The Hellenic Telecommunications Organisation (OTE) was founded in 1949 and is a public limited company listed on the Athens Stock Exchange and on the stock exchanges of New York (NYSE) and London (LSE).

Until full liberalisation of the Greek telecommunications market on 1 January 2001, OTE was the sole provider of fixed voice services and telecommunications networks in Greece, including local, long-distance and international communications services. Today, OTE is present in almost all segments of the broader electronic communications market (fixed, mobile, Internet, maritime and satellite communications) both as a network operator and as a service provider.

In Greece, the liberalisation of the electronic communications market on 1 January 2001 was not accompanied by the full privatisation of OTE. At the time of the notification, the Greek State held 38 % of the company’s share capital, with the remaining capital being held by Greek institutional investors (12 %), international investors (29 %), Hellenic Exchangeable Finance S.C.A. (11 %) and the public at large (10 %). In August 2005, through a convertible bonds transaction, Hellenic Exchangeable Finance sold its 11 % participation in OTE to the Greek State. On 7 September 2005, the Greek State sold a 10 % stake in OTE, reducing its participation in OTE to 38,7 %.

To date, OTE remains subject to a number of specific laws and ‘collective employment agreements’ that were adopted before liberalisation in 2001 and which depart from the current labour legislation applicable to other public limited companies in Greece. In particular, OTE’s obligations towards its employees are governed by (a) Greek employment law, (b) collective employment agreements negotiated between OTE and the employees’ union (OME-OTE), mainly before the market was liberalized, and (c) OTE’s general employment statute (‘GES’).

The labour legislation applicable to OTE exhibits several particularities as compared to the ordinary rules.

First, all its employees enjoy a de facto quasi permanent status. Articles 2 and 17 of the GES provide that OTE cannot unilaterally terminate an employment contract in order to reduce its workforce. According to Greek Law No 2257/1994, the provisions of OTE’s GES have the same binding effect as any other Greek law. As a result, the labour status of OTE employees cannot be modified without the latter’s consent and the passing of legislation giving effect thereto.

Third, the current GES prohibits salary increases based on considerations other than an employee’s formal qualifications and seniority in the company. OTE cannot therefore increase salaries based on employee productivity and/or achievements. On the basis of past agreements with the trade unions, new recruits enjoy higher entry-level salaries compared to the private sector, while experienced employees in management posts receive lower salaries.

Finally, according to the applicable legal framework, OTE has to make higher lump-sum payments for retirees. Upon retirement, OTE employees receive two lump sums: (a) a lump sum imposed by the law, equivalent to 11,6 times the last gross monthly salary, and (b) a lump sum negotiated by OTE and the unions not exceeding EUR 20 100, plus 9 gross monthly salary payments (compared to 9,6 salary payments in the case of private firms).

OTE employees are obliged to retire when (a) they complete 35 years of full service or (b) when they complete 30 years of full service, and reach the age of 58 years, or (c) when they reach the age of 62 years and fulfil the minimum years of service under the law, namely 15 years or 4 500 days of work. Those who are entitled to a pension but have not reached the age for mandatory retirement can continue to work until they do so.

Based on a study carried out by the McKinsey consulting firm and in order to ensure the long-term viability of the company, OTE adopted a package of restructuring measures in May 2004, the key element of which is the voluntary retirement scheme (VRS). With the VRS, OTE aims to reduce its permanent staff and be in a position to recruit new qualified staff that will no longer enjoy permanent status.

OTE currently employs around 16 000 people enjoying guaranteed employment. The McKinsey study indicated that OTE could operate and offer the same kind of services with approximately 30 % fewer employees. In addition, the study highlighted the need to recruit qualified staff capable of dealing with IT, new technologies, marketing sales, finance and regulatory issues. The average age of OTE’s staff (47 years) and the fact that only a small percentage of the current workforce (19 %) holds a university or college diploma further compound OTE’s labour inflexibility.

An abolition of the permanent status of existing OTE staff — which could have enabled OTE to reduce its workforce like any other company — would have given rise, according to the Greek authorities, to serious legal constitutional concerns and was therefore discarded as an unrealistic option. Given the permanent status of OTE’s employees as currently enshrined in legislation, a reduction in the workforce was possible only with the consent of the employees’ trade union (OME-OTE). In this respect, a VRS was first agreed between OTE and the company’s trade union in February 2005, conditional upon the Government passing legislation giving it binding effect. In May 2005, OTE also concluded a collateral collective employment agreement with the trade union whereby any new recruits would no longer benefit from the permanent status.

The relevant legislation was passed on 14 July 2005 (Law No 3371/2005) and the VRS agreement between OTE and the trade union was finalized on 20 July 2005. This provided the legal framework which OTE needed in order to offer early retirement to around 6 000 people while at the same time being able to take on new staff (around 1 200 people) subject to the ordinary labour laws (i.e. with no permanent status).

The right to early retirement was given to employees who by 2012 will have reached the mandatory retirement age, namely the age of 58 and 30 years of service, or 35 full years of service, or the age of 62 years and 15 years of service. The remaining years of service (‘notional years’) of employees opting for early retirement would be recognised and these employees would be entitled to immediate pension payments. The recognition of a maximum of eight notional years of employment is the basis for the calculation of the main and auxiliary pensions as well as the two lump-sum retirement payments, one from OTE and one from the auxiliary fund.

On 14 July 2005, following the conclusion of the agreement between OTE and the trade unions on the implementation of the VRS, the Greek Parliament adopted Law No 3371/2005. Article 74 of that Law gives the necessary legal effect to the VRS and lays down the State’s financial contribution to the scheme.

In particular, Article 74 of the Law gives permanent OTE employees reaching the statutory retirement age by 31 December 2012 the possibility of requesting immediate discharge while receiving the pension they would have received if they remained with OTE until that date. For that purpose, the employees are granted recognition of as much notional employment time as necessary, with regards to both the main and the auxiliary pension. Following discharge, the employees are entitled to immediate payment of the pension calculated in this way.

The expenditure arising from the recognition of notional employment time in respect of the total pension contributions of the employees and of the employer, as well as the expenditure arising from the pensions which are awarded by TAP-OTE, will be borne by OTE and the Greek authorities. On the other hand, the costs relating to the auxiliary pensions and the lump-sum payment is to be borne entirely by OTE.

Pursuant to Article 74(4)(a) of Law No 3371/2005, the Greek authorities are to transfer 4 % of the share capital of OTE to TAP-OTE. The value of the Greek State’s contribution to the VRS is calculated by multiplying the total number of shares (490 582 879) in OTE by 4 % and by the current OTE stock value as quoted on the Athens Stock Exchange. Under to the Law, the Minister for Economic Affairs and Finance is authorised to sign contracts effecting the aforesaid transfer and setting out the rights of the Greek State in relation to those shares, including the Greek State’s right to buy back the shares if it so wishes (call option), but also the obligation to do so should the pension fund need cash to fund the pension benefits under the VRS (put option) at their closing price on the day of the non-stock-market transfer. Implementing measures and other details concerning the execution of these options have not yet been specified, pending the Commission’s assessment.

On 20 December 2005 the Greek authorities informed the Commission that a total number of 5 525 employees had submitted a valid application within the required timeframe for taking part in the VRS, approximately 90 % of the initially envisaged workforce reduction. Notwithstanding the fact that the exact figure would not be known until all applications had been fully processed and assessed in detail, the Greek authorities estimate that the overall cost of the VRS will be around EUR 1,1 billion (or around EUR 863 million in net present value terms).

As indicated above, the Greek State’s participation takes the form of a transfer of 4 % of its shares in the company to the TAP-OTE pension fund.

Based on the share price of OTE on the date of the publication of the Law (14 July 2005), the value of the 4 % of the shares to be transferred from the State to the pension fund was around EUR 315 million. However, given that the value of the shares will be determined on the day of the transfer, the State’s contribution may well be higher. Since July 2005, the share price of OTE has increased from around EUR 16 in July 2005 to around EUR 23 by mid-January 2006, and around EUR 22 in early February 2007.

The Greek authorities consider that the State’s contribution to the VRS does not constitute State aid. In providing finance for the VRS, the Greek State has acted like a private investor. Furthermore, the State’s contribution only partially relieved OTE from the extra costs resulting from the VRS as compared to less costly similar schemes offered under the generally applicable labour laws and regulations. Consequently, the aim of the State’s contribution was merely to restore a level playing field and therefore not to distort competition.

The Greek authorities take the view that OTE is at a disadvantage vis-à-vis its competitors in the recently liberalised market for fixed telephony. Due to the life tenure status of OTE employees, OTE could not unilaterally dismiss staff but had to have recourse to voluntary redundancy offers. In order for such an offer to be attractive, OTE had to offer its employees voluntary redundancy terms and conditions that reflected the latter’s permanent status.

The Greek authorities proposed a two-stage calculation aimed at identifying separately (a) the financial burden imposed on OTE by the permanent status, and (b) the burden imposed by inflated salaries.

Next, comparing the cost of OTE’s VRS with the costs of a VRS based on private-sector salaries, which are roughly one third lower than salaries paid by OTE, the Greek authorities estimate the additional salary burden on OTE at EUR 193 million, based on a comparison between OTE’s costs and twice the minimum legal redundancy compensation payments. Taking the alleged additional costs due to both permanency and higher salaries together, the total extra burden imposed on OTE amounts to EUR 462 million, which exceeds the State’s contribution as estimated at the time of the notification (around EUR 315 million).

First, the Commission questioned whether the financial contribution was provided in line with the market economy investor principle since no other investor in the company contributed financially to the early retirement scheme. Moreover, all investors would benefit equally from the expected increase in the company’s value, without the Greek State receiving a return proportionate to its contribution. Furthermore, the Greek authorities have not shown that they could expect a reasonable return from their contribution.

Second, the Commission questioned whether the Greek Government’s financial contribution was actually limited to relieving OTE of alleged extra costs compared to other operators offering redundancy/early retirement schemes to their employees. In particular, the Commission doubted that the only example put forward by the Greek authorities, according to which a normal company would, in the context of voluntary redundancy plans, offer around twice the redundancy compensation required by law for dismissals, could be regarded as an appropriate benchmark for determining the normal costs of a company offering an early retirement scheme for around 5 000 to 6 000 employees who did not enjoy the special permanent employment status.

Furthermore, the Commission expressed fears that there was a risk that the financial contribution by the Greek State, which is not fixed but will depend on the value of OTE shares at the date of the actual transfer, would exceed the thus calculated alleged extra costs to OTE.

The Commission also considered that even if one were to accept that OTE bears additional costs due to the special employment status of its employees, this would not necessarily justify the State’s contribution, given that OTE might have benefited, and may continue to benefit, from other advantages which could neutralise any possible structural disadvantages. Such advantages could result from the specific employment status of OTE employees, the specific legal framework applicable to OTE or specific interventions, reducing OTE’s labour costs below the labour costs of companies subject to the generally applicable labour laws. References were made to a possible exemption of OTE from unemployment contributions and a relief in the past from its pension obligations.

Finally, the Commission also questioned whether OTE derives benefits from its former monopoly position compensating for the disadvantages resulting from the extra costs of the VRS, in particular as regards its fixed telecom network.

Based on the above Hay Group report, another international economics and antitrust consultancy, Charles River Associates International (CRA International), compiled a final report in which it calculated the extra costs incurred by OTE as compared to its private sector competitors, i.e. the cost of permanency and the cost of higher salaries.

The main findings of the individual reports can be summarised as follows.

On the basis of the above studies, CRA International has calculated the NPV of the costs that OTE will incur for a total of 5 494 employees as a result of implementing the VRS.

On the basis of the above post-tax amount, CRA International calculated the costs that OTE would have incurred had it been a private company. To this end, CRA International assumed that (a) according to the conclusions drawn by the Hay Group report, a private company would under normal circumstances offer a package amounting to 1,5 times the legal redundancy indemnity, and that (b) according to the data presented in the 2004 KPMG survey of compensations and benefits in the Greek high tech sector, this percentage would apply to salaries which are 33 % lower than those paid by OTE. Based on the assumption that OTE would provide a package equal to 150 % of the legal requirement but with private-sector salaries, i.e. 33 % lower than those of OTE, CRA International concluded that a private company other than OTE would have incurred costs, after tax, amounting to EUR 314,4 million for implementing the VRS.

For the sake of completeness, CRA International also calculated the extra costs borne by OTE on the basis of two alternative scenarios. The first scenario is based on the higher OTE WACC discount rate (7,8 %). Under this scenario, the extra burden is reduced to EUR 390,4 million. The second scenario assumes that there is no tax deductibility. Under this scenario, the extra burden increases to EUR 540,2 million when using the OTE’s WACC, and to EUR 643,4 million when using the risk-free discount rate of 3 %.

With regard to advantages that OTE may derive from its former monopoly position, the Greek authorities recall that the fixed line market has been fully liberalised since 2001, and that OTE has been the subject of extensive ex ante regulation in accordance with the provisions of the applicable regulatory framework for electronic communications services and networks. The remedies imposed on OTE by the national regulatory authority, the Hellenic Telecommunications and Post Commission (EETT), in relation to the fixed markets have led to competitive entry from alternative operators and the subsequent loss of market share by OTE.

In their reply, the Greek authorities based their calculations on OTE’s share price at close of trading on 25 April 2006, namely EUR 17,98. Thus, on 25 April 2006, 4 % of the stock of OTE corresponded to a stock value of EUR 353 million. The value of the Greek State’s contribution to the VRS, as of 25 April 2006, was therefore 25 % lower than the amount of EUR 469,9 million that corresponds to the extra cost of the VRS.

However, given that the price of OTE shares is subject to fluctuation on the Athens Stock Exchange, if the total value of the 4 % of OTE’s stock exceeds the extra costs borne by OTE, Greece expressly undertakes to amend Article 74 of Law No 3371/2005, so as to limit the State’s financial contribution accordingly.

The Greek authorities underline that in accordance with Article 34 of Greek Company Law No 2190/1920, the general meeting does not have the competence to adopt management decisions; such competence is vested in the board of directors (Article 9(d) of OTE’s statutes). The VRS was thus discussed and decided by the company’s board of directors and later presented to institutional investors.

The Greek authorities argue that the comments made about the fact that every year the Greek State covers part of the deficit of TAP-OTE are based on an incorrect understanding of Greece’s social security system. The Greek authorities reiterate that the main pension fund for OTE employees, TAP-OTE, is a separate legal entity, governed by public law, in the same way as all other pension funds in Greece. It has its own board of directors, administration, budget and finance departments. Almost all existing pension funds are public law funds, and are independent from the companies in which the employees work, are self-governed and not profit-oriented. Pension rights are vested rights under the Greek Constitution (Article 25). The basic characteristics of the Greek social security system are its obligatory, public and universal character. The Greek pension system is thus a ‘pay as you go’ system. Deficits of the various public law funds are not financed by the employers or the employees, but by the State, the latter being under the constitutional obligation to guarantee that all pensions are fully paid.

From 1994 until 2001, although a private law company under state control and totally independent from the public law pension fund TAP-OTE, OTE was mandated through ad hoc legislation and through collective labour agreements to cover the deficit of TAP-OTE, and thus to operate a kind of a social insurance arrangement on behalf of the State. OTE’s liability to cover such ad hoc deficits of TAP-OTE increased yet further its non-wage costs compared to its competitors and new entrants in the market and constituted a clear disadvantage for the company.

With regard to the alleged advantages that OTE derived from its former monopoly position, the Greek authorities emphasise that since 2001, the Greek telecommunications market has been fully liberalised and subject to the ex ante regulatory supervision of EETT, the national regulatory authority. The alleged abusive behaviour of OTE would have to be dealt with under the respective sector-specific rules of the new regulatory framework and the relevant directives thereof. For the Greek authorities, compensatory measures that pertain to a fully liberalised market cannot be requested through a completely different avenue, i.e. the State aid assessment of state measures which are solely labour-related.

Moreover, no shareholder other than the Greek State has contributed to the extra costs of the restructuring plan of OTE, although the expected improved profitability of OTE should benefit all investors without distinction. In these circumstances, the behaviour of the Greek State was different from that of the other private investors in OTE. Even if the special position of the State as the largest shareholder might justify different behaviour, one would normally expect that where one of the shareholders of a company provides financial assistance without the other shareholders doing so in the same manner, such a shareholder would receive some sort of compensation by way of an increased stake in the company or suchlike. However, in the present case, the State receives no compensation in excess of that of all the other investors in the company.

The fact that the share price of OTE has increased since the announcement of the VRS does not necessarily mean that the State’s financial contribution should be considered, for this reason alone, compatible with the private investor principle. In principle, any financial contribution by the State towards improving the financial position of a quoted company is likely also to improve the latter’s share price, and this regardless of whether such a contribution qualifies as aid within the meaning of Article 87(1) of the Treaty.

For all the above reasons, the argument of the Greek authorities that the State’s contribution to the costs of the VRS complies with the private investor principle should be rejected.

It is true that the labour law applicable to OTE is different from that applied to any other private company in Greece, in that the permanent tenure of OTE employees and their higher salaries cannot be modified unless new legislation is passed giving effect to the consent required of OTE’s employees. Overall, the labour rules applicable to OTE increase its labour and social security costs and deprive the company from the freedom enjoyed by other competing companies when it comes to restructuring their labour costs in line with the prevailing market conditions.

In this regard, the present case bears a number of similarities with Combus. In Combus, the Danish State did not compensate the company concerned but the officials employed by it. Likewise, the Greek State is not compensating OTE but the employees’ pension fund for the loss of revenue due to early retirement. Like in Combus, the permanent status of OTE’s employees constitutes a ‘privileged and costly status’ vis-à-vis the status of private-sector employees. Like in Combus the intention of the Greek Government is to free OTE ‘from a structural disadvantage it ha[s] in relation to its private-sector competitors’.

Furthermore, as was the case in Combus, the State’s intervention does not aim to make up for, or alleviate OTE from, its past pensions obligations resulting from the period of time when the company became subject to a sui generis labour law framework (past liabilities), but is strictly limited to putting OTE in line with the private sector for its future pension rights.

That being said, the Commission also notes that the factual and legal context of the case at hand exhibits a number of particularities compared with Combus.

First, in Combus the Danish authorities’ compensation aimed to facilitate the planned change of status of the company from public to private, hence the financial compensation (bonus) offered by the Danish Government to Combus employees whose status changed from public servants to private-law contract employees. OTE, however, became a public limited company in 1994, without the State taking any appropriate measures at the time to ensure that the company’s labour rules would be aligned on those of a normal public limited company. Nor did the State intervene in 2001, when OTE lost its exclusive right to provide fixed voice telecommunications services and the Greek electronic communications market was fully liberalised.

In this respect, it is not impossible that the high number of employees enabled OTE, especially during the critical years before and immediately after full liberalisation, to secure and maintain its current dominant position and continue to be present in virtually all segments of the electronic communications market.

Although, as pointed out in recital 93, the labour rules imposed on OTE are indeed an exception to the ordinary labour law applied to date to any other private company in Greece, and the permanent status and the high salaries guaranteed to OTE employees were not in reality the result of a freely negotiated collective agreement, but rather imposed on the company by the State itself, the Commission notes that at no time since OTE became a listed company did the Greek authorities indicate that OTE’s labour law liabilities did not have to be assumed by the company’s normal budget or that the State would have to compensate OTE for the extra costs of permanency and high salaries imposed by law on it. Likewise, OTE’s stock valuation was also based on the assumption that the permanency and high salary costs of OTE are normally for OTE’s budget to bear.

These considerations, examined in conjunction with the findings in the Combus case, indicate that the measure at issue can be regarded as aid. However, the matter does not need to be pursued further since, for the reasons set out in detail below, it is in any event compatible with the common market under Article 87(3)(c) of the Treaty.

By relieving OTE from the extra costs it bears as a former public undertaking due to the permanent employment status and the high salaries of its staff, the notified measure will enable the company to operate freely in the fully liberalised electronic communications market and to make the necessary adjustments to respond to market and other technological developments that affect the company’s viability in the long term.

In particular, the reduction of around one third of OTE’s staff through the VRS, together with the consent of OTE employees to abolish permanency for future recruits in exchange for the early retirement package offered by OTE, are key components of the overall restructuring operations of OTE that should guarantee the company’s profitability, efficient operations and further privatisation. To date, the permanent employment status of OTE employees, their excessive number and the fixed salary regime applied to them constitute major obstacles to the further privatisation of the company and to the exit of the Greek State from OTE.

Therefore the planned financial contribution of the Greek State to the costs of the VRS is in line with the common interest.

At the opening of the formal investigation, the Commission expressed reservations as regards the need for the present VRS by reference to other previous VRSs that were financed entirely by OTE.

In these circumstances, the decision of OTE to recognise up to seven notional years of service to all employees who would have been subject to mandatory retirement between 2005 and 2012, and thus offer them an early retirement option with a full pension, appears to have been the only means likely to lead to the timely release of a significant number of employees. An employee that enjoys a quasi-civil-servant status would decide to exit the company only if the employer offered the appropriate incentives to that effect. OTE needed therefore to offer at least adequate compensation for the economic benefits that an employee would have continued to enjoy had he stayed under the protection of permanency. The subsequent successful take-up of the VRS (around 91 % of all eligible employees) confirms that the further incentives offered by OTE to its employees in the form of recognised notional years of service is an appropriate instrument.

OTE could not have gone back to resorting to other less costly measures such as a redundancy plan, since OTE employees would have to consent to losing their life tenure employment status in exchange for a lower redundancy compensation. Nor could it have abolished retroactively the permanent status of its employees in order to be able to carry out a mandatory redundancy scheme since, as the Greek authorities explained, such an option would have raised very serious legal and constitutional issues that would have defeated the whole restructuring of OTE.

Accordingly, the decision of the Greek authorities to finance the costs of the VRS that result from the permanency costs and the high salaries of OTE is in line with the necessity requirement, for it enables OTE to restructure its operations in a manner similar to that of a private company without having to incur the extra costs that derive from the pre-liberalisation period.

The State’s contribution compensates OTE only for the permanency and high salaries costs that arise from the extra notional years that are given to employees who would have reached the mandatory retirement age from 2005 to 2012. In particular, the Greek State does not intervene to finance the existing pension liabilities of OTE or to cover any sort of pension deficit that should have been assumed by the company. OTE has paid all its past employer contributions to TAP-OTE in full, and is also paying all the costs of the VRS, up to the effective date of the implementation of the VRS, with the exception of the costs that a private company would not have to bear had it had to take similar measures to reduce its workforce.

Thus, the Greek State is transferring 4 % of its stake in OTE into the pension fund in order to finance the costs of the VRS that result from the fact that the pensions of those eligible for the VRS are not calculated on the basis of the year of their actual departure, but on the basis of the year they would have retired had they chosen to take full benefit of their permanent status. In other words, the State is essentially financing the future employer and employee pensions that correspond to the notional years being awarded to those taking advantage of the VRS offer.

The State’s contribution should also be assessed within the wider agreement reached by the management of OTE and its employees whereby in exchange for the generous incentives given for early retirement, OTE employees have consented to the abolition of the permanent employment status for future recruits. Had the employment status of OTE future employees remained unchanged, the State’s contribution would not have had any effect on the company’s long-term viability since any future recruits would have neutralised any short-term cost savings that OTE would have realised through the VRS.

The proportional character of the aid in question also depends on ascertaining first that (a) the Greek authorities have adequately quantified the extra costs that the OTE will have to bear because of the permanency and high fixed salaries of the personnel taking advantage of the VRS offer, and (b) that the State’s contribution does not overcompensate OTE.

At the opening of the formal investigation the Commission observed that the additional costs borne by OTE owing to the special employment status of its employees would not necessarily justify the State’s contribution, given that OTE might have benefited, and may continue to benefit, from other advantages which neutralise the cost of the VRS (see recital 47). Such advantages could arise from the specific employment status of OTE employees, in general, or specific interventions, reducing OTE’s labour costs below the labour costs of companies subject to the generally applicable labour laws, such as exemption from unemployment charges or relief from pension obligations. OTE might also derive benefits from its former monopoly position, compensating for the disadvantages resulting from the extra costs of the VRS (in particular as regards its fixed telecom network).

It follows from the foregoing that as long as it does not exceed the extra burden imposed on OTE due to the permanent status and the high salaries of its employees, the planned contribution of the Greek State to the costs of the VRS of OTE, calculated at EUR 390 million, is an aid measure which pursues an objective of common interest in a necessary and proportionate way without adversely affecting trading conditions. Therefore, it is compatible with Article 87(3)(c) of the Treaty.