for State aid purposes, the United Kingdom forecasts that RMG should be in a position to bear all its costs, including depreciation and financial charges. Moreover the expected return on capital would be enough to enable the restructured RMG to compete in the market place on its own merits.

(119)

As regards the own contribution requirement, the view of the United Kingdom remains that the particular circumstances of this case justify a flexible approach to own contribution.

(120)

Nevertheless, the United Kingdom has clarified how RMG is also using its own resources to fund the costs associated with the restructuring activity set out in section 2.5.

(121)

The United Kingdom considers that any distortion of competition arising from the notified measures will be minimal. It also reiterates that RMG’s subsidiary GLS is not directly impacted by the measures and there will therefore be no impact on competition from the measures in the European parcels and express markets in which GLS operates.

(122)

As regards compensatory measures, the United Kingdom maintains that the Commission should consider the extent to which this principle should be applied in order to avoid any action which would directly or indirectly obstruct RMG in its performance of the universal service.

(123)

In response to the third party submissions the United Kingdom addresses the issues at hand thematically.

(124)

In response to the fears of potential spill-over effects on neighbouring markets via RMG subsidiary GLS the United Kingdom elaborates that GLS is not benefitting from the proposed aid measures due to the fact that GLS employees are neither currently nor have ever been part of the RMPP, and that its pension system has no connection whatsoever to the RMPP, making spill over effects impossible. Furthermore the United Kingdom stresses that the measures, however implemented will not have any effect any cash position of GLS.

(125)

In response to comments which question the level of debt deriving from the statutory pension contribution, the United Kingdom asserts that the size of the deficit was directly linked to the legacy costs incurred and that RMG should therefore be relieved of the deficit in its entirety.

(126)

With regards to the general compatibility of the measures with the R&R Guidelines the United Kingdom considers that the proposed measures fit within the scope of the R&R Guidelines. Furthermore the United Kingdom maintains its position expressed in the notification that the Commission should undertake its assessment of the proposed measures under Article 107(3) of the Treaty in the spirit of Article 106(2) of the Treaty.

(127)

In response to comments questioning the long term viability of RMG after the aid is granted, the United Kingdom rejects the concerns of the interested parties and submits that on the basis of the independent advice from its economic advisers, it firmly believed that RMG will return to viability and prosper in the long- term.

(128)

The United Kingdom rejects comments alleging that the amount of aid was not limited to the strict minimum necessary and in essence aimed at making RMG more attractive to potential investors with a view to realise a successful privatisation in the future. It explains that the measures were specifically designed to spend only the strict minimum necessary to secure the future of the universal service and restore RMG to viability to that end.

(129)

The United Kingdom furthermore rejects claims that the measures would lead to an undue distortion of competition since the benefits to consumers flowing from RMG’s survival would significantly outweigh the limited degree of market distortion.

(130)

In response to the comments on the required own contribution, the United Kingdom rejects arguments forwarded by interested parties who question the existence of exceptional circumstances which would justify a deviation from the 50 % own contribution rule prescribed in the R&R Guidelines. The UK maintains its position voiced in the notification that the Commission should take account of RMG’s public sector heritage and its public service burden when determining appropriate level of own contribution.

(131)

Furthermore the United Kingdom points out that the separation of POL from RMG already puts RMG in a position where it will lose businesses opportunities in the development of related fields such as personal banking and other usage of POL’s infrastructure.

(132)

The United Kingdom also firmly rejects calls to divest its express parcel operator GLS as a compensatory measure as suggested in some of the third party comments. The United Kingdom clarifies that it considers GLS to be a vital part of RMG’s overall strategy and that it regards the firm as crucial to the attainment of long term viability. In this context the United Kingdom is keen to stress that diversification of a firms activities into more profitable areas is expressly recognised by the R&R Guidelines (paragraph 17) as a vital part of the recovery of a struggling enterprise. Furthermore the United Kingdom believes that a divestiture of GLS would threaten the viability of RMG in such a way that it would endanger not only the restructuring plan but also the provision of the universal service in the United Kingdom.

(133)

The United Kingdom emphasises its position with regards to the applicability of the legacy cost reasoning along the lines of the La Poste, EDF  (19) and OTE  (20) case-law to the present case. The United Kingdom maintains its position that, despite of the technical differences between the United Kingdom and French pension systems a sufficient logical analogy remained which allowed for a legacy cost reasoning to be applied to this case.

(134)

In response to comments which recommended assessing the measures under Article 106(2) of the Treaty rather than the R&R Guidelines pursuant to Article 107 of the Treaty, the United Kingdom again stresses its position that such a move would not be the appropriate step for RMG under the present circumstances. Nevertheless the United Kingdom believes that the Commission should bear Article 106(2) of the Treaty in mind in its application of the R&R Guidelines.

(135)

The United Kingdom also remarks on Deutsche Post’s submission calling on the Commission to discount any proceeds already generated in favour of RMG with respect to its pension liabilities in the form of higher prices in price regulated areas from the pension relief. The United Kingdom seeks to refute this line of reasoning and expresses a belief that there is effectively no double counting between regulated prices and the pension deficit due to the methodology and regulatory arrangements employed by RMG and the past and present regulators which ensured that RMG would not receive funds for the same purpose twice.

(136)

The United Kingdom rejects Deutsche Post’s submission that the assessment of State aid to former postal monopolies should be undertaken on an identical set of criteria to ensure a uniform application of Union law across the Member States, and argues instead that the Commission should be free to assess each case on its particular circumstances taking account of the particularities of each individual case.

(137)

Finally the United Kingdom comments on the many remarks and suggestions made by some third parties which the United Kingdom believes to fall within the scope of regulatory activity rather than this case. With regards to those issues, such as structural separation, transparency, review and cessation of certain activities, the United Kingdom is keen to stress that such measures are of a regulatory nature and should be raised in the appropriate forum with the national regulator rather than the context of State aid proceedings. In addition, the United Kingdom notes that the extent of the VAT exemption for postal services in the United Kingdom has already been considered by the Court of Justice of the European Union (21) and is expected to be further reviewed by the UK tax authorities.

(138)

Article 107(1) of the Treaty provides that ‘any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, insofar as it affects trade between Member States, be incompatible with the internal market’. In determining whether a measure constitutes State aid within the meaning of Article 107(1) of the Treaty, the Commission has to apply the following criteria: the measure must be imputed to the State and use State resources, it must confer an advantage on certain undertakings or certain sectors which distorts competition and it must affect trade between Member States.

(139)

Article 107(1) of the Treaty is concerned with aid granted by a Member State or through State resources. In other words, the measures in question must appear as the result of behaviour attributable to the State or must involve State resources.

(140)

As regards the pension relief, the United Kingdom’s taking over of certain of RMG’s accrued pensions liabilities is financed by State resources and is imputable to the State: the United Kingdom will set up a new statutory pension scheme which will be a liability of the UK Government and to which certain part of the accrued liabilities held by the RMPP will be transferred.

(141)

Concerning the debt reduction measures, those are clearly financed from State resources and imputable to the State: the United Kingdom will write off the debt from the outstanding loans that RMG currently owes to it.

(142)

In order to ascertain whether the measures under scrutiny contain elements of State aid, it needs to be determined whether they confer an economic advantage on RMG in that they allow it to avoid costs that would normally have had to be borne by its own financial resources and have thus prevented market forces from producing their normal effect (22).

(143)

In this respect, it should also be borne in mind that several of the Court of Justice’s rulings contradict the theory that compensation for a structural disadvantage exempts a measure from being qualified as aid. The Court of Justice has constantly held that the existence of aid is to be assessed in relation to the effects and not in relation to the causes or objectives of State intervention (23). The Court of Justice has also held that the concept of aid includes advantages granted by public authorities which, in various forms, reduce the charges which are normally included in the budget of an undertaking (24). The Court of Justice has also clearly stated that the costs linked to remuneration of employees naturally place a burden on the budgets of undertakings, irrespective of whether or not those costs stem from legal obligations or collective agreements (25). In that context, the Court of Justice has considered that the fact that State measures aim to compensate for additional costs cannot constitute grounds for disqualifying them from the definition of aid (26).

(144)

The Commission takes the view that the liabilities a company bears under employment legislation or collective agreements with trade unions, such as pension costs, are part of the normal costs of a business which a firm has to meet from its own resources (27). Those costs are inherent to the economic activity of the undertaking (28). It does not matter in that regard whether the undertaking bears the pension costs by directly financing the pensions of its former staff or by paying contributions to a pension fund, which in turn uses the collected contributions to finance the pensions of the companies’ employees. The decisive element is that, in one way or another, undertakings bear the full costs for pensions.

(145)

As regards the pension relief, the Commission observes that it will provide a financial advantage to RMG, given the effects on RMG of the deficit in the RMPP, and the obligations RMG has towards the RMPP under UK pensions law. These obligations include the payment of contributions, in particular to address the deficit, and are reflected in the fact that the deficit is recorded on RMG’s balance sheet as required by rule 19 of the International Accounting Standards (hereinafter referred to as IAS). Therefore, the Commission finds that the taking over of certain accrued pensions liabilities by the United Kingdom will relieve RMG of financial obligations that the undertaking would normally have had to bear and thus prevent market forces from producing their normal effect.

(146)

Furthermore, the Commission observes that the pension relief not only confers an advantage on RMG, but also on its subsidiary POL as it relieves the latter of the obligation under the secondment arrangements with RMG to contribute to the pension deficit. GLS on the other hand is not considered to be a beneficiary of the pension relief in view of the fact that its employees are not part of the RMPP, and its pension system has no connection whatsoever to the RMPP.

(147)

The Commission also notes that arguments intended to demonstrate that the pension costs borne by RMG are higher than those of its competitors are irrelevant for the purpose of finding whether the pension relief constitutes a State aid. However, their comparative level can be taken into consideration in the assessment of the compatibility of the pension relief.

(148)

The Commission finds therefore that the pension relief provides a selective advantage to RMG and POL within the meaning of Article 107(1) of the Treaty.

(149)

As regards the non-taxation of the release of the provisions made in the accounts as a result of the pension deficit, the Commission accepts the argument of the United Kingdom that this is justified because the building up of the provisions could not be deducted from tax. The pension liabilities currently in RMG’s accounts represent amounts which are as yet unpaid under the RMPP and under UK tax legislation, tax relief is only available for pension contributions where and when those pension contributions are paid. As such, RMG has not claimed tax relief for any liabilities reflected in its accounts to date. Following the transfer of those liabilities to the new scheme, RMG will no longer be responsible for funding the RMPP and therefore will not claim any tax relief. As RMG will not be able to claim tax relief in respect of the related pension obligations which are currently reflected in its accounts, equally, it would not expect to suffer tax on the reversal of the accounts provisioning. Therefore, the Commission finds that the tax treatment of the pension relief does not involve a selective advantage for RMG and does therefore not constitute State aid.

(150)

As regards the assessment whether the debt reduction measures provide a selective advantage, the Commission assesses this type of measures under the private creditor test (29). This test asks whether a private creditor in the same situation would have acted the same way in order to maximise its chances to recover its credit. The Commission observes first that the United Kingdom has not claimed that it is acting in line with the behaviour of a private creditor in relation to the debt reduction measures and therefore it has not provided the Commission with any information that would enable it to apply such test. Second, the Commission is of the view that a private creditor would not have agreed to a reduction of his credit without demanding any further covenants or at least agreements on a rescheduling of the reminder of its credit with a view to maximise his chances of debt repayment after a successful restructuring. Therefore, the Commission finds that the debt reduction measures in the restructuring plan provide a selective advantage to RMG within the meaning of Article 107(1) of the Treaty.

(151)

When aid granted by a Member State strengthens the position of an undertaking compared with other undertakings competing in intra-Union trade, the latter must be regarded as affected by that aid. In accordance with settled case-law (30), for a measure to distort competition and affect trade between Member States it is sufficient that the recipient of the aid competes with other undertakings on markets open to competition.

(152)

The UK postal market was fully opened to competition in 2006, while already being open to competition before that date in certain market segments (for example delivery of parcels and delivery of bulk mail in case of postings above 4 000 items and in general any postal service that was not reserved to a specific undertaking). In this context, it is sufficient to point out that RMG is competing with companies established in other Member States (such as Post NL or Deutsche Post) and is itself active on markets outside the United Kingdom through its express parcel subsidiary GLS. Therefore, the measures in question are liable to distort competition and affect trade between Member States.

(153)

In light of the above, the Commission concludes that both the pension relief as well as the debt reduction measures in the restructuring plan constitute State aid within the meaning of Article 107(1) of the Treaty.

(154)

As the derogations provided for in Article 107(2) of the Treaty and Article 107(3)(a)(b) of the Treaty do clearly not apply, the Commission will assess to which extent the pension relief and the debt reduction measure can be found compatible with the internal market under Article 107(3)(c) of the Treaty.

(155)

The United Kingdom has not invoked Article 106(2) of the Treaty as such as justification for the compatibility of the aid granted to RMG.

(156)

The Commission will assess whether the pension relief can be declared compatible pursuant to Article 107(3)(c) of the Treaty, which provides that aid to facilitate the development of certain economic activities or of certain economic areas may be declared compatible with the internal market where such aid does not adversely affect trading conditions to an extent contrary to the common interest.

(157)

According to the case-law, the Commission may declare State aid compatible with the internal market if the aid contributes to the attainment of an objective of common interest (31), is necessary for the attainment of that objective (32), and does not adversely affect trading conditions to an extent contrary to the common interest (proportionality).

(158)

Postal services contribute to social, economic and territorial cohesion in the Union. The gradual opening of postal services to competition, which started at Union level in 1998, has brought about increased quality, greater efficiency and better responsiveness to users. Market opening has allowed the establishment of an internal market for postal services. It therefore contributes to the objective of the establishment of the internal market set out in Article 3(3) of the Treaty on European Union.

(159)

However, during the process of liberalisation, the former incumbent may suffer from a competitive disadvantage because he is burdened with ‘legacy costs’, that is to say costs which come from commitments entered into prior to the beginning of market opening and which can no longer be honoured under the same conditions in a competitive market environment because the historic operator is no longer able to pass on the corresponding costs to consumers.

(160)

The Commission has recognised in its decision-making practice that the gradual transition from a situation of largely restricted competition to one of genuine competition at Union level must take place under acceptable economic conditions (33). Therefore, it has accepted in a number of decisions that Member States grant State aid to relief the historic operator of a part of its ‘legacy’ pension liabilities (34).

(161)

In its Decision regarding the State aid granted to EDF (35), the Commission declared compatible with the common market State aid that relieved EDF of specific pension liabilities which exceeded those resulting from the general retirement arrangements and which had been defined during the monopoly period. The Commission stated that these liabilities were not dissimilar in nature to that of stranded costs in the electricity sector (36) and that aid to compensate excessive pension costs would therefore be treated in the same way as compensation for stranded costs. Therefore, the Commission declared that the same approach would be applied in the analyses of similar cases in the future.

(162)

In its Decision of 10 October 2007 on the State aid granted to La Poste (37), the Commission declared compatible with the common market State aid that relieved La Poste of specific pension liabilities which exceeded those resulting from the ordinary pension arrangements and which had been defined during the monopoly period. These liabilities arose from, first, the higher pension contributions payable in respect of employees with civil servant status and, secondly, the requirement to ensure the equilibrium of its retirement scheme for these employees.

(163)

The Commission noted that the measures were limited to what was strictly necessary to establish a level playing field for social security contributions and ultimately would therefore favour the development of competition and further liberalisation of the postal sector. It further noted, by way of drawing a parallel with the EDF decision, that La Poste no longer recruited civil servants and that the future pensions payments of La Poste placed it in a comparable situation vis-à-vis its competitors as regards social security contributions.

(164)

In its Decision of 25 January 2012 concerning subsidies for the financing of the civil servants’ pension costs at Deutsche Post (38), the Commission verified, in line with its La Poste Decision, whether the social security contributions borne by Deutsche Post were equivalent to those of private competitors. The Commission found that, in addition to pension subsidies, Deutsche Post has also benefitted from dedicated stamp price increases to finance the civil servants’ pension costs. Taking account of this extra relief, Deutsche Post had effectively borne significantly lower social contributions than private competitors in certain market segments. Accordingly the Commission declared the pension subsidies as partly incompatible with the internal market and ordered Germany to recover the incompatible share of the pension subsidies.

(165)

In its Decision on the same day in BPost (39), the Commission found the State aid granted to BPost for the relief of civil servants’ pension liabilities as compatible with the internal market under Article 107(3)(c) of the Treaty since it only relieved BPost of legacy pension costs without placing the company in a more favourable position than its competitors as regards the social security contributions. The Commission verified that the social security contributions borne by Belgian Post were equivalent to those of private competitors.

(166)

There are certain parallels between the case on RMG and previous case-law.

(167)

First of all, all cases involve material economic risk and involve uncapped liabilities: RMG bears the economic risk of a pension scheme which stems from RMG’s public monopoly legacy. The other postal incumbents bore a similar economic risk prior to being relieved of their liabilities, and were similarly disadvantaged when compared to their competitors. All cases concern aid beneficiaries in equivalent positions because their pension arrangements differed very significantly from the competitors’ pension arrangements.

(168)

Second of all, as with the previous cases, the Commission considers that in the absence of any State intervention to relieve RMG of at least part of the pension liabilities, RMG would not be able to compete on its merits with its competitors. After all, leaving RMG with the pension deficit would lead to its bankruptcy. As mentioned in recital 29, RMG has shown at the end of the 2010/2011 financial year negative operating assets on its balance sheet. Even after a successful implementation of the restructuring plan RMG would remain with net liabilities of at least GBP 2 000 million without a relief of the pension deficit.

(169)

However, there are some factors which distinguish the previous cases from this case.

(170)

In the first place, the UK pension arrangements differ significantly from those in other Member States. Most occupational pension schemes are ‘contracted out’ of the State pension arrangements known as the State Earnings Related Pension Scheme. Most large employers run their own pension schemes. Under UK pension law, those schemes must provide a pension entitlement which meets certain standards, and employers have certain obligations to ensure that schemes are adequately funded. Under current accounting standards (IAS), employers must record deficits on such pension schemes on their balance sheets.

(171)

In this respect, the RMPP is in principle similar to pension funds of private competitors. The only difference between RMG and competitors lies in the fact that the level of pension liabilities — and thus the deficit of the RMPP — has arisen from terms and conditions which were agreed during the monopoly period and in line with the status of civil servants.

(172)

Furthermore, the terms and levels of other social costs (for example contributions to the State pension arrangement, contributions to health and unemployment insurances) do not differ between RMG’s employees and private competitors’ employees.

(173)

Finally, RMG will remain liable for all newly accrued liabilities in the future as well as for new liabilities from an increase in the previously-accrued benefits of current employees as a result of future above-inflation wage increases. This means that RMG will continue to bear the same level of pension costs for newly accrued pension rights. The notified pension relief will therefore only reduce historic pension liabilities up to the date of the pension relief on 1 April 2012, while RMG remains fully responsible for any deficit that may arise from newly accrued pension rights after the pension relief on 1 April 2012.

(174)

These differences justify an adjustment of the approach followed in previous cases to assess the compatibility of the measure at issue and to account for the specificities of the UK pension arrangements. In the previous cases, the compulsory social security contributions (for example the contribution to the social insurances for pension, health, and unemployment) were used as a benchmark but this is not appropriate in the current case.

(175)

First, as RMG bears — apart from the pension costs — the same level of costs as competitors for the other social insurances (for example the financing terms for health and unemployment insurances do not differ from those of competitors), the benchmarking has to be carried out with regard to the funding of pension’s liabilities. It has to be ensured that RMG is placed in the same position as competitors in respect of their obligations as regards the financing of pension funds.

(176)

Second, in the previous cases, the Commission approved a level of aid such that the postal incumbent’s future social costs were capped at the competitors’ social contribution rates. The United Kingdom reform does not go that far but leaves RMG the full financial responsibility for any deficit that results from the newly accrued pension rights. Therefore, the comparison has to be done on the basis of RMG’s accrued pension liabilities at the date of the pension relief on 1 April 2012.

(177)

Third, it is not straightforward to find a single benchmark for the level of competitors’ pension costs because the pension benefits offered by the pension funds differ from one company to another. Each pension fund has individual arrangements with the sponsoring companies. At most, the comparison can be done based on an average of comparable pension funds.

(178)

Therefore, the Commission will assess whether RMG will, as a result of the pension relief, be placed in a comparable situation vis-à-vis its competitors and other UK companies as regards the liability for accrued pension deficits.

(179)

With regard to Deutsche Post’s comment that the assessment should take into account the extent to which pension costs were passed on through increased regulated stamp prices, the Commission has reviewed the UK postal regulator’s pricing decisions. The Commission finds that in the RMG case pension costs were evenly apportioned between the different business segments of RMG according to generally accepted cost allocation principles. This means that both the price-regulated as well as the other services in competition have carried an appropriate share of the pension deficit. It is therefore not true that in the RMG case the regulated prices financed a disproportionate share of pension costs for the benefit of the non-price regulated business segments. The UK postal regulator has ensured that all of RMG’s business segments have equally and proportionally contributed to the financing of the RMPP’s deficit and have not been placed in a better position than competitors.

(180)

The Commission will first assess the United Kingdom’s contention that the current deficit of the RMPP can be fully relieved because the amount of liabilities which are due to more generous entitlements that the RMPP offered to its members exceeds the current deficit.

(181)

The United Kingdom has submitted a study to support its assertion that the pension deficit has been caused by abnormally high pension liabilities. This study estimates that the level of abnormal liabilities of the Royal Mail scheme is GBP 12,7 billion when compared to the liabilities that would result from a pension fund that offers pension benefits in line with the statutory minimum. An amount of GBP 6,9 billion of abnormal liabilities results when compared to the UK average pension fund’s liabilities. As, in both cases, those liabilities would be higher than the current deficit of GBP 4,5 billion, the United Kingdom claims that a total relief of the pension deficit is justified.

(182)

First, the Commission refutes the comparison to the statutory minimum because the submitted data on the average UK pension schemes clearly shows that the majority of UK pension schemes offer benefits that go significantly beyond the statutory minimum.

(183)

Second, the Commission considers that the provided comparison to the average pension schemes must be critically reviewed because the different elements of the comparison show different degrees of quality and reliability.

(184)

Compared to RMPP’s retirement age of 60, the average retirement age was 63,5 across United Kingdom private sector schemes over the period 1990 to 2010. The difference in pension costs of GBP 3,5 billion is calculated based on reliable data.

(185)

The redundancy benefits of GBP 0,5 billion under the RMPP are an unusual feature for private sector schemes and are identified as pension costs that go beyond those of general pension arrangements.

(186)

For members of UK pension schemes who left active service prior to 1991, pension schemes are not required to provide inflationary increases on all their benefits in the period between leaving employment and retiring. However, the RMPP does provide inflationary increases on all benefits for such members. The United Kingdom was not able to provide exact numbers of private sector schemes that also offer deferred pension revaluation for pre-1991 leavers but assures the Commission that a clear majority of schemes do not provide such revaluation. In the calculation of the abnormal liabilities of GBP 1,1 billion, it is assumed without sufficient justification that 75 % of all private sector schemes would not offer such additional benefits.

(187)

Contrary to the RMPP, pensions accrued prior to 1997 are generally not required to increase once retirement benefits have started to be paid to the respective member of the scheme. However, 36 % of private sector schemes guarantee increases in line with inflation as does the RMPP. The other private sector schemes do not offer guaranteed increases in the same magnitude but it was common practice in the past that a majority of those schemes decided at their own discretion increases that came close to the guaranteed increases. The United Kingdom’s expert doubts that this practice will continue in the future because also private schemes are now in deficit and may decide to cut back on the discretionary increases. The calculated legacy costs of GBP 1,9 billion depend sensitively on the assumptions about the future behaviour of the private sector schemes and are therefore the least robust estimate out of the four items of legacy costs.

(188)

As the United Kingdom itself admits, an analysis of legacy cost compared to an average benchmark is necessarily characterised by a certain margin of approximation given the diversity of UK pension schemes and the lack of detailed benchmarking data stretching back 20-30 years. While the United Kingdom considers that the estimates of the four items are considered reasonable based on their expert’s experience, the United Kingdom notes nevertheless that the degree of confidence and level of external supporting data does vary by item.

(189)

The Commission considers that the estimates of legacy costs concerning the retirement age and the redundancy benefits are reliable because they are calculated based on objective data. Consequently, the Commission notes as an intermediate result of its assessment that the provided data by the United Kingdom on the abnormality of the pension liabilities would provide sufficient evidence to justify a (partial) relief from the pension deficit in so far as the aid was limited to the legacy costs stemming from these two items.

(190)

However, concerning the other items, the magnitude of abnormality depends sensitively on the assumptions made by the expert. Although the Commission recognises that the RMPP offered more generous benefits than average private sector schemes, it is difficult to exactly quantify them.

(191)

The Commission therefore concludes that although the submitted expert study is based on reasonable assumptions as regards abnormality resulting from early retirement age and redundancy benefits, it suffers from a lack of (historical) data on the other sources of abnormality and can therefore not be considered reliable enough to justify a complete relief of RMPP’s pension deficit.

(192)

Moreover, the Commission is of the opinion that a total relief of the pension deficit would place RMG in a better position vis-à-vis its competitors and other UK companies as regards its pension liabilities. Indeed, when looking at the pension deficits that the FTSE 100 companies (40) show on their balance sheets, the vast majority of those companies with a comparable profile to RMG, currently do carry pension deficits due to the rising life expectancy of the pension schemes’ members and the adverse conditions on the stock markets.

(193)

In order to overcome these difficulties in assessing the compatibility of the aid at issue, the Commission has looked at the average pension deficits of companies with a profile similar to that of RMG.

(194)

The United Kingdom puts forward that the ratio of pension deficit to EBITDA (= Earnings before Interest, Tax, Depreciation, and Amortisation) provides a measure of the relative burden of the pension liabilities and a company’s ability to fund such liabilities. The United Kingdom submitted the latest available accounting data from 2011 on the pension deficits and EBITDAs of the FTSE 100 companies. The Commission considers that on average, the FTSE 100 companies show a pension deficit that amounts to [16 to 23 %] of the EBITDA.

(195)

In contrast, RMG’s pension deficit is significantly higher than its EBITDA — for example measured in relation to its 2011 EBITDA — RMG’s pension deficit amounts to more than 12 times its EBITDA. As the letter business is highly labour intensive, RMG is particularly exposed to the increased pension deficits from the defined-benefit schemes that RMG entered into in the pre-liberalisation period. Compared to other companies of a similar profile, RMG is therefore in a worse financial situation in respect of its ability to cover the pension deficits from on-going revenues.

(196)

The Commission considers that the ratio of pension deficit to EBITDA provides a reasonable benchmark for the pension deficit that is generally assumed by UK companies with a comparable profile to RMG. Aid granted to relieve RMG of abnormal pension liabilities can therefore be considered as compatible insofar as RMG carries after the grant of the aid a liability on its balance sheet that is comparable to the pension deficit that a UK company of a similar size generally assumes on its balance sheet. Using as benchmark group the FTSE 100 companies, which show an average liability for pension deficits of [16 to 23 %] of their EBITDA, RMG should also retain a liability for a pension deficit that equals [16 to 23 %] of its EBITDA. This way, the pension relief will be limited to those pension costs that comparable private sector companies have generally not assumed.