Audit of Compensation for Services of General Economic Interest

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Table of Contents:

  1. Compensation Control
  2. What is a Compensation Audit?

In recent years, the role of public services in the economy has been increasing, particularly those provided by municipal companies in the general economic interest. These services are considered by the EU Member States to be particularly important for society and the economy, and thus are provided even when they are not profitable for private enterprises. Therefore, Member States decide to support entities that provide services of general economic interest. This support is given in the form of compensation.

Compensation can constitute state aid if the beneficiary is an entrepreneur, the compensation comes from public sources, and is caused by public intervention, it brings the beneficiary a selective advantage, it can distort competition, and it can affect trade between Member States. State aid in the form of compensation for the provision of public services is consistent with the internal market and exempt from the notification requirement specified in Article 108(3) of the Treaty, provided that the conditions set out in the Commission’s Decision of December 20, 2011, on the application of Article 106(2) of the Treaty on the Functioning of the European Union to state aid in the form of compensation for the provision of public services granted to enterprises entrusted with the operation of services of general economic interest are met.

Compensation Control

Member States ensure that the compensation granted for the provision of services of general economic interest meets the requirements set out in the 2011 Commission Decision, particularly ensuring that the enterprise does not receive compensation exceeding the amount set by the Commission’s decision. They conduct regular checks or ensure such checks are conducted at least every three years during the period of entrustment and at the end of that period. The control of compensations received by companies providing services of general economic interest is a crucial element in ensuring proper operation and financial transparency. Such control is based primarily on Commission Decision No. 2012/21/EU, which sets the framework for the application of Article 106(2) of the Treaty on the Functioning of the European Union to state aid in the form of compensation for the provision of public services.

Compensation cannot exceed the amounts specified in the Commission’s Decision, and any deviations are treated as state aid incompatible with the principles of the EU internal market, which may result in the need for repayment. The responsibility for controlling the adherence to the established maximum level of compensation rests with the entity granting it, which, in case of detecting excessive compensation, should demand the repayment of such overcompensation.

What is a Compensation Audit?

The financial control of entities remunerated in the form of compensation is referred to as a compensation audit. The main goal of such an audit is to determine the compliance of the amount of remuneration received by the enterprise in the form of compensation with the corresponding amount of incurred, justified costs related to the provision of public services, and the compliance of the method of determining such remuneration with the applicable EU and national legal regulations (Compensation Audit – Settlement of a 10-Year Contract, Tomasz Staśkiewicz, Public Transport Bulletin No. 165, August 2022). Compensation must not exceed the amount necessary to cover the net costs resulting from fulfilling public service obligations, including a reasonable profit.

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Due to the nature and timing of the compensation audit, two types of control are distinguished:

  • Ex ante audit — conducted to ensure that the compensation system adopted in the performance (entrustment) contract prevents the granting of excessive compensation. The subject of such control is the verification of the projected components of compensation to confirm the correctness of the estimated level of net costs of providing public services and a reasonable profit for a given period, as well as the compliance of the accounting system operating at the public operator with the principles accompanying its calculation.
  • Ex post audit — guaranteeing that the funds paid in the form of compensation will not exceed the actual net costs incurred in connection with the provision of services of general economic interest.

Audits of the compensations granted aim to avoid situations where enterprises receive compensation exceeding the amounts specified by EU regulations. Since excess compensation is not necessary for the provision of services of general economic interest, it constitutes state aid incompatible with the internal market.

Due to the particular nature of public services provided in the general economic interest, it is crucial to establish precise rules for recording, settling, and accounting for these services in contracts with enterprises implementing such services.