EUROPEAN COMMISSION
Brussels, 07.VI.2005 C(2005)1643 fin
Subject: State aid NN 42/2005 – United Kingdom Rescue aid in favour of MG Rover Group Ltd.
Sir,
1. PROCEDURE
(1) In March 2005, the United Kingdom contacted the Commission in respect of a potential rescue aid in favour of MG Rover Group Limited. The company was negotiating eventual takeover by Shanghai Automotive Industry Corp (hereinafter SAIC), with which it had signed a Joint Venture partnership to develop new models and technologies in June 2004. Negotiations had reached an advanced stage, but due to a lack of confidence about the future solvency of Phoenix Ventures Holding Group, which owns MG Rover Group Ltd, on 7 April 2005 it appeared that there remained no reasonable prospect of a deal on the basis being considered. The United Kingdom, therefore, did not provide a bridging loan that might have been available otherwise. On 8 April 2005 administrators were appointed for MG Rover and its subsidiary Powertrain Limited. Most of the other companies in the group have since gone into administration; the main exception at present is Phoenix Ventures Holding Group.
(2) On 11 April 2005, the press reported that the Secretary for Trade and Industry agreed to provide a £ 6.5 million loan. The same day, the Commission requested the United Kingdom to provide the relevant information. By letter dated 22 April 2005, registered on 25 April 2005, the United Kingdom provided the requested information. This information concerned not only the £ 6.5 million loan, but as well support measures for the region, the suppliers and individual employees. This decision, however, concerns only the loan.
The Right Hon Jack STRAW MP Secretary of State for Foreign and Commonwealth Affairs Downing Street London SW1A 2AL United Kingdom
Commission européenne/Europese Commissie, B-1049 Brussels – Belgium - Telephone: 00-32 (0) 2 299 11.11. 2. DESCRIPTION
2.1 The beneficiary
(3) The loans are granted to MG Rover Group Limited (in Administration) (hereinafter ‘MGR’) and its subsidiary Powertrain Limited (in Administration) (hereinafter ‘Powertrain’). Both are 100% owned by the Phoenix Venture Holdings Group of companies (hereinafter ‘PVH’). PVH is a UK registered limited liability company. PVH was formed in May 2000 when BMW sold the assets of the then Rover Group for a symbolic £ 10. Four private persons own the ‘class E shares’ of PVH, which account for 40% of the equity, but 100% of the voting rights. The other classes of shares are owned by various classes of people, including employees and car dealerships.
(4) MGR sold mass manufactured passenger vehicles. It had around 0.75% of the EEA market for such vehicles. It has a car manufacturing plant in Longbridge, Birmingham, United Kingdom, which is an area eligible for assistance under Article 87(3)(c) of the Treaty. MGR had approximately 6 100 employees, including 1 250 at its subsidiary Powertrain. PVH as a whole had approximately 6 500 employees. PVH had a production capacity of about 200 000 cars per year. The UK estimate that a further 12 200 jobs were reliant on the business. Many of those jobs are in an assisted area as MGR sources suppliers from the local area to a significant extent.
(5) In the period to 31.12.2004, the annual losses increased to around £ 170 million. The difficulties concerned the whole PVH Group and MGR represents its main activities.
2.2 The aid
(6) On 11 April, the Secretary for Trade and Industry agreed to provide a loan to MGR and Powertrain amounting to £5.2 million and £ 1.3 million respectively. The purpose of the loans was to provide a very short breathing space to:
(a) assist the administrators to look very quickly at any prospect of selling the assets in administration as a going concern; and
(b) in the event that no buyer emerged during the period of the loan for the assets on a going concern basis, enable the position of the workforce to be resolved in an orderly manner, reducing immediate social disruption.
(7) The loan was for one week only, 11-17 April. It was paid on 13 April. It covered the operating costs of the administrators for that week, principally one week’s wage bill. The amount was based on the administrators’ estimate of the cost of retaining all the employees of MGR and Powertrain for one week, the other operating costs and their professional fees for that period. The administrators agreed not to issue any redundancy notices in respect of any employees of the companies on or before 17 April without the prior written consent of the Secretary of State. In the morning of 15 April it became clear that selling the assets as a going concern would not be possible. The
2 administrators therefore decided it was not appropriate for them to seek any further funding. Therefore, the UK will be providing no further loans to the administrators.
(8) The loan was used to pay all the operating costs associated with the administrators from 11-17 April inclusive. The major items were staff wages and salaries and associated taxation and other personnel costs of the employees of MGR and Powertrain and the administrators’ professional fees, together with operating costs. Approximately 5,000 employees were told to stop working as from Monday 11 April. The remaining approximately 1,100 assisted the administrators in performing their duties and operated limited areas of the operation. Some very limited finishing work was done in the factory using stock in hand, for example on cars which had failed quality control. As of 20 April no cars had been shipped from the site.
(9) Powertrain produced engines for the Land Rover which is part of Ford as well as for MG Rover models. However, no engines were produced during the week 11-17 April and none have been produced since then.
(10) The loans were granted at a fixed annual interest rate of 7.5%, which was based on the estimated interest payable by healthy firms in the motor vehicles sector and which is higher than the reference rate adopted by the Commission for the UK, 5.81% currently. Interest will accrue daily on the outstanding principal amount of the loan.
(11) If the operating costs associated with the administration of MGR and Powertrain for the week of 11 - 17 April inclusive are less than the amounts of the loans, the borrower shall repay the difference within 3 months of 17 April. The loans, apart from this potential difference, are subordinated to the payment of other creditors of the borrowers. The repayment conditions ensure that the creditors of MGR and Powertrain will not be worse off compared to their situation in the event of an immediate break-up of the assets and business of the MGR and Powertrain on 11 April.
(12) The aid is based on the Industrial Development Act 1982, Section 7.
(13) The loan has not been repaid. The UK undertakes to communicate a liquidation plan within 6 months of the drawdown of the loan on 13 April.
(14) Nor PVH neither any company in it has received rescue or restructuring aid in the past. No such aid was paid to the previous Rover Group in the last 10 years. Nor PVH neither any company in it, has received state aid which is the subject of an outstanding recovery order by the Commission.
3 (15) The UK considers that the £ 6.5 million loan to the administrators is not state aid within Article 87(1) EC. One of the elements of Article 87(1) is that there must be a distortion of competition. In the present case, the loan would not have distorted, nor have threatened to distort, competition.
3. ASSESSMENT
3.1 Existence of aid
(16) According to Article 87(1) of the EC Treaty, any 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.
(17) The loans are granted by the Department of Trade and Industry. Although MGR and Powertrain were in administration and although production had been substantially reduced or stopped, the companies still performed economic activities, e.g. selling already manufactured cars and engines. Companies in difficulties like MGR and Powertrain would not have obtained the subordinated loans on commercial conditions. Consequently they convey MGR and Powertrain with an advantage that they would not have obtained on the market. The advantage did not merely consist in postponing the layoff of employees by one week. The purpose of the loans was as well to assist the administrators to look very quickly at any prospect of selling the assets in administration as a going concern. The Commission assumes that there was such a prospect, however small the likelihood. Had such a scenario materialised, MGR and Powertrain would currently be operating as a going concern. The products manufactured by MGR and Powertrain, cars and motors, are widely traded between Member States. The Commission therefore finds that the loans threatened to distort competition and affect trade between Member States. Consequently, they constitute State aid in the sense of Article 87(1) of the EC Treaty.
3.2 Compliance of the aid with the common market
(18) The aid falls to be assessed as ad hoc aid by the Commission. Article 87(2) and (3) of the EC Treaty foresee exemptions to the general incompatibility stated in paragraph (1).
4 (19) The Commission considers that the exemption of Article 87(3)(c) applies. Article 87(3)(c) provides for the authorisation of State aid granted to promote the development of certain economic sectors, where such aid does not adversely affect trading conditions to an extent contrary to the common interest. For its assessment of rescue and restructuring aid the Commission has issued special Guidelines, the Community Guidelines on State aid for rescuing and restructuring firms in difficulty1 (hereinafter “Community Guidelines”).
Eligibility of the company
(20) The financial difficulties of MGR and its subsidiary Powertrain were abundantly clear. Being in Administration, they fall within the definition of a firm in difficulties in section 2.1, point 10(c), of the Community Guidelines. As MGR in its current form was created in 2000, it is not to be considered a new company in the meaning of point 12 of the Community Guidelines. The difficulties are specific to MGR and its subsidiary Powertrain and do not result from an arbitrary allocation of costs within the group. It is clear that, given their own financial and/or operational difficulties, other entities within the group could not come to the rescue of MGR or Powertrain. Powertrain was dependent for 80% of its sales on MGR, so the collapse of MGR inevitably would result in failure of Powertrain
Form of the aid, interest rate, duration
(21) In conformity with point 25(a), the aid consists of liquidity support in form of a loan. The duration of one week is much shorter than the maximum allowable duration of 6 months. The loan will be granted at an interest rate higher than the reference rate adopted by the Commission.
Aid warranted on the grounds of serious social difficulties and no unduly adverse spillover effects on other Member States
(22) The aid provided the last chance for selling MGR and Powertrain as going concerns, which would have limited the job loss among the 6 100 employees and the 12 200 jobs reliant on the business. Many of these jobs were in an assisted area. If all those affected by the closure are to go onto the unemployment register the claimant rate for the Birmingham travel to work area may increase from 4.5% to 5.5%. A significant number of people may remain unemployed for 12 months, even if the announced support measures in favour of individual employees, the suppliers and the region would succeed in limiting the impact.
(23) If the joint venture with SAIC had gone ahead, there would still have been job losses but they would have been considerably fewer and spread over a period of time.
(24) Comparing these two situations, the Commission considers that the aid was warranted on the grounds of serious social difficulties in conformity with point 25(b).
1 OJ C 244, 1.10.2004, p.2.
5 (25) MGR had only a limited market share, in particular compared to the market shares of other players in the EU. Competition in the market is intense. Nevertheless, taking into account the limited duration of the measure and the serious social difficulties in the event of immediate bankruptcy, the Commission considers that the aid has no unduly adverse spillover effects on other Member States.
Undertaking as regards repayment
(26) In conformity with point 25(c) of the Community Guidelines, the United Kingdom has committed to transmit within a delay of 6 months a liquidation plan. Liquidation lies in the hands of the administrators, the rules being laid down in national law.
Aid restricted to the minimum necessary
(27) The aid is restricted to the amount needed to keep the firm in business for the period during which the aid is authorised in conformity with point 25(d) of the Community Guidelines. The United Kingdom did not seek to apply the formula contained in the Annex to the Community Guidelines. In fact, the Commission estimates that the result from this formula, adapting it to the aid’s duration of one week instead of 6 months2, could be significantly lower than the aid actually granted. The justification submitted by the UK authorities show, however, that it can reasonably be expected that the granted amount was indispensable for MGR and Powertrain for the duration of the aid. In the extremely precarious situation, it seems unlikely that any significant amount of cash from other sources was available to the companies. If this would have been the case, the administrators would first of all have to use such cash in the interest of the creditors, not the company itself or its employees. In any event, the aid did not provide the company with extra cash that, during the one single week for which it was granted, could be used e.g. to expand its capacities or for an aggressive pricing strategy.
‘One time – last time principle’ and ‘Deggendorf principle’
(28) MGR has not received rescue aid at an earlier occasion. The notified aid, therefore, complies with the ‘one time-last time’ principle laid down in section 3.3, points 72-77, of the Community Guidelines.
(29) MGR has not benefited from aid that the United Kingdom has to recover on the basis of an earlier Commission decision. Therefore, the ‘Deggendorf principle’, as laid down in section 2.5, point 23, of the Community Guidelines, does not oppose to the approval of the aid.
2 The formula aims at estimating the negative operating cash-flow of the company in the year preceding the application for the aid. The result normally has to be divided by 2 to keep the company in business for a six-month period. For a one-week period, the result should rather be divided by 52.
6 4. DECISION
(30) In view of the above, the Commission considers that the State aid which the United Kingdom granted to MGR and Powertrain in the form of two loans amounting to £ 6.5 million fulfils the conditions to be considered compatible with the common market.
(31) The Commission has accordingly decided not to raise objections against the aid.
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 Competition State Aid Greffe SPA 3, office 6/5 B-1049 Brussels
Fax No: + 32 2 /296 12 42
For the Commission
Neelie KROES Member of the Commission
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