Communication from the Commission to the European Parliament, the Council, the

European Economic and Social Committee and the Committee of the Regions on the
interpretation of Council Regulation (EEC) No 3577/92 applying the principle of
freedom to provide services to maritime transport within Member States (maritime
cabotage) /* COM/2003/0595 final */

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN

PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL
COMMITTEE AND THE COMMITTEE OF THE REGIONS on the interpretation of
Council Regulation (EEC) No 3577/92 applying the principle of freedom to provide
services to maritime transport within Member States (maritime cabotage)

TABLE OF CONTENTS

1. Introduction

2. The opening of the maritime cabotage market

2.1. Freedom to provide maritime cabotage services

2.2. The beneficiaries of the freedom to provide services

2.2.1. The concept of Community shipowner

2.2.2. The conditions of registration in a Member State and access to national cabotage

2.3. Opening up the market to ships which are not among the Regulation's beneficiaries

3. The scope of Regulation (EEC) No 3577/92

3.1. Pleasure craft

3.2. Cruise services

3.3. Maritime versus port services

3.4. Feeder services

4. Manning rules

4.1. The content of the manning rules which may be imposed by a host State

4.2. Consecutive cabotage

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4.3. Revision of the manning rules

5. Public service

5.1. Geographical scope of public service links

5.2. Island cabotage routes on which public service obligations may be imposed

5.3. The obligations that may be imposed

5.3.1. The distinction between public service obligations and public service contracts

5.3.2. The principle of non-discrimination.

5.4. The procedure for imposing public service obligations

5.5. Market access and competition on public service routes

5.5.1. Exclusivity

5.5.2. Duration of public service contracts

5.5.3. Bundled routes

5.6. The case of "small islands"

5.7. Public subsidies granted to compensate for public service obligations

6. Safeguard measures

Summary

Drawing on the experience gained during ten years' practical application of Regulation
(EEC) No 3577/92, the Commission has decided in the interests of transparency to
publish its interpretation of the provisions of that Regulation.

This Communication is being presented for information purposes only, to help explain
the Regulation to all parties who wish to make use of it. It indicates how the Commission
intends to apply the Regulation. It does not set out either to revise the Regulation or to
encroach on the Court of Justice's jurisdiction in matters of interpretation.

The Communication's layout mirrors that of the Regulation.

It starts by specifying the scope of the freedom to provide services in the maritime
cabotage sector. It indicates who enjoys that freedom and recalls which services the
Regulation covers.

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It goes on to specify the extent of the derogations to the freedom to provide services, as
provided for in the Regulation. There are three such derogations. Firstly, Member States
have the power to impose manning rules on board vessels performing island cabotage
services between two ports on their territory. Secondly, Member States may impose
public service obligations on shipowners in order to ensure an adequate scheduled
transport service to, from and between islands. Lastly, Member States may ask the
Commission to adopt safeguard measures to remedy a serious disturbance of the internal
market.

1. Introduction

Council Regulation (EEC) No 3577/92 applying the principle of freedom to provide

services to maritime transport within Member States (maritime cabotage) [1], which was
adopted when the internal market was created, is now ten years old. Since its entry into
force on 1 January 1993, maritime cabotage has undergone gradual liberalisation. Certain
services were exempted from the application of the Regulation for a number of years.
Since 1 January 1999 virtually all maritime cabotage services have been liberalised. Only
two types of island cabotage service still qualify for derogations in Greece: scheduled
passenger and ferry services, and services performed by vessels of less than 650 gt.

[1] OJ L 364, 12.12.1992, p. 7.

Since 1993, the Commission has reported several times on the economic and legal
progress of liberalisation [2], but has not addressed the problems of interpretation raised
by the Regulation. Many such problems have been raised. This is witnessed by the
dozens of enquiries the Commission has received from Member States, and from natural
and legal persons. It is also apparent from the infringement proceedings the Commission
has had to institute against Member States whose legislation it believed ran counter to the
Regulation. Several of these issues have been referred to the Court of Justice of the
European Communities.

[2] COM(95) 383, COM(97) 296, COM(2000) 99, COM(2002) 203.

With the experience afforded by several years of implementation, the Commission

believes it would be useful to indicate how it intends to interpret the provisions of the
Regulation.

The Commission's first concern is transparency. It has assumed positions on issues

relating to the implementation of the Regulation on many occasions, but always on a
bilateral basis. Yet the questions certain persons raise are often of direct interest to others.

The Commission's second concern is clarification. Some of the Regulation's provisions

are not altogether clear to anyone who does not apply them on a daily basis. This
Communication is intended to help explain the text of the Regulation to both those who
apply it and those who hope to rely on it.

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This Communication merely presents the Commission's interpretation of the Regulation
for information purposes. It does not set out to revise the Regulation or to encroach on
the Court of Justice's jurisdiction in matters of interpretation. If a future judgement of the
Court of Justice contradicts the Commission's analysis, the Commission will of course
comply with it without delay.

For ease of reading, this Communication follows the order of the provisions in the
Regulation. Only some of the provisions are reproduced, so readers are advised to refer to
the text of the Regulation.

2. The opening of the maritime cabotage market

2.1. Freedom to provide maritime cabotage services

Article 1 of Regulation (EEC) No 3577/92 liberalised maritime cabotage in the countries

where that economic sector was reserved for nationals. Freedom to operate between two
ports in the same Member State is offered to all Community shipowners. [3]

[3] For the beneficiaries of the freedom to provide services, see point 2.2.

The Commission considers that this freedom may in no circumstances be subjected to

schemes of prior authorisation, in particular schemes coupled with restrictive conditions
[4]. At the very most, Member States may ask shipowners to supply advance information
on the services they intend to provide. Similarly, the Commission does not believe
Member States can require companies to have a representative on their territory.

[4] See, however, the rules set out in Sections 4 and 5.

The standstill clause in Article 7 of the Regulation, which remains valid even though the
Article of the Treaty to which it refers has been deleted, in principle prohibits Member
States from introducing restrictions on the freedom to provide services which did not
exist before the Regulation entered into force.

2.2. The beneficiaries of the freedom to provide services

Article 1 of the Regulation stipulates who the beneficiaries are of the freedom to provide
maritime cabotage services. They are Community shipowners (1) who have their ships
registered in a Member State (2) and flying the flag of that Member State (3), provided
that they comply with the conditions for carrying out cabotage in that Member State (4).

Conditions (1), (2) and (4) imposed by the Regulation merit closer attention. The
question also arises of the opening of the market to vessels which do not comply with the
conditions listed above.

2.2.1. The concept of Community shipowner

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Article 2(2) of the Regulation distinguishes three types of Community shipowner.

"(a) nationals of a Member State established in a Member State in accordance with the
legislation of that Member State and pursuing shipping activities;

(b) shipping companies established in accordance with the legislation of a Member State
and whose principal place of business is situated, and effective control exercised, in a
Member State; or

(c) nationals of a Member State established outside the Community or shipping

companies established outside the Community and controlled by nationals of a Member
State, if their ships are registered in and fly the flag of a Member State in accordance with
its legislation."

The matter which has raised the most queries is the definition of the concept of "control"
to which the Regulation refers in two of the three categories of Community shipowner.

The Regulation states that Community shipowners include "shipping companies

established in accordance with the legislation of a Member State and whose principal
place of business is situated, and effective control exercised, in a Member State" (Article
2(2)(b)). The Commission considers that the concept of "effective control in a Member
State" means in this context that the major decisions are taken and the day-to-day
management performed from Community territory and that management board meetings
are held in the territory of the Community.

Also included among Community shipowners are "nationals of a Member State

established outside the Community or shipping companies established outside the
Community and controlled by nationals of a Member State, if their ships are registered in
and fly the flag of a Member State in accordance with its legislation" (Article 2(2)(c)).
The Commission considers that the concept of "control by nationals of a Member State"
referred to in that Article means that the majority of the company's capital is held by
Community nationals.

The condition that the ship should be registered in a Member State also warrants
clarification.

2.2.2. The conditions of registration in a Member State and access to national cabotage

The Regulation does not list the Member State registers for which the conditions of
registration and of access to national cabotage are met. Such a list would in any event be
liable to change over time.

The condition of registration in a Member State assumes that the register in question is
located in a territory in which the Treaty and the laws deriving from it apply.
Accordingly, ships entered in the Kerguelen (French Austral and Antarctic Territories)

5
register or the registers of the Dutch Antilles, the Isle of Man, Bermuda or the Cayman
Islands are not among the beneficiaries of the Regulation [5].

[5] By and large, these territories form part of the overseas countries and territories
subject, by virtue of Article 299(3) of the Treaty, to special arrangements for association
with the Member States.

By contrast, ships registered in Gibraltar are among the Regulation's beneficiaries as the
Treaty applies to that territory [6]. Nonetheless, ships entered in this register could be
refused access to Community cabotage if it were established that they were not
effectively subject to the Treaty and to the Community law derived from it.

[6] Article 299(4) of the Treaty stipulates that "the provisions of this Treaty shall apply to
the European territories for whose external relations a Member State is responsible".

The Regulation also provides that for a ship from a Member State to be able to carry out
cabotage in another Member State it must first comply with all the conditions for carrying
out cabotage in the Member State in which it is registered.

Accordingly, ships which do not enjoy access to national cabotage are not entitled to
access to the markets of the other Member States either. Similarly, ships which enjoy
conditional access to the national market may have similar conditions placed upon them
if they wish to operate in another Member State. For example, if registration in the
second register X of a Member State is subject to the condition that the ship operate at
least half the year on international routes, the ship entered in that register X will not be
able to demand broader access to cabotage in the other Member States (it will not be
entitled to provide scheduled services there all year round) [7].

[7] On this point, see the Fourth Commission report on the implementation of Council
Regulation 3577/92 applying the principle of freedom to provide services to maritime
cabotage (1999-2000) COM(2002) 203 pp. 5 and 6.

2.3. Opening up the market to ships which are not among the Regulation's beneficiaries

Several Member States have opened up their markets more fully than the Regulation
requires, whether erga omnes, by means of bilateral agreements or by means of
individual authorisations. Such practices do not infringe Community law.

3. The scope of Regulation (EEC) No 3577/92

Article 2(1) of Regulation (EEC) No 3577/92 indicates that the Regulation applies to
maritime transport services (the carriage of passengers or goods by sea) within a Member
State. It goes on to provide an indicative list of the types of cabotage service covered by
the Regulation.

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Since the Regulation entered into force, four main questions have been raised regarding
its scope. Do pleasure craft fall within the scope of the Regulation? Does the cabotage leg
of an international cruise service fall within the scope of the Regulation? Do services
provided by vessels such as tugs fall within the scope of the Regulation? Should feeder
services be considered as cabotage or as international services? These questions are
addressed individually below.

3.1. Pleasure craft

Regulation (EEC) No 3577/92 only covers maritime services "normally provided for
remuneration". Accordingly, most pleasure craft activities fall outside its scope.

3.2. Cruise services

Cruise services do fall within the scope of Regulation (EEC) No 3577/92 when they are
provided within a Member State (see Articles 3(1) and 6(1) of the Regulation). The
question is whether the cabotage leg of an international cruise service also falls within the
scope of the Regulation.

The Commission takes the view that the Regulation only applies when passengers are
embarked/disembarked in the Member State where the cabotage leg takes place.

A cruise service starting in Member State X or a third country and ending in a third
country or Member State X and calling at ports in a Member State Y does not come
under Regulation (EEC) No 3577/92 if no passengers join or leave the cruise in Member
State Y. In that case, it is Council Regulation (EEC) No 4055/86 of 22 December 1986
applying the principle of freedom to provide services to maritime transport between
Member States and between Member States and third countries which applies [8].

[8] OJ L 378, 31.12.1986, p. 1.

3.3. Maritime versus port services

Do services provided by vessels such as tugs fall within the scope of Regulation (EEC)
No 3577/92? The text of the Regulation itself does not answer this question. To clarify
the status of a number of services normally provided near the coast (e.g. towing, pilotage,
dredging), it is useful to recall the general legal framework applying to the provision of
services.

In the Services Chapter of the Treaty, Article 49 provides that "restrictions on freedom to
provide services within the Community shall be prohibited in respect of nationals of
Member States who are established in a State of the Community other than that of the
person for whom the services are intended". However, that Article does not apply to
"services in the field of transport". Article 51(1) of the Treaty provides that "freedom to
provide services in the field of transport shall be governed by the provisions of the Title
relating to transport". The Transport Title of the Treaty indicates that, in respect of sea

7
transport, it is for the Council to decide on any appropriate provisions that may be laid
down (see Article 80(2) of the Treaty).

Thus far, the Council has adopted two Regulations applying the principle of freedom to
provide services to the maritime transport sector: Regulation (EEC) No 4055/86
concerning trade between Member States and between Member States and third countries
and Regulation (EEC) No 3577/92, which concerns trade within Member States. Both
Regulations apply to the carriage of passengers and goods by sea.

A proposal for a Directive applying the principle of freedom to provide services to port
services is also under discussion in the Council and the European Parliament [9]. It
applies to the technical-nautical services of pilotage, towage and mooring provided for
port users, either within the port area or on the waterway access to and from the port or
port system [10].

[9] COM(2002) 101 final.

[10] The scope of the draft Directive also includes cargo handling and passenger services.

Accordingly, of the various services provided near the coast, those such as dredging
which are not services "in the field of transport" come under Article 49 of the Treaty,
while services "in the field of transport", such as towing, come under the above-
mentioned legislation based on Article 80(2) of the Treaty.

To sum up, as regards "services in the field of transport", technical-nautical services

provided within the port area as defined by the draft Directive would be subject to that
Directive. Technical-nautical services involving the deep-sea carriage of goods or
passengers, outside the port area, are subject to Regulation (EEC) No 4055/86 and
Regulation (EEC) No 3577/92. In practice, this mainly concerns the towage of ships
following a breakdown or the towage of rigs into position.

The Commission would point out that the carriage of passengers by boat is subject to
Regulation (EEC) No 3577/92 even when the service takes place within a single "port
system" as defined by the legislation of the Member State concerned (e.g. the crossing of
an estuary by sea). Similarly, the Commission takes the view that the carriage of
passengers by boat for touristic purposes starting and ending in the same port is covered
by the Regulation.

3.4. Feeder services

Feeder services are services by which a carrier unloads goods from a vessel that has
sailed from a point of departure in order to transfer the same goods on to another vessel
which continues the journey to a port of destination. The service is normally carried out
under a through bill of lading. The question has been raised whether such services should
be considered as international services falling within the scope of Regulation (EEC) No

8
4055/86 (which does not impose any flag requirement) or as cabotage services falling
within the scope of Regulation (EEC) No 3577/92 (where there is a flag requirement).

In February 1996, the Commission consulted the Member States on this issue. The
consultation revealed that in all the Member States where cabotage services are reserved
for Community flagged vessels in accordance with Regulation (EEC) No 3577/92, feeder
services are considered to be cabotage services (the sole exception is Portugal), whereas
in the rest of the Member States, feedering is free. The Commission therefore considered
that Member States could reserve feeder services for Community-flagged vessels.

It should be noted, however, that allowing a company to perform feeder services for the
carriage of international cargo following or preceding an international voyage by the
same company may lead to substantial savings in the cost of transport.

The Commission therefore takes the view that this issue will require further examination.

***

Having clarified the scope of the freedom to provide maritime transport services as
established by the Regulation (EEC) No 3577/92, the Commission will now examine the
derogations to this freedom introduced by the Regulation.

The Regulation provides for three types of derogation. Freedom to provide island
cabotage services may be limited by the imposition of manning rules (see Section 4
below) and public service obligations (see Section 5) by the Member States concerned.
Freedom to provide services may also be temporarily suspended in the event of a serious
disturbance of the internal transport market (see Section 6).

4. Manning rules

Questions of manning have traditionally been the responsibility of the flag States. The
rules vary greatly from one register to another. For instance, some Member States impose
strict nationality conditions requiring all crew members to be Community nationals.
Others merely reserve the posts of master and chief officer for Community nationals.
These different nationality requirements translate into major differences in cost from one
register to another.

To limit intra-Community competition on the most sensitive routes, Article 3 of the

Regulation provides that "host" Member States may impose their own manning rules on
ships carrying out island cabotage. "Host" Member States may also decide the manning
rules applicable to small ships (ships smaller than 650 gt). In practice, five Member
States have chosen to avail themselves of these provisions of the Regulation.

However, so as not to void the principle of freedom to provide services of its content, the
Regulation stipulates that the rules of the flag State will continue to apply to cargo ships

9
over 650 gt carrying out island cabotage where the voyage concerned follows or precedes
a voyage to or from another State ("consecutive cabotage").

These provisions raise two sets of questions regarding the extent of the host State's
competence.

The first relates to the content of those manning rules for which the host State is
responsible, while the other concerns the boundary between the competence of the host
State and that of the flag State in the case of consecutive cabotage.

The question has also been raised whether it is the host State's rules or the flag State's
rules which apply to cruise liners carrying out island cabotage. The Commission
considers the Regulation to be very clear on this point: for cruise liners, the manning
rules are the responsibility of the flag State (see Article 3(1) of the Regulation). This
matter has been referred to the Court of Justice.

4.1. The content of the manning rules which may be imposed by a host State

The Regulation does not specify which "matters relating to manning" are the
responsibility of the host State. Some people claim the host State's competence is
unlimited (the Regulation refers to "all" manning rules). The Commission takes a more
restrictive approach. It believes the host State's competence needs to be limited in order
to safeguard the principle of freedom to provide services, in respect of which that
competence is a derogation.

The Commission considers that host States are competent to specify the required
proportion of Community nationals on board ships carrying out island cabotage (and
ships smaller than 650 gt). A Member State may therefore require the crews of such ships
to be composed entirely of Community nationals. Member States may also require the
seafarers on board to have social insurance cover in the European Union. In terms of
working conditions, they may impose the minimum wage rules in force in the country.
However, as regards the rules on safety and training (including the languages spoken on
board), the Commission considers that Member States may do no more than require
compliance with the Community or international rules in force (STCW and SOLAS
Conventions), without disproportionately restricting the freedom to provide services.

4.2. Consecutive cabotage

Article 3(3) of the Regulation stipulates that "from 1 January 1999, for cargo vessels over
650 gt carrying out island cabotage, when the voyage concerned follows or precedes a
voyage to or from another State, all matters relating to manning shall be the responsibility
of the State in which the vessel is registered (flag State)".

The Commission takes the view that flag rules must apply only where goods actually are
carried during the international leg of the voyage which follows or precedes the national
leg of the voyage.

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Were this not the case, shipowners could circumvent the rules of the host State by adding
a fictitious international voyage to their island cabotage journey. That is why the
Commission has accepted that Member States may continue to apply the host State's rules
where the international voyage which follows or precedes the island cabotage is made in
ballast. The Commission nonetheless considers that the flag State's rules may apply to
Community ships which carry out an island cabotage voyage after having performed an
operationally and commercially independent voyage to or from another State and which,
in making their way to the port of loading for the island cabotage voyage, perform a
journey in ballast which is sufficiently short and inconsequential for the island cabotage
voyage in practice to indeed follow or precede an international voyage.

The manning rules applicable where the ship concerned is fulfilling public service
obligations are specified in point 5.3.2.2.

4.3. Revision of the manning rules

According to the Regulation, definitive manning arrangements were to have been adopted
by the Council before 1 January 1999 on the basis of a Commission proposal following a
detailed examination of the economic and social consequences of the liberalisation of
island cabotage.

The Commission presented a report on the matter to the Council on 17 June 1997, and a
proposal for a regulation on 29 April 1998 [11]. The proposal was for a generalisation of
the flag State's responsibility for manning issues. The host State retained responsibility
for ships smaller than 650 gt and for determining the required proportion of Community
nationals in the crews of ships carrying out scheduled passenger and ferry services
(including mixed services and scheduled cruise services). Seafarers from third countries
on board such ships were to have been subject to the same working conditions as
residents of Member States.

[11] COM(1998) 251 final.

The Commission proposal failed to win the approval of the Member States. The
Commission therefore proposed that it be withdrawn on 11 December 2001. The
Commission currently has no plans to present a new proposal. Accordingly, the rules laid
down in Article 3 of the Regulation will not be amended in the short term.

5. Public service

The maritime transport of passengers and goods is vital for the inhabitants of Europe's
islands. That is why a special set of rules was drawn up to protect some of these maritime
links not adequately served by the market.

The Regulation offers Member States a framework to organise in a compatible way

market intervention through restrictions on market access or funding relating to public
service obligations on maritime services. The purpose of this Section is to further clarify,

11
where necessary, the conditions laid down by the Regulation with the objective of
rendering public intervention compatible with general Treaty rules.

5.1. Geographical scope of public service links

According to the wording of Article 4(1) of the Regulation, public service links have to
serve routes to, from and between islands. Long estuaries or fjords which lead to a detour
of about 100 km by road [12] may be treated as islands for the purposes of this section as
they may cause a similar problem by isolating conurbations from each other.

[12] The ratio between the distance around the estuary and the distance across should be
around 10 or greater.

5.2. Island cabotage routes on which public service obligations may be imposed

It is for the Member States (including regional and local authorities where appropriate) to
determine which routes require public service obligations [13]. In particular, public
service obligations may be envisaged for regular (scheduled) island cabotage services in
the event of market failure to provide adequate services.

[13] It is not for shipowners to set public service obligations.

According to the conditions laid down by the Regulation, Member States may impose
public service obligations in order to "ensure the adequacy" of regular maritime transport
services to a given island (or in relation to an estuary), where Community shipowners, if
they were considering their own commercial interest, would not provide services of an
adequate level or under the same conditions [14]. Trade should otherwise remain free.

[14] See Recital 9 and Article 2(4) of the Regulation. See also the judgement in Case C-
205/99 (reference to the Court under Article 234 of the Treaty by the Tribunal Supremo,
Spain, for a preliminary ruling in the proceedings pending before that Court between
Asociación Profesional de Empresas Navieras de Líneas Regulares (Analir) and others
and Administración General del Estado), paragraphs 31 et seq., [2001] ECR I-1271.

When imposing public service obligations for services described in Article 4(1) of the
Regulation, Member States must limit their intervention to the essential requirements
referred to in Article 4(2) and fulfil the requirement of non-discrimination as laid down
by Article 4(1) of the Regulation in respect of all Community shipowners interested in
serving the route. This requirement must be strictly observed when deciding on the
content of the obligations to be fulfilled and during the administrative procedure resulting
in the selection of an operator of a given service or establishing the amount of
compensation.

5.3. The obligations that may be imposed

5.3.1. The distinction between public service obligations and public service contracts

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A distinction is made in Regulation (EEC) No 3577/92 between "public service
obligations" (see Article 2(4) and Article 4(2) of the Regulation) and "public service
contracts" (see Article 2(3)). Public service contracts are the instrument normally used to
enshrine public service obligations where a horizontal approach applying to all
shipowners intending to serve a given route may not be sufficient to meet the essential
transport needs, in particular general conditions concerning the quality of a given service.

Article 4(2) of the Regulation sets out an exhaustive list of requirements that may be
introduced when "public service obligations" are imposed. Article 2(3) of the Regulation
provides only an indication of the scope of public service contracts; Member States may
go further. In practice, quality requirements are often part of "public service contracts",
but cannot be introduced as part of "public service obligations". With regard to "public
service obligations", the requirement relating to the shipowners' "capacity to provide the
service" may include an obligation related to their solvency as well as the requirement
that they have no outstanding tax and social security debts [15]. The Commission takes
the view that the obligation to use a fast ferry may also fall within this category.

[15] Case C-205/99, cited above, paragraphs 45 to 51.

When public service obligations are imposed, the requirements relating to the regularity
and frequency of the service may be met collectively - and not individually - by all the
shipowners serving the same route [16].

[16] If an island needs to be served 4 times a week and two shipowners are willing to
participate in the trade, each of them should only commit itself to operating twice a week
or, respectively, once and three times a week.

5.3.2. The principle of non-discrimination.

Pursuant to the principle of non-discrimination laid down by the Regulation, Member

States must not set obligations that are tailor-made for a given shipping company and that
would prevent other Community shipowners from entering the market or apply
obligations with that effect.

In particular, the Commission would draw the attention of the Member States to the
problems raised by the following two types of provision.

5.3.2.1. The taking-over of vessels

Firstly, the question has been raised whether a Member State, when putting a public
service contract out to tender, could require the successful bidder to take over vessels and
crews from the previous operator. The Commission takes the view that, in most cases,
such an obligation would infringe Regulation (EEC) No 3577/92 as it would be
discriminatory. It would prevent Community shipowners from bidding with their own
vessels and would give an advantage to the incumbent operator should the latter be a
candidate for its own succession.

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However, the Commission can agree that where serving an island requires the use of a
vessel with a design so special that it cannot be found or sold on the market or used for
another purpose, it will be less restrictive of the freedom to provide services for there to
be a requirement that that vessel be taken over than for the service to be awarded to a
single shipowner with a contract that would be long enough to allow the full amortisation
of a purpose-built vessel. In such cases, the vessel could be leased - under very clear
conditions set out in detail in the tender documents - by successive operators from a
vessel-owning company set up for that purpose. An obligation for the new service
provider to take the ship over directly from its predecessor would also be conceivable. It
has to be stressed that this obligation cannot be extended to the crew (taking over the on-
board personnel should of course remain an option for the bidder).

Where Member States' authorities themselves own vessels or have them otherwise at their
disposal, these may be placed at the disposal of all potential service operators under the
same non-discriminatory terms.

5.3.2.2. Manning conditions

Secondly, questions have also been raised in relation to the manning conditions that may
be imposed under public service obligations and contracts.

The Commission takes the view that the type of manning rules that may be imposed by
host Member States on any vessel participating in an island cabotage service (Article 3(2)
of the Regulation) and the type of rules that may be imposed under public service
obligations and contracts (Article 4 of the Regulation) should in principle be the same.
These rules are specified in Section 4 of this Communication.

Indeed, Member States would be likely to infringe the principle of non-discrimination

laid down by Regulation (EEC) No 3577/92 should they go beyond what is acceptable
under Article 3 of that Regulation when they impose public service obligations [17].

[17] The Commission nonetheless takes the view that, in some exceptional cases, a
condition which cannot be accepted under Article 3 of the Regulation, but which is
essential for the public service, will be acceptable under Article 4 of the Regulation if it is
duly justified and proportionate to the goal pursued. This will need to be examined on a
case-by-case basis.

However, the Commission considers that Member States may lawfully impose their own
manning conditions on board vessels operating on public service routes even when the
island cabotage voyage is followed or preceded by a voyage to or from another Member
State. Article 3(3) of the Regulation should not apply to routes where public service
obligations are imposed.

5.4. The procedure for imposing public service obligations

14
Member States have several administrative means at their disposal for imposing "public
service obligations", applied to all operators of a given route, such as a declaration
regime, a licensing system or an authorisation system. Member States may also impose
public service obligations by concluding public service contracts with one or a limited
number of operators.

The Court of Justice, in Case C-205/99, stated that a procedure as restrictive as an

authorisation procedure is acceptable provided that it is necessary, proportionate to the
aim pursued and based on objective, non-discriminatory criteria which are known in
advance to the undertakings concerned. Companies should also be given the right to
appeal against any decision taken against them [18].

[18] Case C-205/99.

It must be stressed, however, that it would be difficult for a Member State to introduce an
authorisation system after the entry into force of the Regulation without infringing the
standstill provision laid down by Article 7 of the Regulation. In principle, only Member
States which had an authorisation system in force before the entry into force of the
Regulation may continue to implement it.

When the competent authority of a Member State concludes a public service contract, it
also has to respect the applicable procurement rules. Procurement law entails, at the
minimum, a sufficient degree of publicity, in order to ensure an effective competition, as
well as the organisation of a transparent and non-discriminatory selection procedure
proportionate to the aim to be achieved [19]. In addition, for the award of contracts
falling within the scope of Council Directive 92/50/EEC of 18 June 1992 relating to the
coordination of procedures for the award of public service contracts [20], technical
specifications must comply with certain rules and there is an obligation to publish the
relevant contract award notice in the Official Journal of the European Union.

[19] See the Commission interpretative communication on concessions under

Community law (OJ C 121, 29.4.2000, p. 2), as well as the judgement in Case C-324/98
Teleaustria and Telefonadress v Telekom Austria [2000] ECR I - 10745; see also point
5.3.2 above.

[20] OJ L 209, 24.7.1992, p. 1.

The Commission takes the view that, in general, the awarding of public service contracts
risks to discriminate between operators, as normally only one operator of a given route is
concerned. It therefore considers that launching an open Community-wide invitation to
tender is in principle the best way to ensure non-discrimination (on these matters, see also
point 5.6 below [21]).

[21] In principle, an independent authority should be responsible for the whole procedure.
However, the Commission recognises that, in some cases, it might be sufficient for only

15
the final part of the procedure (evaluation of the bids and adoption of the final decision)
to be entrusted to an independent body.

The Commission does not require the Member States to notify every public service
contract they conclude (should the contract involve public compensation, reference is
made to point 5.7 of this communication). The notification obligation laid down by
Article 9 of the Regulation only refers to acts with a broader scope such as a general legal
framework for cabotage services.

5.5. Market access and competition on public service routes

By imposing public service obligations, Member States intervene in the conditions of

market access on certain routes, which may distort competition if not done in a non-
discriminatory way. Such interventions may be considered both legitimate and lawful in
view of the aim pursued (to ensure the adequacy of regular (scheduled) transport services
to, from and between islands). Any intervention in relation to a public service obligation
should remain proportionate to the aim pursued. Should it go beyond what is strictly
needed, it would unnecessarily restrict a freedom which is essential for the proper
functioning of the internal market. The Commission wishes to address three topics related
to this issue.

5.5.1. Exclusivity

Granting exclusivity to a shipowner on a public service route normally allows Member

States to achieve the least burden to the community but it restricts the traditional freedom
of trade in the maritime transport sector.

A fair balance should be established between the two principles.

In duly justified cases exclusivity may be considered the only adequate instrument to
meet the essential transport needs, when granted for a limited period of time and on the
basis of an open, fair and non-discriminatory Community-wide award procedure.

Exclusivity may also be awarded in a way which always restricts access for additional
services under non-discriminatory conditions while safeguarding the performance of the
operator providing the services meeting the essential transport needs under exclusive
rights.

The Commission stresses, however, that in many cases, less restrictive measures than
exclusivity may be taken in order to avoid "market skimming" and to diminish the
amount of State aid needed. An operator contractually bound to fulfil public service
obligations all year round, without an exclusive right, might suffer from the behaviour of
another operator who, in the absence of any public service obligations could enter the
market only for the more profitable months of the year and seriously reduce the first
operator's earnings.

16
The Commission considers that light public service obligations may be imposed on all
operators of the same route in parallel to a public service contract concluded with one
operator [22]. For example, a condition could be set according to which any shipowner
entering a route where a public service contract is in force which imposes all year round
services will have to operate all year round as well.

[22] On the possibility for a Member State to impose public service obligations in parallel
to a public service contract, see also Case C-205/99, paragraphs 60 to 71.

5.5.2. Duration of public service contracts

The Regulation does not set any maximum duration for public service contracts.
However, it follows from Article 1 and Article 4 of the Regulation that public service
contracts should have a limited duration in order to allow regular and open prospecting of
the market. With a view to complying with the principle of proportionality in any market
intervention, the least distortional form to meet the essential transport needs should be
chosen. All Community shipowners should be regularly given the opportunity to apply
for the operation of a given service (on this matter, see also point 5.6 below).

In the Commission's view, a contract of a period of more than 6 years does not normally
meet the proportionality requirement.

5.5.3. Bundled routes

Member States often wish to group public service routes to and from different islands
into a single bundle in order to generate economies of scale and attract operators. Bundles
as such are not contrary to Community law provided that bundling does not lead to
discrimination.

The most appropriate size of bundles should be decided by taking account of the best
synergy to be made in meeting essential transport needs.

5.6. The case of "small islands"

The Commission's attention has been drawn to the fact that cumbersome procedures for
concluding public service contracts in the maritime sector are over-complicated when it
comes to organising services for small islands, which normally only attract local
operators.

In order to reconcile this specificity with the need to comply with the principles of
transparency and non-discrimination, which it considers can be achieved only through
open, fair and non-discriminatory award procedures, the Commission takes the view that,
without prejudice to Community procurement rules where applicable, the selection of a
suitable operator entrusted to serve a small island could be carried out following a simple
call for expressions of interest without launching a formal tender, provided that a
Community-wide announcement of the service - which is very easily organised - is

17
maintained. The Commission takes the view that a longer duration of contracts, of 12
years, might be acceptable.

For the purpose of this Communication, experience, and particularly a study carried out
on behalf of the Commission, shows that "small islands" could be understood to mean
islands where the total annual number of passengers carried by sea to and from the island
is around 100 000 or fewer. As far as outermost regions are concerned, this threshold
only applies to trade within the region (and not trade between an outermost island and the
mainland).

The simplified rules may in principle apply to the carriage under public service contracts
of both passengers and goods to and from a "small island". However, goods trade, which
can normally be organised under competitive conditions, should be excluded wherever
there is a risk of unjustifiable market distortion.

Where the same operator serves several small islands, the total number of passengers
carried by that operator in the context of the public service is taken into account when
determining whether the threshold is reached.

5.7. Public subsidies granted to compensate for public service obligations

The Regulation applies in the same way whether subsidies are granted or not. However,
when State aid is granted in order to compensate for public service obligations, Member
States have to grant it in compliance with Community legislation and in particular
Regulation (EEC) No 3577/92 and the Treaty State aid rules as interpreted by the Court
of Justice.

6. Safeguard measures

Article 5 of the Regulation stipulates that Member States may request the Commission to
adopt safeguard measures "in the event of a serious disturbance of the internal transport
market due to cabotage liberalisation". Article 2(5) provides that such measures may be
applied for a maximum of one year where problems appear on the market which "are
likely to lead to a serious and potentially lasting excess of supply over demand, are due
to, or aggravated by, maritime cabotage operations, and pose a serious threat to the
financial stability and survival of a significant number of Community shipowners,
provided that the short-term and medium-term forecasts for the market in question do not
indicate any substantial and lasting improvements".

This provision has been applied only once, in Spain, when the Regulation first entered
into force [23].

[23] Commission Decision 93/396/EEC of 13 July 1993 on Spain's request for adoption
by the Commission of a prolongation of safeguard measures pursuant to Article 5 of
Regulation (EEC) No 3577/92 applying the principle of freedom to provide services to

18
maritime transport within Member States (maritime cabotage) , OJ L 173, 16.7.1993, p.
33.

It should be stressed that individual instances of shipowners on a given route going

bankrupt are not sufficient to warrant the application of this clause.

The cabotage reports published since the Regulation entered into force show that
liberalisation of cabotage has not caused any other serious disturbance of the internal
transport market. It is unlikely that it would cause such a disturbance now, given that
most services have been liberalised.

19
29.11.2005 EN Official Journal of the European Union
COMMISSION DECISION
of 28 November 2005
on the application of Article 86(2) of the EC Treaty to State aid in the form of public service
compensation granted to certain undertakings entrusted with the operation of services of general
economic interest
(notified under document number C(2005) 2673)
(2005/842/EC)
THE COMMISSION OF THE EUROPEAN COMMUNITIES,
Having regard to the Treaty establishing the European
Community, and in particular Article 86(3) thereof,
Whereas:
(4)
(1) Article 16 of the Treaty requires the Community, without
prejudice to Articles 73, 86 and 87, to use its powers in
such a way as to make sure that services of general
economic interest operate on the basis of principles
and conditions which enable them to fulfil their
missions.
(2) For certain services of general economic interest to
operate on the basis of principles and under conditions
that enable them to fulfil their missions, financial support
from the State intended to cover some or all of the
specific costs resulting from the public service obligations
may prove necessary. In accordance with Article 295 of
the Treaty, as interpreted by the case-law of the Court of
Justice and Court of First Instance of the European
Communities, it is irrelevant from the viewpoint of
Community law whether such services of general
economic interest are operated by public or private
undertakings.
(5)
(3) Article 86(2) of the Treaty states in this respect that
undertakings entrusted with the operation of services of
general economic interest or having the character of a
revenue-producing monopoly are subject to the rules
contained in the Treaty, in particular to the rules on
competition. However, Article 86(2) allows an
exception from the rules contained in the Treaty,
provided that a number of criteria are met. Firstly,
there must be an act of entrustment, whereby the State (1) [2003] ECR I-7747.
L 312/67
confers responsibility for the execution of a certain task
to an undertaking. Secondly, the entrustment must relate
to a service of general economic interest. Thirdly, the
exception has to be necessary for the performance of
the tasks assigned and proportional to that end (here-
inafter the necessity requirement). Finally, the devel-
opment of trade must not be affected to such an
extent as would be contrary to the interests of the
Community.
In its judgment in the case of Altmark Trans GmbH and
Regierungspräsidium Magdeburg v Nahverkehrsgesellschaft
Altmark GmbH (1) (Altmark), the Court of Justice held
that public service compensation does not constitute
State aid within the meaning of Article 87 of the
Treaty provided that four cumulative criteria are met.
First, the recipient undertaking must actually have
public service obligations to discharge, and the obli-
gations must be clearly defined. Second, the parameters
on the basis of which the compensation is calculated
must be established in advance in an objective and trans-
parent manner. Third, the compensation cannot exceed
what is necessary to cover all or part of the costs
incurred in the discharge of the public service obli-
gations, taking into account the relevant receipts and a
reasonable profit. Finally, where the undertaking which is
to discharge public service obligations, in a specific case,
is not chosen pursuant to a public procurement
procedure which would allow for the selection of the
tenderer capable of providing those services at the least
cost to the community, the level of compensation needed
must be determined on the basis of an analysis of the
costs which a typical undertaking, well run and
adequately provided with means of transport, would
have incurred.
Where those four criteria are met, public service compen-
sation does not constitute State aid, and Articles 87 and
88 of the Treaty do not apply. If the Member States do
not respect those criteria and if the general criteria for
the applicability of Article 87(1) of the Treaty are met,
public service compensation constitutes State aid that is
subject to Articles 73, 86, 87 and 88 of the Treaty. This
Decision should therefore only apply to public service
compensation in so far as it constitutes State aid.
L 312/68 EN Official Journal of the European Union
(6) Article 86(3) of the Treaty allows the Commission to
specify the meaning and extent of the exception under
Article 86(2) of the Treaty, and to set out rules intended
to enable effective monitoring of the fulfilment of the
criteria set out in Article 86(2), where necessary. The
conditions under which certain systems of compensation
are compatible with Article 86(2) and are not subject to
the prior notification requirement of Article 88(3) of the
Treaty should therefore be specified.
(7) Such aid may be declared compatible only if it is granted
in order to ensure the provision of services that are
services of general economic interest as referred to in
Article 86(2) of the Treaty. It is clear from the case-law
that, with the exception of the sectors in which there are
Community rules governing the matter, Member States
have a wide margin of discretion in the definition of
services that could be classified as being services of
general economic interest. Thus, with the exception of
the sectors in which there are Community rules
governing the matter, the Commission’s task is to
ensure that there is no manifest error as regards the
definition of services of general economic interest.
(8) In order for Article 86(2) of the Treaty to apply, the
undertaking beneficiary of the aid must have been speci-
fically entrusted by the Member State with the operation
of a particular service of general economic interest.
According to the case-law on the interpretation of
Article 86(2) of the Treaty, such act or acts of
entrustment must specify, at least, the precise nature,
scope and duration of the public service obligations
imposed and the identity of the undertakings concerned.
(9) In order to ensure that the criteria set out in Article
86(2) of the Treaty are met, it is necessary to lay
down more precise conditions which must be fulfilled
in respect of the entrustment of the operation of
services of general economic interest. Indeed the
amount of compensation can be properly calculated
and checked only if the public service obligations
incumbent on the undertakings and any obligations
incumbent on the State are clearly set out in a formal
act of the competent public authorities within the
Member State concerned. The form of the instrument
may vary from one Member State to another but it
should specify, at least, the precise nature, scope and
duration of the public service obligations imposed and
the identity of undertakings concerned, and the costs to
be borne by the undertaking concerned.
29.11.2005
(10) When defining public service obligations and in assessing
whether those obligations are met by the undertakings
concerned, the Member States are invited to consult
widely, with particular emphasis on users.
(11) Moreover, in order to avoid unjustified distortions of
competition, Article 86(2) of the Treaty requires that
compensation does not exceed what is necessary to
cover the costs incurred by the undertaking in
discharging the public service obligations, account
being taken of the relevant receipts and a reasonable
profit. This should be understood as referring to the
actual costs incurred by the undertaking concerned.
(12) Compensation in excess of what is necessary to cover the
costs incurred by the undertaking concerned is not
necessary for the operation of the service of general
economic interest, and consequently constitutes incom-
patible State aid that should be repaid to the State.
Compensation granted for the operation of a service of
general economic interest but actually used by the under-
taking concerned to operate on another market is also
not necessary for the operation of the service of general
economic interest, and consequently also constitutes
incompatible State aid that should be repaid.
(13) In order to ensure compliance with the necessity
requirement set out in Article 86(2) of the Treaty it is
necessary to lay down provisions relating to the calcu-
lation and monitoring of the amount of compensation
granted. Member States should check regularly that the
compensation granted does not lead to overcompen-
sation. Nevertheless, in order to allow a minimum of
flexibility for undertakings and Member States, where
the amount of overcompensation does not exceed 10 %
of the amount of annual compensation, it should be
possible for such overcompensation to be carried
forward to the next period and be deducted from the
amount of compensation which would otherwise have
been payable. The revenue of undertakings entrusted
with the operation of services of general economic
interest in the field of social housing may vary drama-
tically, in particular due to the risk of insolvency of
leaseholders. Consequently, where such undertakings
only operate services of general economic interest, it
should be possible for any overcompensation during
one period to be carried forward to the next period,
up to 20 % of the annual compensation.
29.11.2005 EN Official Journal of the European Union
(14) To the extent that compensation is granted to under-
takings entrusted with the operation of services of
general economic interest, the amount of the compen-
sation does not go beyond the costs of the services, and
the thresholds laid down in this Decision are respected,
the Commission considers that the development of trade
is not affected to such an extent as would be contrary to
the interests of the Community. In such circumstances,
the Commission considers that the compensation should
be deemed to constitute State aid compatible with Article
86(2) of the Treaty.
(15) Small amounts of compensation granted to undertakings
providing services of general economic interest whose
turnover is limited do not affect the development of
trade and competition to such an extent as would be
contrary to the interests of the Community. When the
conditions set out in this Decision are fulfilled, prior
notification should therefore not be required. For the
purpose of defining the scope of the exemption from
notification, the turnover of undertakings receiving
public service compensation and the level of such
compensation should be taken into consideration.
(16) Hospitals and undertakings in charge of social housing
which are entrusted with tasks involving services of
general economic interest have specific characteristics
that need to be taken into consideration. In particular,
account should be taken of the fact that at the current
stage of development of the internal market, the intensity
of distortion of competition in those sectors is not neces-
sarily proportionate to the level of turnover and compen-
sation. Accordingly, hospitals providing medical care,
including, where applicable, emergency services and
ancillary services directly related to the main activities,
notably in the field of research, and undertakings in
charge of social housing providing housing for disad-
vantaged citizens or socially less advantaged groups,
which due to solvability constraints are unable to
obtain housing at market conditions, should benefit
from the exemption from notification provided for in
this Decision, even if the amount of compensation they
receive exceeds the thresholds laid down in this Decision,
if the services performed are qualified as services of
general economic interest by the Member States.
(17) Article 73 of the Treaty constitutes a lex specialis with
regard to Article 86(2). It lays down the rules applicable
to public service compensation in the land transport
sector. That Article has been developed by Council Regu-
lation (EEC) No 1191/69 of 26 June 1969 on action by
Member States concerning the obligations inherent in the
L 312/69
concept of a public service in transport by rail, road and
inland waterway (1), which lays down general conditions
for public service obligations in the land transport sector
and imposes methods for calculating compensation.
Regulation (EEC) No 1191/69 exempts all compensation
in the land transport sector that fulfils the conditions of
notification under Article 88(3) of the Treaty. It also
allows Member States to derogate from its provisions
in the case of undertakings providing exclusively urban,
suburban or regional transport. Where that derogation is
applied, any compensation for public service obligations
is, in so far as it constitutes State aid, governed by
Council Regulation (EEC) No 1107/70 of 4 June 1970
on the granting of aids for transport by rail, road and
inland waterway (2). According to the judgment in
Altmark, compensation which does not respect the
provisions of Article 73 cannot be declared compatible
with the Treaty on the basis of Article 86(2), or on the
basis of any other Treaty provision. Consequently, such
compensation should not be covered by this Decision.
(18) Unlike land transport, the maritime and air transport
sectors are subject to Article 86(2) of the Treaty.
Certain rules applicable to public service compensation
in the air and maritime transport sectors are to be found
in Council Regulation (EEC) No 2408/92 of 23 July
1992 on access for Community air carriers to intra-
Community air routes (3) and Council Regulation (EEC)
No 3577/92 of 7 December 1992 applying the principle
of freedom to provide services to maritime transport
within Member States (maritime cabotage) (4). However,
contrary to Regulation (EEC) No 1191/69, these Regu-
lations do not refer to the compatibility of the possible
State aid elements nor contain an exemption from the
obligation to notify under Article 88(2) of the Treaty. It
is therefore appropriate to apply this Decision to public
service compensation in the air and maritime transport
sectors provided that, in addition to fulfilling the
conditions set out in this Decision, such compensation
also respects the sectoral rules contained in Regulation
(EEC) No 2408/92 and Regulation (EEC) No 3577/92
when applicable.
(19) The thresholds applicable to public service compensation
in the air and maritime transport sectors should normally
be the same as those applicable in general. However, in
the specific cases of public service compensation for air
or maritime links to islands and for airports and ports
which constitute services of general economic interest as
(1) OJ L 156, 28.6.1969, p. 1. Regulation as last amended by Regu-
lation (EEC) No 1893/91 (OJ L 169, 29.6.1991, p. 1).
(2) OJ L 130, 15.6.1970, p. 1. Regulation as last amended by Regu-
lation (EC) No 543/97 (OJ L 84, 26.3.1997, p. 6).
(3) OJ L 240, 24.8.1992, p. 8. Regulation as last amended by 2003 Act
of Accession.
(4) OJ L 364, 12.12.1992, p. 7.
L 312/70 EN Official Journal of the European Union
referred to in Article 86(2) of the Treaty it is more
appropriate to also provide alternative thresholds based
on average annual number of passengers as this more
accurately reflects the economic reality of these activities.
(20) This Decision is to a large extent a specification of the
meaning and extent of the exception under Article 86(2)
of the Treaty as it has been consistently applied in the
past by the Court of Justice and the Court of First
Instance and by the Commission. To the extent that it
does not modify the material law applicable in this area
it should apply immediately. However, certain provisions
of this Decision go beyond the status quo by setting out
additional requirements aimed at enabling effective moni-
toring of the criteria set out in Article 86(2). In order to
allow Member States to take the necessary measures in
this respect, it is appropriate to foresee a period of one
year prior to the application of those specific provisions.
(21) Exemption from the requirement of prior notification for
certain services of general economic interest does not
rule out the possibility for Member States to notify a
specific aid project. Such notification will be assessed in
accordance with the principles of the Community
framework for State aid in the form of public service
compensation (1).
(22) This Decision applies without prejudice to the provisions
of Commission Directive 80/723/EEC of 25 June 1980
on the transparency of financial relations between
Member States and public undertakings as well as on
financial transparency within certain undertakings (2).
(23) This Decision applies without prejudice to the
Community provisions in force in the fields of public
procurement and of competition, in particular Articles
81 and 82 of the Treaty.
(24) This Decision applies without prejudice to stricter specific
provisions relating to public service obligations that are
contained in sectoral Community legislation,
(1) OJ C 297, 29.11.2005.
(2) OJ L 195, 29.7.1980, p. 35. Directive as last amended by Directive
2000/52/EC (OJ L 193, 29.7.2000, p. 75).
29.11.2005
HAS ADOPTED THIS DECISION:
Article 1
Subject matter
This Decision sets out the conditions under which State aid in
the form of public service compensation granted to certain
undertakings entrusted with the operation of services of
general economic interest is to be regarded as compatible
with the common market and exempt from the requirement
of notification laid down in Article 88(3) of the Treaty.
Article 2
Scope
1. This Decision applies to State aid in the form of public
service compensation granted to undertakings in connection
with services of general economic interest as referred to in
Article 86(2) of the Treaty which falls within one of the
following categories:
(a) public service compensation granted to undertakings with
an average annual turnover before tax, all activities included,
of less than EUR 100 million during the two financial years
preceding that in which the service of general economic
interest was assigned, which receive annual compensation
for the service in question of less than EUR 30 million;
(b) public service compensation granted to hospitals and social
housing undertakings carrying out activities qualified as
services of general economic interest by the Member State
concerned;
(c) public service compensation for air or maritime links to
islands on which average annual traffic during the two
financial years preceding that in which the service of
general economic interest was assigned does not exceed
300 000 passengers;
(d) public service compensation for airports and ports for
which average annual traffic during the two financial years
preceding that in which the service of general economic
interest was assigned does not exceed 1 000 000
passengers, in the case of airports, and 300 000 passengers,
in the case of ports.
29.11.2005 EN Official Journal of the European Union
The threshold of EUR 30 million in point (a) of the first subpar-
agraph may be determined by taking an annual average repre-
senting the value of compensation granted during the contract
period or over a period of five years. For credit institutions, the
threshold of EUR 100 million of turnover shall be replaced by a
threshold of EUR 800 million in terms of balance sheet total.
2. In the field of air and maritime transport, this Decision
shall only apply to State aid in the form of public service
compensation granted to undertakings in connection with
services of general economic interest as referred to in Article
86(2) of the Treaty which complies with Regulation (EEC) No
2408/92 and Regulation (EEC) No 3577/92, when applicable.
This Decision shall not apply to State aid in the form of public
service compensation granted to undertakings in the field of
land transport.
Article 3
Compatibility and exemption from notification
State aid in the form of public service compensation that meets
the conditions laid down in this Decision shall be compatible
with the common market and shall be exempt from the obli-
gation of prior notification provided for in Article 88(3) of the
Treaty, without prejudice to the application of stricter
provisions relating to public service obligations contained in
sectoral Community legislation.
Article 4
Entrustment
In order for this Decision to apply, responsibility for operation
of the service of general economic interest shall be entrusted to
the undertaking concerned by way of one or more official acts,
the form of which may be determined by each Member State.
The act or acts shall specify, in particular:
(a) the nature and the duration of the public service obligations;
(b) the undertaking and territory concerned;
(c) the nature of any exclusive or special rights assigned to the
undertaking;
(d) the parameters for calculating, controlling and reviewing the
compensation;
L 312/71
(e) the arrangements for avoiding and repaying any overcom-
pensation.
Article 5
Compensation
1. The amount of compensation shall not exceed what is
necessary to cover the costs incurred in discharging the public
service obligations, taking into account the relevant receipts and
a reasonable profit on any own capital necessary for discharging
those obligations. The compensation must be actually used for
the operation of the service of general economic interest
concerned, without prejudice to the undertaking’s ability to
enjoy a reasonable profit.
The amount of compensation shall include all the advantages
granted by the State or through State resources in any form
whatsoever. The reasonable profit shall take account of all or
some of the productivity gains achieved by the undertakings
concerned during an agreed limited period without reducing
the level of quality of the services entrusted to the undertaking
by the State.
2. The costs to be taken into consideration shall comprise all
the costs incurred in the operation of the service of general
economic interest. They shall be calculated, on the basis of
generally accepted cost accounting principles, as follows:
(a) where the activities of the undertaking in question are
confined to the service of general economic interest, all its
costs may be taken into consideration;
(b) where the undertaking also carries out activities falling
outside the scope of the service of general economic
interest, only the costs associated with the service of
general economic interest shall be taken into consideration;
(c) the costs allocated to the service of general economic
interest may cover all the variable costs incurred in
providing the service of general economic interest, a propor-
tionate contribution to fixed costs common to both service
of general economic interest and other activities and a
reasonable profit;
(d) the costs linked with investments, notably concerning infra-
structure, may be taken into account when necessary for the
operation of the service of general economic interest.
L 312/72 EN Official Journal of the European Union
3. The revenue to be taken into account shall include at least
the entire revenue earned from the service of general economic
interest. If the undertaking in question holds special or exclusive
rights linked to another service of general economic interest
that generates profit in excess of the reasonable profit, or
benefits from other advantages granted by the State, these
shall be included in its revenue, irrespective of their classifi-
cation for the purposes of Article 87. The Member State
concerned may decide that the profits accruing from other
activities outside the scope of the service of general economic
interest are to be assigned in whole or in part to the financing
of the service of general economic interest.
4. For the purposes of this Decision ‘reasonable profit’ means
a rate of return on own capital that takes account of the risk, or
absence of risk, incurred by the undertaking by virtue of the
intervention by the Member State, particularly if the latter
grants exclusive or special rights. This rate shall not normally
exceed the average rate for the sector concerned in recent years.
In sectors where there is no undertaking comparable to the
undertaking entrusted with the operation of the service of
general economic interest, a comparison may be made with
undertakings situated in other Member States, or if necessary,
in other sectors, provided that the particular characteristics of
each sector are taken into account. In determining what
constitutes a reasonable profit, the Member States may
introduce incentive criteria relating, in particular, to the
quality of service provided and gains in productive efficiency.
5. When a company carries out activities falling both inside
and outside the scope of services of general economic interest,
the internal accounts shall show separately the costs and
receipts associated with the service of general economic
interest and those of other services, as well as the parameters
for allocating costs and revenues.
The costs linked to any activities outside the scope of the
service of general economic interest shall cover all the
variable costs, an appropriate contribution to common fixed
costs and an adequate return on capital. No compensation
shall be granted in respect of those costs.
Article 6
Control of overcompensation
Member States shall carry out regular checks, or ensure that
such checks are carried out, to ensure that undertakings are
not receiving compensation in excess of the amount determined
in accordance with Article 5.
Member States shall require the undertaking concerned to repay
any overcompensation paid, and the parameters for the calcu-
29.11.2005
lation of the compensation shall be updated for the future.
Where the amount of overcompensation does not exceed
10 % of the amount of the annual compensation, such over-
compensation may be carried forward to the next annual period
and deducted from the amount of compensation payable in
respect of that period.
In the sector of social housing, Member States shall carry out
regular checks, or ensure that such checks are carried out, at the
level of each undertaking, to ensure that the undertaking
concerned is not receiving compensation in excess of the
amount determined in accordance with Article 5. Any over-
compensation may be carried forward to the next period up
to 20 % of the annual compensation, provided that the under-
taking concerned only operates services of general economic
interest.
Article 7
Availability of information
The Member States shall keep available for a period of at least
10 years, all the elements necessary to determine whether the
compensation granted is compatible with this Decision.
Upon a written request from the Commission, Member States
shall provide the Commission with all the information that the
latter considers necessary to determine whether the systems of
compensation in force are compatible with this Decision.
Article 8
Reports
Periodic reports on the implementation of this Decision,
comprising a detailed description of the conditions of appli-
cation in all sectors, including the social housing and the
hospital sectors, shall be submitted to the Commission by
each Member State every three years.
The first report shall be submitted by 19 December 2008.
Article 9
Evaluation
By 19 December 2009 at the latest, the Commission will
undertake an impact assessment based on factual information
and the results of wide consultations conducted by the
Commission on the basis, notably, of data provided by the
Member States in accordance with Article 8.
29.11.2005 EN Official Journal of the European Union L 312/73

The results of the impact assessment will be made available to Article 11

the European Parliament, the Committee of Regions, the
European Economic and Social Committee and the Member Addressees
States.
This Decision is addressed to the Member States.

Article 10
Entry into force Done at Brussels, 28 November 2005.

This Decision shall enter into force on 19 December 2005.

For the Commission
Points (c), (d) and (e) of Article 4, and Article 6 shall apply from Neelie KROES
29 November 2006. Member of the Commission
 COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 11.5.2006
COM(2006) 196 final

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN

PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL
COMMITTEE AND THE COMMITTEE OF THE REGIONS

updating and rectifying the Communication on the interpretation of Council Regulation

(EEC) No 3577/92 applying the principle of freedom to provide services to maritime
transport within Member States (maritime cabotage)

EN EN
 COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN
PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL
COMMITTEE AND THE COMMITTEE OF THE REGIONS

updating and rectifying the Communication on the interpretation of Council Regulation

(EEC) No 3577/92 applying the principle of freedom to provide services to maritime
transport within Member States (maritime cabotage)

In its Communication of 22 December 2003 to the European Parliament, the Council, the
European Economic and Social Committee and the Committee of the Regions on the
interpretation of Council Regulation (EEC) No 3577/92 applying the principle of freedom to
provide services to maritime transport within Member States (maritime cabotage)1 the
Commission addressed several matters relating to the implementation of the Regulation in
question.

Further to developments in Community law and because of a need for clarification, the
Commission feels that it is necessary to return to two of the subjects dealt with in the above-
mentioned Communication.

(1) Passenger threshold for “small islands”

Section 5.6 of the Communication deals with simplified procedures for the carriage of goods
and passengers to “small islands”, which are taken to mean islands where the total annual
number of passengers carried by sea to and from the island is around 100 000 or fewer.

On 28 November 2005 the Commission adopted Decision 2005/842/EC on the application of

Article 86(2) of the Treaty to State aid in the form of public service compensation granted to
certain undertakings entrusted with the operation of services of general economic interest2.

That Decision sets out the conditions under which State aid in the form of public service
compensation granted to certain undertakings entrusted with the operation of services of
general economic interest is to be regarded as compatible with the common market and
exempt from the requirement of notification laid down in Article 88(3) of the Treaty. Article 2
(1)(c) of the Decision applies to compensation for air or maritime links to islands on which
average annual traffic during the two financial years preceding that in which the service of
general economic interest was assigned does not exceed 300 000 passengers.

The Commission considers that compensation for services of general economic interest in the
field of maritime transport and the procedures for selecting the undertakings in charge of
those services are closely linked and that, therefore, the same passenger threshold should be
provided for in Article 2(1)(c) of Decision 2005/842/EC and in Section 5.6 of the
Communication on Cabotage.

1
COM(2003) 595.
2
OJ L 312 of 29.11.2005, P.67.

EN 2 EN
 For these reasons the Commission intends to apply a threshold of 300 000 passengers per
year, instead of 100 000 passengers, for the purposes of Section 5.6 of the Communication on
the interpretation of Council Regulation (EEC) No 3577/92.

(2) Ships registered in Gibraltar

Section 2.2.2 of the Communication on the interpretation of Council Regulation (EEC) No

3577/92 deals with access to cabotage and the conditions of ship registration in the Member
States. Paragraph 3 of Section 2.2.2 addresses ships registered in Gibraltar. The above-
mentioned paragraph provides for the possibility of refusing access to cabotage to Gibraltar-
registered ships if it were established that those ships were not effectively subject to the
Treaty and to the Community law derived from it.

Since the Community set of rules in the field of maritime transport is entirely applicable to
ships registered in Gibraltar, the statement contained in the above-mentioned Paragraph 3 is
incorrect and must be rectified.

Therefore, the Commission points out that ships registered in Gibraltar are entitled to have
access to maritime cabotage under the same conditions as any ship registered in a Member
State.

EN 3 EN