Digitalisation of public administration: State aid considerations of the Recovery and Resilience Facility

Introduction

The modernisation of the public sector with the adoption of new technologies aims at increasing efficiencies in the sector’s activities and as such has been a priority for a number of EU Member States. The EU Recovery and Resilience Facility (RRF) includes the digitalisation of public administration among eligible funding activities, acknowledging the need for Member States to operate digital infrastructures which enhance their economic and social role. This article examines the use of the RRF to finance the digitalisation of public administration in light of the EU state aid rules. In particular, we look at:

• what forms of aid to the public administration constitute state aid;
• when an aid measure is deemed compatible with the internal market without the need for notification; and
• when an aid measure should be notified to the Commission yet it may still qualify as compatible with the internal market.

The RRF has been established pursuant to the Regulation (EU) 2021/241 (RRF Regulation) and is planned to provide EUR672.5 billion of financial support to both public investments and reforms – EUR312.5 billion in grants and EUR360 billion in loans. Investments and reforms may relate to any of the flagship areas that the Commission has defined, with the focus being climate and digital transition. The particular area that this article touches on is the digitalisation of public administration (Flagship Modernise).

State aid rules are fully applicable to the measures funded by the RRF, including the measures targeting the public administration (Recital 8 RRF Regulation). In light of the latter, it is important to clarify how state aid rules apply to RRF financing targeting the public administration.

Conditions to qualify as state aid

An aid measure from the RRF directed to the public administration shall not qualify as state aid if at least one of the below conditions is not met.

State resources

For an aid measure to qualify as state aid, such measure needs to be attributed to the state. The RRF funds are channelled through the authorities of Member States; thus they qualify as state resources.

However, an aid measure that does not require the transfer of public resources in the first place does not meet the criterion in consideration (ie in-house trainings on digitalisation).

Economic activity

State aid rules require that the undertaking benefiting from the aid measure performs an economic activity; non-economic activities fall out of the scope of the state aid framework (C-262/18P and C-271/18P). In the context of public administration, the below indicative services are considered non-economic:

• In healthcare, services that are not paid directly by patients or by their insurance are not considered economic activity.
• In social security, compulsory social security schemes, under the control of the state, pursuing an exclusively social objective, functioning according to the principle of solidarity, offering insurance benefits independently of contributions of the insured person, do not involve an economic activity. Instead optional schemes funded on a profit-making basis would fall under state aid rules.
• In education, educational systems that are financed entirely or mainly by public funds and not by pupils or their parents are considered non-economic and their financing does not fall within the scope of state aid rules.
• In culture, public funding of a cultural or heritage conservation activity that is accessible to the general public free of charge or with a fraction of the cost to visitors fulfils a purely social and cultural purpose which is non-economic in nature.

Therefore, the main challenges in terms of state aid relate to the entities that perform economic activities and are separate from public administration yet are entrusted with the provision of Services of General Economic Interest (SGEI).

Selectivity

Measures that are of general application and do not favour certain undertakings, or the production of certain goods, are not selective and do not constitute state aid (ie generally applicable tax rate).

Economic advantage

When the aid measure relates to an economic activity, the public funding may grant an advantage to the public administration or entity benefiting from the aid measure. However, the existence of an economic advantage may be excluded when the public administration or entity performs an economic activity but is entrusted with an SGEI, the costs of digitalisation of its services may be considered an eligible cost in relation to the SGEI mission provided.

An economic advantage may be excluded pursuant to the criteria set out in the Altmark (C-280/00) case, if:

• the public administration or entity has clearly defined public service obligations to discharge;
• the parameters of compensation have been established in advance in an objective and transparent manner;
• there is no compensation paid beyond the net costs of providing the public service and a reasonable profit; or
• the SGEI has been either assigned through a public procurement procedure that ensures the provision of the service at the least cost to the community or the compensation does not exceed what an efficient company would require.

Affectation of trade and distortion of competition

In cases of very low amounts of aid, distortion of competition can be excluded. Support granted under the de minimis Regulation is not regarded as state aid if no more than EUR200,000 is granted to a single undertaking over a period of three fiscal years and the other conditions laid down in the de minimis Regulation are also respected. For SGEI activities, public funding may not exceed EUR500,000.

State aid qualifying as compatible without the need for notification

Should all the above conditions be met and should a subsequent aid measure qualify as state aid, it may be cleared as compatible with the internal market without the need to notify the Commission. In particular, state aid may qualify as compatible with the internal market in the below cases:

• Existing aid measure: The aid measure is already covered by an existing state aid scheme, or it constitutes an up to 20% increase of the original budget of an aid scheme subject also to full compliance with the RRF Regulation, especially with the eligibility criterion of the measure having started on 1 February 2020 at the earliest.
• General Block Exemption Regulation (GBER): If state aid falls under the GBER, Member States do not have to notify such state aid. However, they would still need to inform the Commission. There is no provision in the GBER specifically concerning the digitalisation of public administration, including healthcare. However, depending on the specific design of the investment by the Member State, a number of GBER provisions could be used for actions related to the digitalisation of public administration.

Article 31 GBER allows training aid up to EUR2 million per training project.
Article 53 GBER allows investment aid for culture and heritage conservation up to EUR150 million per project, as well as operating aid up to EUR75 million per beneficiary per year.

• SGEI Decision: If and to the extent the public administration performs an economic activity and is entrusted with an SGEI, the costs of digitalisation of its services may be considered as an eligible cost in relation to the SGEI mission provided. State aid for the compensation of such SGEI is exempted from notification on the basis of the SGEI Decision, provided that the criteria of that Decision are met, in particular: (i) definition and entrustment of an SGEI, (ii) parameters of compensation established ex ante in a transparent manner, (iii) amount of compensation not exceeding the costs for the provision of the SGEI and a reasonable profit, (iv) a mechanism to ensure the absence of overcompensation. The SGEI Decision is in particular applicable for:
• SGEIs up to EUR15 million per year (calculated as an average across the years of entrustment);

public service compensation granted to hospitals providing medical care, irrespective of the amount; labour market, social housing and the care and social inclusion of vulnerable groups, irrespective of the amount; and

public service compensation for the provision of SGEIs meeting social needs as regards health and long-term care, childcare, access to and reintegration into the labour market, social housing and the care and social inclusion of vulnerable groups, irrespective of the amount.

State aid requiring notification

If the measure constitutes state aid and does not meet the conditions above that allow for automatic clearance without need for notification, the aid measure may still qualify as compatible with the internal market subject to the Commission’s assessment following notification.

This is particularly relevant for entities engaging in SGEI that do not fall under the SGEI decision but could be cleared post-notification under the SGEI Framework that specifies the application of Article 106(2) TFEU. The principles set out in this SGEI Framework apply to public service compensation only in so far as it constitutes state aid not covered by the SGEI Decision. The three basic criteria of the SGEI Framework that shall be met are that:

• the service in question is a genuine public service;
• the service is entrusted to the undertaking by an official act specifying the public service obligations and the methods of calculating the compensation; and
• the undertaking is not overcompensated for the provision of public service.

Conclusion

On the basis of the above analysis, public administration and entities that would consider benefiting from the RRF funds in the context of the Flagship Modernise should keep in mind that:

state aid rules remain fully applicable in the case of aid to public administration even for financing provided by the RRF; and
the compatibility of state aid depends on the amount of the aid measure and/or on whether the aid constitutes compensation for the provision of SGEI.

At the outset, the architecture of the RRF does not escape EU regulation and oversight. On the contrary, the Commission maintains its monitoring and enforcement competences for grants within the RRF should such funding have the potential to distort competition in any relevant market. Enhanced EU state aid scrutiny is thus required by both Member States and potential beneficiaries before applying for RRF financing.

Orestis Omran

Partner

Bruxelles
T: +32 25001539