Funding of Public Service Broadcasting and State Aid Rules — STATE AID Two Recent Cases in Belgium and Ireland Nóra TOSICS, Ronald VAN DE VEN and Alexander RIEDL (1)

Competition Policy Newsletter

Funding of public service broadcasting and State aid rules — STATE AID two recent cases in Belgium and Ireland Nóra TOSICS, Ronald VAN DE VEN and Alexander RIEDL (1)

Introduction () These rules aim at ensuring transparency, proportionality and accountability of the funding The present article illustrates the Commission’s regimes for public broadcasters. In both the Bel- State aid assessment practice concerning funding gian and the Irish cases, one of the main issues for public service broadcasters on the basis of two was to enable public service broadcasters to meet recent cases which were both concluded in Febru- the challenges posed by the new media environ- ary 2008. The cornerstones of the Commission’s ment, while ensuring a proper definition of the assessment of the State financing of public service public service mandate also in the field of new broadcasting were set out in the 2001 Broadcast- media services. ing Communication () and further developed in its decision making practice (). In view of the challenges brought by techno- logical progress, and building on the experience The basic requirements of the EC State aid rules gained in more than twenty decisions since 2001, for the funding of public service broadcasters are the Commission also launched a process of mod- the following: ernisation of the Broadcasting Communication in l A clear and precise definition of the public early 2008. service remit; l Proper entrustment with the public service State financing of the Flemish public mandate and supervision that public service service broadcaster VRT tasks are provided as required; Background l Separation of the accounts for commercial and public service activities (in accordance with the In 2004, the Commission received complaints Transparency Directive); against various aspects of the State financing granted by the Flemish Community of Belgium l Limitation of public funds to the net pub- to the public service broadcaster VRT (Vlaamse lic service costs and adequate ex post control Radio- en Televisieomroep) (). Private competi- mechanisms; tors argued that the definition of the public serv- l Respect of market conform behaviour in the ice remit was not sufficiently precise and that public service broadcasters’ commercial activi- there were no effective control mechanisms. The ties. complainants also claimed that the public financing received by VRT for the fulfilment of its public service tasks was not proportionate to the net costs of carrying out these tasks.

(1) Directorate-General for Competition, unit C-4 and The Commission initiated a preliminary inves- Task Force Pharmaceuticals Sector Inquiry. The authors tigation and requested further information from would like to thank Alexandra Antoniadis and Jan Ger- the Belgian authorities, who had meanwhile initi- rit Westerhof for their valuable comments. The content ated a number of modifications to the applicable of this article does not necessarily reflect the official position of the European Commission. Responsibility legal framework. In July 2006, DG Competition for the information and views expressed lies entirely informed the Belgian government, by means of with the authors. (2) Communication from the Commission on the applica- tion of State aid rules to public service broadcasting, OJ C 320, 15.11.2001, pages 5-11 (3) See, for instance, EC Competition Policy Newsletter 2004, number 2: ‘The Commission’s State aid policy on activities of public service broadcasters in neighbouring markets’, EC Competition Policy Newsletter 2006, number 3: ‘State aid in the broadcasting sector: two decisions regarding ad hoc aid to public service broadcasters in Portugal and the Netherlands’ and EC Competition Pol- (4) In 1971, due to changes in the organisation of the Bel- icy Newsletter 2007, number 2: ‘Increased transparency gian State, the Flemish authorities became responsible and efficiency in public service broadcasting. Recent for radio and television broadcasting in the Flemish cases in Spain and Germany’. Community of Belgium.

Number 3 — 2008 81 State aid a so-called Article 17 letter (), of its preliminary Definition of public service mission view that the financing regime in favour of VRT including new services was no longer compatible with EU State aid rules, initiating a so-called existing aid procedure. In The Flemish authorities will amend the legal such a procedure, which concerns aid measures framework to introduce a provision which will already in place before the entry into force of the clarify that the VRT may not launch new services EC Treaty rules in the respective countries (), the or activities which are not covered by the on-going Commission aims to establish a compatible legal five-year management contract without a prior framework for the future in line with the State (‘ex ante’) evaluation and an explicit entrustment aid requirements in cooperation with the Mem- by the Flemish government. The authorities will ber State. In the Article 17 letter, Belgium was set out the criteria which will be used to deter- requested to clarify a number of points, in par- mine whether a service will be considered as a new ticular concerning the definition of the public service not covered by the current management service remit, especially in relation to new media contract and hence subject to an evaluation. These services, the effective supervision and control of criteria may also be helpful in assessing whether VRT´s fulfilment of its public service obligations, new media services and activities serve the same as well as the prevention of overcompensation for democratic social and cultural needs of society as public service activities. do traditional broadcasting services. In late 2007, the Belgian authorities submitted Before deciding on an entrustment, the authori- proposals by the Flemish government to amend ties will request the advice of the Flemish Media the legal framework during 2008. The Commis- Council (Raad voor Cultuur, Jeugd, Sport en sion assessed these commitments and concluded Media), an independent specialist advisory body. that the modifications would be suitable to ensure The Media Council will look at developments in compliance with EC State aid rules. On this basis, the Flemish media market and in technology, the the Commission concluded on the case in Feb- evolution of the Flemish media landscape and the ruary 2008, issuing a decision () that the public role of the VRT therein. The Council will also take funding of VRT was compatible with Article 86 observations of third parties into consideration (2) of the EC Treaty, conditional on the implemen- and its advice will be made public. The need to tation of the commitments proposed by February include the observations of third parties pre-sup- 2009. The Commission will monitor the imple- poses that these parties have had the possibility mentation of these commitments. to see the proposal for a new service or activity. This will also entail public consultation during the The acceptance of these commitments by the evaluation procedure. Commission was, inter alia, based on the following considerations. Furthermore, to ensure a maximum degree of transparency in the procedure leading to the definition of the public service mission of the VRT in future management contracts, the Flem- ish authorities will conduct a public consultation of all stakeholders to be performed when a new management contract is prepared every five years. (5) Article 17(2) of Council Regulation (EC) N° 659/1999 of The consultation will result in a recommendation 22 March 1999 laying down detailed rules for the appli- cation of Article 93 of the EC Treaty provides the fol- by the Media Council to the Flemish government lowing: ‘Where the Commission considers that an exist- which will also be made public. ing aid scheme is not, or is no longer, compatible with the common market, it shall inform the Member State con- An updated framework for merchandising and cerned of its preliminary view and give the Member State related activities of the VRT will further clarify concerned the opportunity to submit its comments within which services can be considered as commercial a period of one month. In duly justified cases, the Com- and are clearly outside the public service remit. mission may extend this period.’ (6) With regard to those Member States which have acceded The public availability of this framework will in 2004 and 2007, special rules apply. In the case of these further increase transparency and enhance the countries, the cut-off date for existing aid is 10 Decem- ability of commercial operators to plan their own ber 1994. In addition, those measures included in the activities. lists annexed to the Treaties of Accession, and those approved under the so-called ‘interim procedure’ are The provisions outlined above will allow the also considered existing aid. supervisory authorities to check that the VRT (7) Commission decision of 27 February 2008 on State aid E 8/2006, see under: http://ec.europa.eu/comm/com- does not extend its activities at its own discretion petition/state_aid/register/ii/by_case_nr_e2006_0000. and — where necessary — to enforce the entrust- html. ment requirement.

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Proportionality of public financing In the Article 17 letter, the Commission consid- STATE AID ered that the funding system which dated from The Flemish authorities also committed them- before Ireland’s accession to the EU could be selves to strengthening the annual monitoring considered as existing aid. At the same time, the and correction mechanisms concerning the con- Commission raised concerns regarding the com- trol of possible overcompensation. As from the patibility of the scheme. The Commission consid- financial year 2008, any possible overcompensa- ered that the definition of the public service remit tion of the VRT is capped at a maximum of 10% in particular in fields other than broadcasting was of the annual public financing received by the not sufficiently clear. Furthermore, it expressed VRT in any particular year. If the 10% threshold concern that there were no satisfactory ex-post is exceeded, the VRT must repay the surplus to the controls to verify whether State funding exceeded Flemish Community where the funds will be held the net public service costs (overcompensation), in a special account. These funds may be used by whether commercial activities had unduly ben- the authorities to compensate for eventual fund- efited from licence fee revenues (cross-subsidisa- ing deficits related to the public service mission in tion) or whether the public service broadcasters’ subsequent periods of the ongoing management commercial activities were in line with market contract period. principles. Any accumulated net surplus at the end of a five- In May 2005, the Irish government submitted year management contract period will be taken observations and informed the Commission of into account in the calculation of the public plans to reform the Broadcasting Act. Following financing needs for the next management con- discussions between the Commission and the tract period and will be deducted from the State Irish authorities regarding the changes necessary funds to be received by the VRT. to remove competition concerns, Ireland formally The overseeing of these mechanisms to monitor submitted in January 2008 its commitments to any overcompensation and possible repayments amend the current financing system and to bring will be carried out by the Inspectie van Financiën it in line with the State aid rules. In its decision on the basis of the annual accounts of the VRT. of February 2008 (), the Commission concluded The Inspectie van Financiën is an independent that the commitments were adequate to remove body which exercises an ex ante control over the the concerns regarding the current funding budget of the VRT and all funds granted by the regime. As in the case concerning Belgium, the Flemish Community to the VRT. main changes to the funding system related to the definition of the public service remit on the one hand, and to the fulfilment of the requirement for State financing of Irish public service proportionality on the other. broadcasters RTE and TG4

Background Definition of public service mission including new services The Commission’s existing aid procedure concerning the financing of the Irish public service The Irish authorities committed themselves to broadcasters RTÉ (Radio Teilifís Éireann) and determining the scope of the public service remit TG4 (Teilifís na Gaeilge) was, as in other cases, of the public broadcasters in a more precise man- prompted by a complaint. The complainant argued ner, by enumerating their respective objects and that the legal provisions did not contain a proper duties in the broadcasting legislation. These definition of the public service remit, and that the objects also include so-called new media activi- public broadcasters were not properly entrusted ties, such as web-based services in connection with public service obligations. Furthermore, the with the public broadcasting activities, and non- complainant claimed that the use of public funds linear audio-visual media services. lacked the necessary transparency to verify that the level of funding was proportionate and to The Irish authorities also foresee a number of make sure that public funds were not used for complementary measures to improve transpar- commercial activities. ency and to further specify the public service objectives, such as the adoption of a Public Serv- On the basis of this information, and of further exchanges with the Irish authorities and the com- (8) Commission decision of 27 February 2008 in the State plainant, the Commission initiated the existing aid case E 4/2005, available at: http://ec.europa.eu/ aid procedure by means of an Article 17 letter in comm/competition/state_aid/register/ii/by_case_nr_ March 2005. e2005_0000.html#4.

Number 3 — 2008 83 State aid ice Broadcasting Charter every five years, and and making recommendations to the Minister, the preparation of annual statements of commit- if necessary, to adjust the financing. The public ments. funding will be subject to annual reviews, and the financial situation of the public broadcasters will A salient feature of the proposed amendments is be assessed in depth every five years. the introduction of a public value test and a sector- based impact test for any significant new activities The Irish authorities also committed themselves to by public broadcasters, as well as for any altera- ensuring that the commercial transactions (com- tions of the statutory public service remit (e.g. var- mercial activities, investments, etc.) of the pub- iations of the number of channels, introduction of lic broadcasters are clearly distinguishable from non-linear audiovisual media services, etc.). public service activities and carried out on market terms, taking into account the ‘arms-length prin- The Irish authorities also specified indicative cri- ciple’. Compliance with market principles is also teria for carrying out these tests. For example, the subject to the control by the independent Broad- public value assessment would consider the extent casting Authority. to which the proposed service will contribute to meeting the democratic, cultural, linguistic, edu- cational and social needs of Irish society, of indi- Conclusions vidual groups within Irish society, and of Irish Following the April 2007 decision concerning communities outside Ireland; the extent to which public service broadcasting in Germany (), the the proposed service is accessible to the public; the decisions concerning public service broadcasters extent to which it reaches under-served audiences, in Belgium and Ireland illustrate further possible or the contribution to media plurality. The crite- ways of complying with the EU State aid require- ria used for the sector-based impact test would ments in the rapidly changing new media environ- cover considerations such as impact on availabil- ment. These examples also illustrate the variety of ity, choice, quality and accessibility of services, as possible solutions aimed at respecting the require- well as on related markets, on sector development, ments of transparency and proportionality while innovation and investment. safeguarding the specificities of the individual The reform entails the establishment of a new, broadcasting systems of each Member State. independent Broadcasting Authority, which plays In both cases, the Member States were granted a a central role in ensuring respect with the State transitional period for the implementation of their aid requirements. This new regulatory body is to commitments. In this period, the Commission’s become the main expert body for assessing the task is to monitor the proper implementation of impact of any new activities by public broadcast- the decisions (10). In parallel, the Commission ers, and plays a central role in supervising the services are working towards a revised Broadcast- fulfilment of the public service obligations by the ing Communication which meets the challenges broadcasters. of the present and future media environment, reaping the benefits of the recent decision-making Proportionality of the public financing practice in individual cases such as the two pre- The Irish authorities also provided commitments sented in this article. to ensure that there is no overcompensation, no cross-subsidisation of commercial activities, and that broadcasters respect the market principles in their commercial activities. They also committed themselves to putting in place regular control mechanisms for this purpose. The Irish authorities made clear that public funding and surpluses generated by commercial exploitation of public broadcasting activities may only be used for the financing of public service activities. Moreover, they committed themselves to ensuring separate accounting of public service and commercial activities, as provided in the (9) Commission decision of 24 April 2007 in the State aid Transparency Directive. On that basis, public case E 3/2005, available at: http://ec.europa.eu/comm/ service broadcasters are to report on an annual competition/state_aid/register/ii/by_case_nr_e2005_ 0000.html#3. basis on the use of their public funding. The inde- (10) The 2008 Broadcasting Bill has been published by the pendent Broadcasting Authority was entrusted Irish authorities in May 2008, see: http://www.dcenr. with the task of controlling the level of funding gov.ie/Broadcasting/Broadcasting+Legislation/.

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