EUROPEAN COMMISSION

Brussels, 20.12.2001 C(2001)4512fin

Subject: State aid N° N 649/2001 – Freight Facilities Grant (FFG)

Sir,

1. PROCEDURE

1. By letter of 18 September 2001, registered under SG(2001)10278 the United Kingdom authorities notified to the Commission their intention to extend the existing FFG scheme to cover also maritime transport (coastal and short sea shipping) in accordance with Article 88 (3) of the EC Treaty. The notification was registered by the Secretariat General of the European Commission on 19 September 2001 under No N 649/2001. The notification was considered incomplete and, on 18 October 2001, the United Kingdom authorities were asked to provide additional information. The Commission received the requested information on 20 November 2001, registered under DG TREN A/70641. However, on 9 November 2001 and on 15 November 2001, two technical meetings were held between the Commission and representatives from the United Kingdom. On 22 November 2001, the Commission sent a letter to the United Kingdom authorities in order to confirm the scope of the notified aid measure, in particular with regard to the financing of infrastructure. The Commission received this confirmation by letter of 27 November 2001, registered on 4 December 2001 (DG TREN A/71635).

The Right Hon Jack Straw MP Secretary of State for Foreign and Commonwealth Affairs Downing Street LONDON SW1A 2AL (United Kingdom)

Rue de la Loi 200, B-1049 Bruxelles/Wetstraat 200, B-1049 Brussel - Belgium Telephone: exchange 32 (0) 2 299.11.11. Telex: COMEU B 21877. Telegraphic address: COMEUR Brussels. 1. DESCRIPTION OF THE AID FFG SCHEME

2.1 Commission’s decision of 16 September 1993, N 162/93

2. The FFG scheme, which was first introduced in 1974, makes available grants for capital investments in freight handling facilities, the purpose of which are to facilitate a transfer of freight transport from road to more environmentally friendly modes of transport. Originally, it covered only rail freight facilities but in 1981, the scope was extended to cover also inland waterway freight facilities.

3. A subsequent modification in 1983, brought within its scope also subsidiaries of British Railways, Freightliner and Sealink (combined transport). The latest modification to the scheme was made in 1993 (authorised by the Commission in case No N 162/93) and extended the scope to include combined transport operators and international railway groupings according to Directive 91/440/EEC1. The decision was based on Regulation (EEC) 11070/702 as modified interpreting Article 73 and 87.3 c) of the Treaty.

General objectives of the aid scheme

4. The aim of the scheme is to encourage companies to take heavy lorries off the roads by helping them to invest in freight facilities, where in absence of a grant, the commercial decision would be to use road transport. FFG provides subsidy only for the extra capital cost of using a less environmentally damaging option and does not provide aid to meet mandatory Community environmental standards. The environmental benefit is calculated in accordance with a standard formula.

5. Grant intensity will be specific to each individual scheme. The FFG scheme first assesses the environmental benefit of the proposal. This is done by determining the lorry-miles that will be saved over the agreed period of the individual scheme, and calculating their monetary value which is the environmental benefit. This monetary environmental benefit forms the absolute budgetary ceiling for the maximum amount of grant that may be paid.

6. the current co-efficients used to calculate the monetary value of the saved road mileage are:

– All urban single carriageway roads, £ 1.50 per mile

– All urban non grade-separate dual carriageway roads £ 1.50 per mile

– All rural single carriageway roads £1.00 per mile

1 OJ L237, 24.8.1991, p.25.

2 OJ L 130/1, 15.6.1970; as amended inter alia by Council Regulation (EC) 3578/92 (OJ L364/11, 12.12.1992), Council Regulation (EC) 2255/96 (OJ L304/3, 27.11.1996) and Council Regulation (EC) 543/97 (OJ L84/6, 26.3.1997)

19 – Motorways, rural dual carriageway roads and urban grade- separate dual carriageway roads £ 0.20 per mile

7. The road mileage, saved by using rail/inland waterways transport, is then multiplied by the appropriate road value producing a route valuation.

8. The annual monetary amount is obtained by multiplying the number of lorry trips by this route valuation. The estimated amount of tonnage saved each year is divided by average payload of lorries (loaded trips). Lorries will have to return either empty or with a “backload”. In the case of empty returns or backloads, the total lorry trips will be multiplied by 2. Road improvements may reduce the route variation during the life of the project and where appropriate this needs to be taken into account in the calculation.

Procedure

9. Any EU company wishing to move freight within Great Britain by rail/inland waterway transport instead of using road transport may apply for State aid under the FFG scheme on a non-discriminatory basis. Grant is paid to the person who incurs the cost of providing the freight facilities. The direct beneficiary could be the owner or consignor of the goods or the transport operator or a combination of all three. Society will be the indirect beneficiary of the environmental benefit, the achievement of which is the whole purpose in granting aid under the FFG.

10. FFG is administrated by the UK Department of Transport, Local Government and the Regions or the Scottish Executive in respect of FFG grants in Scotland. Applications should include the following information:

· Short description of the company and its history, including details of its activities and products. In case of new companies, a business plan and evidence of bank support must be provided.

· A complete description of the proposed project, including the necessary facilities and its estimated budget and details of work undertaken by consultants. Competitive tender and the lowest tender chosen should normally establish prices.

· The road route previously used by the applicants, as well as the annual tonnage and the lorry payload

· A copy of the consent or the stage reached and any other planning issues affecting the facility or associated traffic flows (if planning permission is required). FFG will not be awarded until any necessary planning permission has been granted but this need not hold up processing the application.

· If the applicant is not the originator of the traffic, evidence of agreement with the producer is requested. If the applicant is leasing assets for the scheme, evidence of agreement with the lessor is requested.

· Details of any other grants, which have been applied for in connection with the proposed facility. 11. On receipt of the formal application, the competent authority3 may decide to seek independent engineering advice to examine the design and specification of the project. A visit to the site of the proposed facility, either by the staff of the competent authority or by appointed consultant, will normally be necessary.

12. The applications will be examined with respect to the saved lorry miles and the viability of the project. In order to guarantee the environmental benefit, an agreement will be made between the applicant and the United Kingdom authorities in order to establish the global and annual amounts of tonnage that will be moved to the mode and the route that will be used. In all cases, the net present value of the environmental benefit calculated over the period of agreement must exceed the cost of the grant in order for the scheme to be considered.

13. In addition, United Kingdom authorities will carry out a market analysis to assess any possible competitive impact of the applicant project in existing infrastructures before deciding to make an award under the FFG scheme. The starting point of this analysis would be to identify the infrastructures currently handling traffic in the area where a future project will be developed and the specific volume throughputs for each. The individual traffic flows are then compared with the total business of these infrastructures in order to calculate what percentage of their total business this traffic represents. Finally, the impact of each company’s potential business loss is set against forecasted market growth and assessed within the context of environmental gain.

14. In any case, grant would not be paid if the project can be commercially justified without grant and/or would proceed in any event without it. In addition, if the environmental benefits to be gained are insufficient or road transport is not possible (for example, where a planing condition or a legal restriction prevents or restricts the use of road) the project would also not be considered as aid-worthy.

15. The payment will be made in arrears and only upon production of independently audited evidence that the grant recipient has made the full investment. Additionally, the completed freight facilities are inspected by officials before final payment.

16. In cases where the competent authority has reason to question the robustness of the predictions of the type and quantity of goods that would be handlend by the proposed facility, the competent authority may offer payment of half the grant.

Monitoring and control mechanisms

17. FFG grants are paid in the clear expectation that the aided freight facility will secure the removal of lorries from specific routes for a specific number of years and for a specific tonnage target.

18. Annual reports provided by the beneficiaries to the competent authority and verified by public audit will establish if the operator has achieved the agreed tonnage target. Recipients

3 The UK Department of Transport, Local Government and the Regions, or the Scottish Executive in respect of FFG grants in Scotland. are also required to advise the Government at any time of any matter likely to mean that the tonnage target may not be achieved.

19. If traffic does not reach anticipated levels in the agreed period, the Secretary of State will examine the circumstances to establish whether to extend the original time period in order to obtain the full environmental benefit or to recover a proportionate part of the grant.

Types of aid

20. The FFG scheme will provide capital investment to facilities which can be shown to be required to handle a quantified volume of freight by rail/inland waterway instead of road. The risk of overcompensation is covered by the fact that for the freight facilities grant the assistance is paid only in arrears against certified invoices.

21. The aid intensity is 50% of eligible capital costs. In exceptional cases where the benefits justify it, a higher rate is possible.

Cumulation and duration

22. UK authorities will take care to ensure compliance with rules on aid cumulation. Applicants are required to declare what, if any, other grants have been applied for in connection with their application.

23. The duration under the existing FFG scheme is indefinite

2.2. The notified extension of the FFG scheme to coastal/short sea shipping

Beneficiaries and objectives

24. According to the notification, the extension to the FFG scheme will grant aid to operators of freight handling facilities for coastal/short sea shipping. Such facilities may include quays, moorings and loading/unloading equipment and will be provided to all existing and potential users under non-discriminatory terms. The aid is intended to tip the balance in favour of short sea shipping and to financially support investments in expensive and specialised equipment required for sending freight by water, which would not be needed if the goods went by road. By contributing to the cost of such facilities, grants will enable coastal/short sea shipping to compete in financial terms with road transport.

Mechanisms

25. All the basic requirements and mechanisms currently applied under the existing FFG scheme will remain in force unaffected.

Legal basis

26. The legal basis for the extension of the existing scheme to the maritime sector is the Transport Act 2000, Section 272. In Scotland, this legislation is reflected in Section 71 of the Transport (Scotland) Act 2001. Type of aid

27. Any facility that can be shown to be required to handle a quantified volume of freight by coastal/short sea shipping would be eligible for grant as long as open access to it can be granted. Such facilities may include the following:

· Waterway infrastructure (wharves, jetties, quays, moorings, basins, turning pools, locks and associated works)

· Unloading and loading equipment (lifting and discharging, pumps and associated piping, cranes, fork-lift trucks, hoppers, conveyors, tractors and trailers, containers and specialised pallets)

· Building and storage (warehousing, silos, tanks, storage yards and bays, garaging of mobile facilities, administrative buildings)

· Services (installation of power, lighting, water, drainage, fuel storage)

· Access (access roads – not highways, hard-tanding, security fencing)

· Environmental protection, where required by the planning authority - dust and noise prevention equipment, screening, landscaping, cladding.

· Rights of way, diversion or upgrading of rights of way (surface, underground, overhead) arising out of provision of facilities.

· Design costs, fees for approved staff employed full time and consultant costs for design and construction of project.

If the facility is necessary but not exclusively for the move of freight from road to coastal/short sea shipping, the grant will be proportionally reduced.

28. The aid intensity would not be higher than 50% of the total project cost for facilities that will accessible on non-discriminatory terms for all existing and potential operators. Where access to the infrastructure is limited to one or more specific operators, those will need to be chosen through a transparent, fair and non-discriminatory public tendering procedure. Exceptionally, if the authorities can prove that the requested objectives can not be met through the aid amounts as described above, higher percentages may be granted after prior notification and approval by the Commission.

Duration of the scheme and budget

29. The extended FFG scheme for coastal/short sea shipping will be applied for 10 years. During this period annual reports provided by the United Kingdom authorities will review the performance of the scheme in respect of the grant expenditure, its success in achieving modal shift, the environmental benefit gained and any possible distortion of competition. 30. UK Government expenditure is planned and approved on the basis of three-year budget cycles. The present cycle covers financial years 2001/02, 2002/03 and 2003/04. The United Kingdom budget for the waterborne FFG scheme in this period is as follows: 2001/02: £12.8 million 2002/03: £22.3 million (including provision for project) 2003/04: £14.6 million

2.3. The Port of Rosyth project

31. Following the implementation of the 1995 Defence Review, Rosyth Naval Base closed in 1996. Following acquisition of the site, the company Forth , already operating several ports in the UK, converted a 100 acre brownfield site into a commercial port and commercial activities commenced in 1997. Forth Ports is the owner and operator of the port area and conduct operations on a common user basis. Forth Ports has interests throughout Britain, including Tilbury, London. A whole range of activities have been pursued by Forth Ports to attract port users and sustain economic activity. Its current traffic flows amounts to 175,000 tonnes of cargo per annum.

32. The aim of the project is to develop a port with the capacity to move a significant amount of freight to the Continent, saving the lorry mileage undertaken by Scottish road hauliers currently travelling to other ports, particularly located in South (Dover etc)..

33. For strategic reasons the Port of Rosyth4 was considered as the most suitable by the United Kingdom authorities, which by this measure intend to obtain a significant environmental benefit, which will be calculated on the basis of the FFG scheme.

34. Rosyth was by far the best option available, considering that in Scotland, ports on the are best placed to provide direct access to the main centres of production and consumption, as 80% of Scotland's population and industry lies within a distance of 90km. The present lack of a direct Scottish/Continental link means that practically all exports and imports to and from Scotland have to route through ports in the south and east of the UK and then be further transported for up to 760 km by road to Scotland. This generates significant environmental cost through unnecessary lorry traffic travelling through England and southern Scotland. Eliminating this leg of the journey will also bring the remote northern peripheral areas of Scotland, including the Highlands & Islands, correspondingly closer to the centre of Europe, improving links in an environmentally friendly way with clear beneficial social and economic effect.

35. The Commission has been notified of a particular project concerning the Port of Rosyth within the FFG scheme. This project intends to achieve modal shift from road to water by supporting the capital investment required to introduce the necessary infrastructure in the Port of Rosyth.

36. Items to be granted will exclusively include handling freight facilities operated by the Port of Rosyth. Eligible cost will be the design and provision of shore infrastructure required to receive and accommodate the additional freight movements, provision of plant and

4 By a 1999 Napier University study equipment for container handling and development of the marine facility to enable the port to accept and handle the large ro-ro vessels required for this traffic.

37. The environmental benefits of the project will be delivered over the following 10 years and it is calculated at £ 35.0 million (arising for saving over 400,000 long distance journeys in this period), while the capital grant to Forth Ports (owners of the Port of Rosyth) amounts to £10,96 million. Tariffs income from the operation of the port will compensate in an economic way the cost arising from the operation of the port.

38. Analysis of the case in accordance with the FFG scheme rules has determinate that, to equalise the cost of road and water transportation, aid is required at the level of 94% of the total capital cost of freight only handling facilities at the Port of Rosyth to obtain the desired social outcome. Total capital costs are £ 11,668million. The operation of the port is a wholly commercial matter and the future revenue stream received by Forth Ports will arise exclusively from the commercial fees the company charges for the use of the facility.

Construction of infrastructure

Replacements Facilities 1,208,592

Shore infrastructure & Services 1,785,441

Marine Facility 6,315,073

Plant and Equipment 1,694,417

Design and Professional Fees 665,125

GRAND TOTAL 11,668,648

GRANT AT 94% 10,968,529

39. The handling facilities at the Port of Rosyth will be open to any interested operator on non- discriminatory basis. The fees to be charged by Forth Ports (owner of the port) for the use of Rosyth’s new infrastructure will be based on commercial rates. Under UK law (The Harbours, Docks and Piers Clauses Act 1847) there is a statutory right of open access to harbour facilities. Section 33 of this Act provides that: "Upon payment of the rates made payable by this and the special Act (i.e. the Act which incorporates section 33), and subject to the other provisions thereof, the harbour, dock and pier shall be open to all persons for the shipping and unshipping of goods and the embarking and landing of passengers."

40. Under the FFG scheme, the project will not benefit twice in respect of the same assets or for the same environmental benefits and the mentioned United Kingdom authorities “claw back” will apply. The type of market analysis carried out by the United Kingdom authorities regarding the competitive impact of an award under the FFG scheme first of all assesses the effects deriving from the diversion of freight to the Scottish port of Rosyth from English ports (and the shipping lines) which currently carry the freight. The starting point of the market analysis is therefore to determine which ports and shipping lines are currently handling this traffic and the specific volume throughputs for each. These individual traffic flows are then compared with the total business handled by each of these ports in order to calculate what percentage of their total business this traffic represents. Finally, the impact of potential business loss is set against forecasted market growth and assessed within the context of the environmental gain.Regarding the Scottish Port of Rosyth it has been shown that nearly 70% of the accompanied freight trailers passing from Scotland to the Continent, are in fact transported by road trough South England and across the Channel5. At present, this traffic is usually being trucked to ports in the North East of England and the South East of England . Traffic from the Port of Rosyth would affect traffic from other English ports, in particular that from Hull, Teesport and Dover up to a maximum of 5%, 2% and 0.5% of their current throughput, respectively. However, the Scottish trailer traffic amounts to only 4% of the total UK international trailer traffic. Furthermore, 90% of logistic companies would prefer a Scottish terminal location6, which guarantee a commercial viability to the project.

41. It is also the case that most consultants to a recent DTLR paper “Recent Developments and Prospects at UK Container Ports” were of the view that there will be increase in capacity requested from UK container terminals within the next few years.

42. In the light of the project’s significant environmental benefit of £35 million over 10 years the competitive impact of FFG intervention was judged to be acceptable by the United Kingdom authorities.

2. ASSESSMENT OF THE AID

3.1 Presence of aid

43. According to Article 87(1) EC Treaty, aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the common market.

44. An effect on trade between Member States is realised through market access legislation on Community or national level. Public procurement rules and the Treaty articles on freedom of establishment and free movement of capital also have a certain impact. The management of Port infrastructure is not considered as a closed market.

45. State financing of infrastructure open to all potential users in a non-discriminatory way and managed by the State does normally not fall under Article 87(1) EC Treaty7 as in this case

5 PACT Report “The Feasibility of a new intermodal Maritime Service between Zeeland and Scotland”. European Commission, January 2000, p.2.

6 The Feasibility of a new intermodal Maritime Service between Zeeland and Scotland. European Commission, January 2000, p. 3.

7 cf. Commission decision of 14.9.2000 in case N 208/2000, SOIT (NL). See also Commission’s White paper on Fair Payment for infrastructure use: A phased approach to a common transport infrastructure charging framework in the EU, COM (1998) 466 final of 22.7.1998, Chapter 5, para. 43 and Commission’s Communication COM (2001) 35 final of 13.2.2001, p. 11, Reinforcing Quality in Sea Ports: A Key for European Transport. no advantage is conferred to an undertaking in the sense of Article 87(1), competing with other undertakings. Most land transport infrastructure financing (e.g. road infrastructure constructed and maintained by the public authorities, inland waterway channels) takes the form of this kind of investment. This approach may also apply to maritime ports. The Commission has reflected this in its Communication: “Reinforcing Quality Service in Sea Ports: A key for European Transport”, which attempt to define « public (general) » infrastructures, which in principle triggers no State aid considerations, once it is open to all users on a non-discriminatory basis.8

46. Transport operators and any other users of transport infrastructure clearly fulfil the definition of an undertaking within the meaning of Article 87 (1). It is clear from the Court’s jurisprudence that the central issue in this context is whether an economic activity is being carried out. The organisational form is less relevant. The Court of First Instance in its judgement « Aéroports de Paris v Commission of the European Communities »9 considered that the management and provision of facilities constitute an economic activity for the purposes of Article 87 (1) of the Treaty. A private or public transport infrastructure manager, separate from State administration, will meet the definition. From the point of view of existing or potential competitors any financial benefit provided to such undertakings may, in principle, distort competition.

47. However, if such an infrastructure manager is chosen by an open and non-discriminatory procedure, the State support granted to it for construction and maintenance of transport infrastructure represents the market price to achieve the desired result, financing is also not considered to fall under Article 87(1) EC Treaty.

48. Any other investment aid provided to a particular manager of infrastructure falls within Article 87(1) EC Treaty. It should be permitted as compatible with the Treaty to the extent it is necessary to enable the realisation of the project or activity concerned and provided it does not give rise to a distortion of competition to an extent contrary to the common interest.

8 The Commission according to the Communication: “Reinforcing Quality Service in Sea Ports: A key for European Transport”8, states that « public (general) » infrastructures is open to all users on a non- discriminatory basis. It includes maritime access and maintenance (e.g. dikes, breakwaters, locks and other high water protection measures; navigable channels, including dredging and ice-breaking navigation aids, lights, buoys, beacons; floating pontoon ramps in tidal areas) ; public land transport facilities within the port area, short connecting links to the national transport networks or TENs ; and infrastructure for utilities up to the terminal site. Investments in such infrastructure are normally considered by the Commission as general measures, being expenditures incurred by the state in the framework of its responsibilities for planning and developing a transport system in the interest of the general public provided the infrastructure is de lure and de facto open to all users, actual o potential, in accordance with Community legislation. However, the characteristics of a specific case may show that such infrastructure benefits a specific undertaking and may therefore warrant the conclusion of aid despite its prima facie appearance as public infrastructure.

9 Case T-128/98 of 12 December 2000. 49. The FFG scheme will benefit the coastal/short sea shipping sector by providing grants for freight facilities. A possible distortion of competition can not be excluded in relation with other modes of transport or existing coastal/short sea shipping services. Therefore, a possible effect on intracommunity trade is not excluded. In the case at hand, the selected beneficiaries will receive a commercial advantage from State resources, which other operators competing with them do not get.

50. In view of the above, the Commission finds that the notified aid scheme and the notified Port of Rosyth Project involve aid within the meaning of Article 87 (1) and is hence, in principle, prohibited unless it may be deemed compatible with the common market by virtue of any of the exemptions provided for in the Treaty or secondary legislation.

3.2 Exemption of the aid measure

51. The aim of the notified aid scheme is to enable coastal/short sea shipping to compete on financial terms with road transport by providing the necessary infrastructure. The Commission considers that none of the exemptions of Article 87 (2) of the EC Treaty apply to the scheme. In addition, the State aid under question is not destined to promote the execution of an important project of common European interest or to remedy a serious disturbance in the economy of a member state in the meaning of Article 87 (3) b, nor to promote culture and heritage conservation in the meaning of Article 87 (3) d.

52. Furthermore, Article 73 of the EC Treaty states that aid shall be compatible with the Treaty if they meet the needs of co-ordination of transport. The notion of co-ordination in Article 73 implies more than facilitating the development of an industry, it involves some form of planning by the State. Even if the existing scheme was approved in accordance with Article 87 (3) c and Regulation EEC 11070/70 which interprets Article 73. In the light of the developments in liberalisation, the need for State financial measures to co-ordinate land transport has now been considerably reduced. In addition, Article 73 does not apply to maritime or air sector.

53. Article 80 of the Treaty limits the provisions under the transport chapter by stating that “The provisions of this Title shall apply to transport by rail, road and inland waterway…”

54. The development of activities shifting traffic from road to other modes is in the common interest within the meaning of Article 87 (3) c of the Treaty.12The Commission thus finds that Article 87 (3) c of the Treaty, is the appropriate legal basis to analyse aid for

12 See Commission decision of 8 July 1999, N 121/99- Austria, OJ C 245, 28 August 1999, p.2; Commission decision of 4 May 1999, Italy, OJ L 227, 28 August 1999, p. 12; Commission decision of 9 December 1998, N 598/98- The Netherlands, OJ C 29, 4 February 1999, p.13; Commision decision of 21 January 1997, C 2/97- The Netherlands, OJ C 93, 22 March 1997, p.11. investments in the infrastructure for coastal/short sea shipping transhipment facilities and to assess its compatibility with the common market. This Article states that :

“May be considered to be compatible with the common market: aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest.”

55. It is thus necessary to verify if this requirements are fulfilled in order to apply Article 87 (3) c.

3.2.1 Necessity of the aid

56. The explicit purpose of the FFG scheme is to encourage companies to take heavy lorries off the roads by helping them to invest in freight handling facilities. The mission of such facilities/infrastructures is to create an essential maritime infrastructure into United Kingdom, promoting the use of environmentally friendly modes of transport. In return for the state funding, the beneficiaries will be obliged to construct and to operate port infrastructure/facilities on non-discriminatory terms. The Community has for some time pursued a policy of achieving a balanced intermodal transport system and a policy of fostering the transfer of goods from road to other more environmentally friendly modes.15 The Commission’s White Paper on transport policy16 states that water transport is not expensive and does less damage to the environment than road transport. Intra-Community maritime transport is a key component of intermodality which must provide a means of coping with the growing congestion of road. It must be consider as a real competitive alternative to land transport. Therefore, efforts must be made to harness the advantages of short-sea shipping, for example installing transhipment equipment and encouraging shipping routes between European ports to create networks.

57. The Commission’s view is that in order to achieve an intermodal and sustainable transport system for the future, priority should be given to infrastructure investments. In this respect the Commission takes note of the fact that coastal/short sea shipping transhipment facilities are, by its very nature, nodal points for intermodal transport operations.

58. Sending freight by water can require expensive and specialised equipment which would not be needed if the goods went by road. By contributing to the cost of such facilities coastal/short sea shipping may compete in financial terms with road transport. However, if there were not public sector co-financing intermodal terminal infrastructures, operators

15 Cf. Commission’s Green Paper on Fair and Efficient Pricing, COM (1995) 691 of 20 December 1995; Commission’s White Paper on Fair Payment for Infrastructure Use, COM (1998) 466 of 22 July 1998 and Council Resolution of 14 February 2000 on the promotion of intermodality and intermodal freight transport in the EU, OJ C 56, 29.2.2000.

16 European transport policy for 2010: time to decide. COM (2001) 370 performing economic activities would not invest in them, as their viability could not be ascertained without State funding.17

59. With its intervention, the United Kingdom authorities create an essential maritime infrastructure and the development of an integrated and sustainable transport system. Such transport infrastructure investments hence entail more than just commercial considerations by an undertaking operating in the market for the provision of transport infrastructure. Accordingly, the Commission considers there may be need for State intervention, since market forces are unlikely to provide on a pure commercial basis the necessary coastal/short sea shipping transport infrastructure investments. The Commission thus considers that the FFG scheme is in the Community’s interest.

3.2.2. Proportionality of the State intervention

60. The scheme restricts grants to the lower amount necessary to compensate for the higher costs of coastal and short sea shipping or the value of the environmental benefits. Where the facilities are accessible on non-discriminatory basis for all existing and potential operators the intensity would not be higher than 50%18.

61. In case access to the infrastructure is limited to one or more specific operators, a transparent, fair and non-discriminatory public tendering procedure would establish the necessary amount.

62. It is he Commission’s view that the actual and effective Government funding in these cases will be considerably lower, as the relatively low impact of a subsidy for terminal construction on the costs of the whole transport chain19, will not permit excessive profits or cross-subsidies with other activities on the side of the applicants. Further, the applicants will run a serious commercial risk according to the “claw back” clause established by the United Kingdom authorities if the tonnage target is not achieved and consequently, will have a strong interest in the commercial success of the project.

63. In addition, the access to the aid is granted on non-discriminatory terms. Grants under the FFG scheme are available to any EU company wishing to move freight to, from or within Great Britain by coastal and short sea shipping, instead of using road transport.

64. Furthermore, grants under the FFG scheme will be awarded on a transparent and non- discriminatory basis. The existence of the scheme has been widely published and the

17 Commission decision of 14 September 2000, Case N 208/2000 (NL), SOIT, para. 32. See also High Level Group on Public-private-Partnership financing of Trans European Transport Network projects, Final report of May 1997, p. 25 et seq.

18 Commission decision of 31 January 2001, N 597/2000, NL –Régime de subventions des raccordements industriells particuliers aux vois navegables; Commission decision of 14 September 2001, N 208/2000, NL – SOIT; Commission decision of 15 November 2000, N 755/1999 IT- Bozen.

19 A 50% subsidy for the construction of a combined transport terminal leads to cost reduction for the total transport chain between 4 and 10%, see Commission decision of 14 September 2000, N 208/2000 – The Netherlands (SOIT), point 11. evaluation of applications for grants and the selection procedure for projects are based on objective and publicly known criteria. The compensation provided by the British public authorities to the beneficiaries does not exceed the net extra cost for the creation and use of coastal/short sea shipping facilities, in view of its environmental benefit.

3.2.3. No undue distortion of competition

65. In order to ascertain that there is no undue distortion of competition, different analyses are required: (1) competition between coastal/short sea shipping - road transport; (2) competition between coastal/short sea shipping - other modes of transport (3) competition regarding existing coastal/short sea shipping traffic.

(a) Coastal/short sea shipping - road transport

66. Road freight and coastal/short sea shipping transport traditionally answer to different user requirements. Road freight transport is more flexible and faster than coastal/short sea shipping transport. It will therefore be used for high value general cargo, which is time sensitive, needed in smaller numbers and heterogeneous. As coastal/short sea shipping transport is slower, it can not ask the same prices as road and will as a rule be relied on for less time-sensitive and regular transport flows of larger volumes.

67. The monetary environmental benefit under which the grant may be paid, forms the maximum possible amount. Therefore operators who choose to send freight by water do not gain a commercial advantage over competitors who use road transport. In addition, the beneficiaries are obliged to meet predefined minimum volumes of cargo turnover on the transhipment facility, in default of which a repayment is required by the Secretary of State.

(b)Coastal/short sea shipping - other modes of transport

68. The existing FFG scheme already applies to rail and inland waterways. Thus, the extended scheme will not distort competition vis a vis these modes of transport. On the contrary, it will put coastal/short sea shipping on equal footing with these modes. In addition, grants will not be awarded regarding the transfer of freight from rail/inland waterways to water, or vice versa.

69. Furthermore, aid will not be addressed to deep-sea maritime transport and deep-sea international routes.

(c) Possible distortion of competition regarding existing coastal/short sea shipping traffic

70. The FFG scheme provides for several measures, which prevents or reduces potential distortions of intra-community competition contrary to the common interest arising from the aid. The beneficiaries are obliged to shift a specific amount of tonnage within a determined time period, which implies a significant commercial risk.

71. No aid will be granted to facilitate the re-routing of freight from one port to another, where both of them are located in close geographical proximity since there will not be road mileage saving and therefore no environmental benefit.

72. The aid intensity is set at a level that is considered the minimum necessary to enable coastal/short sea shipping to compete in financial terms with road transport.

73. When evaluating a project, a market analysis will have to assess, on adequate basis, that the new infrastructure is not affecting existing traffic contrary to the minimum necessary.

74. Finally, the Commission will have a close monitoring of a possible distortion of competition through the annual reports provided by the United Kingdom authorities.

75. In this context the Commission recalls that the current levels of transparency in the ports sector are inadequate to ensure information on aggregated public money flows going into the ports where this is happening under national schemes, and to retrace flows and use of public monies within port entities, which at the same time are engaged in both port management, including port infrastructure management, and commercial activities within ports.

76. The Commission believes that the implementation of “Commission Directive 2000/52/EC21 on the transparency of financial relations between Member States and public undertaking as well as on financial transparency within certain undertaking (the “Transparency Directive”) “combined” with a legal requirement to keep separate accounts to be introduced as part of the proposed “Directive on market access to port services” will lead to considerable improvements. The Commission finds that these measures are sufficient to ensure that the aid available under the FFG scheme does not distort competition to an extent contrary to the common interest. The expected shift from road transport to coastal/short sea shipping resulting from the subsidy is not a distortion of competition contrary to the common interest. The policy measure of the United Kingdom authorities is in line with the common transport policy, which wants to foster such a shift.22

77. Accordingly, the notified scheme is deemed compatible with the Treaty by virtue of Article 87 (3) c. of the EC Treaty. The present text is without prejudices to the Commission’s proposal for a Directive of the European Parliament and of the Council “On Market Access to Port Services” .23

21 OJ L 193, 29.7.2000, p. 75; amending Directive 80/723/EEC

22 See Commission decision of 4 October 2000, N 577/99- The Netherlands (RSC-ECT), OJ N° C 354, 9 December 2000, p.20; Commission’s White Paper, European transport policy for 2010: time to decide. COM (2001) 370

23 COM (2001) 35 final 4. THE PORT OF ROSYTH PROJECT

78. The United Kingdom measure relating the adaptation of the Port of Rosyth constitutes a public policy action in line with the common transport policy. The improvement of alternatives modes of transport is one of the common transport policy priorities. The grant to the Port of Rosyth project intends to facilitate the development of the maritime infrastructure within the United Kingdom and therefore a possible effect on intracommunity trade can not be excluded. As this measure is in the common interest within the meaning of Article 87 (3) c, this article must be used to verify its compatibility with the Treaty.

4.1 Necessity and proportionality of the aid

79. The Port of Rosyth, which will be open to any interested operators on non-discriminatory conditions, will provide a direct link between Scotland and Continental Europe. This development will therefore both facilitate trade and decouple the environmental impact of transport from economic growth.

80. In light of the considerable environmental benefits which will be achieved, the proposal is in the wider public interest. Special reference must be done to the Commission’s White Paper on Transport policy, which includes as a principal objective the support to measures proposed by players on the logistics market, with particular emphasis on starting up new services which will be commercially viable in the long term and will lead to substantial shifts from road to other modes. In addition, a back up to the Marco Polo Programme (replacing PACT programme) is required and the concept of “motorways of the sea” will be include in the future revision of the Trans-European networks.

81. The Commission intends to encourage these environmental friendly projects especially in the perspective of ensuring compliance with the Kyoto Protocol24, which will require the streamlining of policies and adoption of further measures at Community level, in particular in transport sector.

82. The Rosyth project is an example where modal shift and the resulting environmental benefit cannot be obtained at a 50% grant level. While society stands to gain a very substantial environmental benefit (£ 35.0 million), this can only be achieved by a significant investment in the new port infrastructure. Because this traffic currently moves on a commercial basis by road to other more distant ports, there is not commercial incentive (i.e. return of capital investment) which would cause the private sector to do it.

83. The level of grant which was required to make the project viable, was calculated on the basis that Fort Ports would not make the necessary investment in Rosyth Port infrastructure were this to result in a financial loss to themselves. The forecast revenue streams earned by Rosyth Port, and the associated capital and variable costs over the 10-year period of the

24Proposal of Council decision concerning the conclusion on behalf of the European Community, of the Kyoto Protocol to the United Nations Framework Convention on Climate Change and the joint fulfilment of commitments thereunder. COM (2001) 579, Point 16 project were calculated on a NPV (net present value) basis. The grant amount in the Port of Rosyth, is nonetheless lower than Forth Ports’ total freight-only infrastructure capital investment which demonstrates that there is no subsidy of non-freight related investment. The traffic flows, costs and revenues calculated by Forth Ports’ consultants were checked and examined for reasonableness by the Department’s own independent consultants. Therefore, an aid intensity of 94% is the minimum necessary to achieve the objective, which is the construction of port facilities increasing modal shift from road to more environmentally friendly transport modes by equalising the cost of road and water transportation.

84. The Commission notes that the United Kingdom authorities have verified through a market analysis that the requested objectives could not be met through a lower amount of aid. In a previous decision27, the Commission has recognised the possibility to allow a high degree of aid intensity , if the market itself does not provide society with public transport infrastructure that is needed to achieve sustainable mobility. The Port of Rosyth project responds to the same idea. A public intervention is needed (in default of a market initiative) if an environmental improvement and the inclusion of the coastal/short sea shipping into the transport logistic chain, is to be achieved in Scotland.

85. Under the FFG conditions, Forth Port (owner of the Port and beneficiary of the grant) will have to achieve a tonnage target within a predefined period of time. Otherwise, a proportionate part of the grant would have to be reimbursed. That implies a significant commercial risk for the beneficiary. FFG will only support the capital costs of Rosyth Port freight-related infrastructure to the extent that this is necessary to allow Forth Ports to make such an investment. Otherwise, the Port of Rosyth will operate on commercial terms. It thus, provides the minimum necessary to achieve the realisation of the project.

86. The environmental benefit of this project will be considerably higher than the potential impact on competition. The standard formula employed by the United Kingdom authorities will permit calculations, in a precise and transparent way, proving that the granted aid is restricted to the minimum necessary. The Commission believes that, in any case, the level of subsidy is limited to an amount justified by the environmental benefit and that the project is in the interest of the Community.

4.2 No undue distortion of competition

87. The Commission promotes the use of environmentally friendly modes of transport and believes that the maritime transport is a key component of intermodality. In order to achieve

27 N 464/99 – Pay Bas: Aide en faveur de la construction et de l’opération d’une infrastructure de parking local . such a sustainable transport system, priority should be given to infrastructure investments. The Port of Rosyth project will contribute to create an essential maritime infrastructure into the United Kingdom.

88. Because of its strategic situation, the Port of Rosyth was considered as the most suitable location. The market analysis carried out by the United Kingdom authorities shows that there would be a very limited impact on existing traffic at other ports.

89. In this case, the Commission judges that the competitive impact is acceptable in the light of the very significant environmental benefit. It is the Commission view that the grant for the Port of Rosyth infrastructure does not affect EU trade to such an extent as would be contrary to the interests of the Community.

90. The Commission has received letters by third parties interested on future services from the Port of Rosyth and other ports within EU. The Commission takes note of the information provided and will eventually investigate the situation of future traffic operators from the Port of Rosyth under a different procedure. The present decision being without prejudice to any eventual aid to any future operator of services.

91. Accordingly the notified Port of Rosyth project, are deemed compatible with the Treaty by virtue of Article 87 (3) c of the EC Treaty.

3. DECISION

The Commission has accordingly decided: - to consider the notified scheme to be compatible with the EC Treaty and not to raise any objection;

- to consider the notified Port of Rosyth project to be compatible with the EC Treaty and not to raise any objection.

If this letter contains confidential information which should not be disclosed to third parties, please inform the Commission within fifteen working days of the date of receipt. If the Commission does not receive a reasoned request by that deadline, you will be deemed to agree to the disclosure to third parties and to the publication of the full text of the letter in the authentic language on the Internet site: http://europa.eu.int/comm/secretariat_general/sgb/state_aids/. Your request should be sent by registered letter or fax to:

European Commission Directorate-General for Energy & Transport Directorate A B-1049 Brussels Fax No : 0032 (0)2 2964104

Yours faithfully, For the Commission

Loyola DE PALACIO Vice-president of the Commission

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