EUROPEAN COMMISSION

Brussels, 26.IX.2006 C(2006)4213 final

Subject: State aid No N 353/2006 – Regional Airports – Capital Expenditure grant Scheme

Sir,

I. Procedure 1. By electronic notification on 7 June 2006, the Irish authorities notified to the Commission, in accordance with Article 88(3) EC Treaty, a scheme involving the capital expenditure for regional airports in Ireland. This case was registered as a notified aid measure with number N353/2006. 2. By electronic mail dated 31 July 2006 (registered under reference DG TREN A/28807 on 1 August 2006) the Irish authorities agreed to extend the time available to the Commission to take a position of the compatibility of the measure to 30 September 2006.

II. Detailed description of the measure

3. The measure which is the subject of the present decision concerns a system providing for the public financing of capital investment in six small regional airports located at Donegal, , Knock, and Kerry and . 4. The specific aims and objectives of the regional airports capital expenditure grant scheme are:

Mr Dermot AHERN TD Minister for Foreign Affairs, Department of Foreign Affairs, St Stephens Green, 2, Ireland

Commission européenne, B-1049 Bruxelles – Belgique/Europese Commissie, B-1049 Brussel – België Telephone: 00 32 (0) 2 299.11.11

a. To ensure compliance with aviation safety standards and enhanced security at airports b. To assist in optimising the contribution of the country’s network of regional airports to balanced regional development, in line with the Irish governments National Spatial Strategy (NSS), a coherent national planning framework for Ireland and the Irish government’s transport investment plan entitled “” framework. c. To assist the regional airports’ capital expenditure programmes where demand for additional air services can be demonstrated and where an economic case can be made to justify increased investment. 5. The duration of the new scheme as notified will cover the period 2006-2010, though no payments will be made until prior Commission approval has been obtained. 6. The scheme will have a total budget over its five years of operation of €65.5 million for the years 2006-2010 as set out below. The planned breakdown of the budget is estimated as follows: 2006 €10.5 million 2007 € 8 million 2008 €13 million 2009 €16 million 2010 €18 million Total €65.5 million 7. No cumulation of aid is possible; it is a strict condition that the provision of assistance under the present scheme will exclude works or equipment in question from assistance under any other State scheme; no community funding will be used in the present scheme. 8. The beneficiaries of the financial assistance will be the following regional airport companies: • Connaught Airport Development Company Ltd. ( Knock, Co. Mayo) • Aerphort Idirnaisiunta Dhun na nGall Teo. (Carrickfin, Co. Donegal) • Corrib Airport Ltd. (Carnmore, Co. Galway) • Sligo North West Airport Co. Ltd (Strandhill, Co Sligo) • plc (, Co. Kerry) • South East Regional Airport Waterford (Killowen, Co. Waterford)

9. The airports which are the recipients of capital investment funding will continue to operate as before and all potential users (airlines) will have access to the improved infrastructure on an equal and non-discriminatory basis. 10. The notified measure provides that proposed projects will be considered for funding under one of two Measures: Measure 1 Regional Airport Safety & Security

2 11. Measure 1 provides for what are called essential safety and security projects. Essential safety and security projects are defined as those works which are necessary for compliance with the standards and recommendations of the (IAA) or Aviation Security Division (ASD) of the Department of Transport. On-going maintenance works to support the essential safety and security criteria are included in this definition. More generally these can be seen as projects to improve safety and security and ensure compliance with specified aviation regulations; or to enhance facilities or equipment which are considered essential for the continued viable and safe operation of the airport. 12. Projects falling under Measure 1 would have priority during all stages of project appraisal and implementation under this scheme. Detailed economic analysis of all projects falling under Measure 1 might not always be necessary. However, the Department of Transport reserves the right to subject ‘safety/security’ type projects to detailed analysis, depending on nature of projects, estimated costs and views of the IAA. 13. Projects falling under Measure 1 would qualify for public funding of 90% of eligible expenditure. Measure 2 Regional Airport Development

14. This measure relates to projects for the expansion of services/operations and upgrading of existing infrastructure and covers any other infrastructure projects falling outside of Measure 1. Such investment may receive exchequer support where demand for additional air services can be demonstrated and where an economic case can be made to justify increased investment. Projects must also be seen to be capable of completion by 2010. A grant aid rate of 75% will apply to such projects. Methodology of granting aid

15. The grant of any public financial assistance under this scheme will be based on a multi-stage process whereby the requests for funding are subject to an appraisal and evaluation.. 16. The Department will formally invite proposals from each regional airport based on a 5-year planning framework. Where a proposal is successful, the approved project(s) would be eligible for grant assistance for the period 2006-2010. The airports would provide the following general information in respect of each proposal: • Business Plan • Recent audited accounts and financial statements • Statement on availability and sourcing of ‘matching funds’ • Airport charges strategy • Access to and availability of alternative sources of funding • Corporate structures in place for project management and cost control

17. Specific information will be sought in respect of proposed projects under each Measure, as follows:

3 Measure 1 Safety & Security

1. Description of project 2. Estimated Cost 3. Safety or security case supporting project 4. Recommendation of IAA / ASD, as appropriate 5. Consideration of alternative approaches to compliance with IAA/ASD recommendations

Measure 2 Airport Development

1. Description of project 2. Estimated cost 3. Any particular airport safety/security aspects of the proposed development, including recommendations if IAA/ASD, where relevant 4. Business case, including a. A demonstration of demand for the proposed development, such as i. Passenger surveys and/or available market research and/or ii. Any commitments from airlines for the provision of new scheduled services b. An economic case justifying the proposed investment, based on i. projected costs and revenues directly and indirectly attributable to the proposed development, and ii. Description of positive impacts for the airport and wider region (in terms of projected increase in economic activity and inbound tourism etc) Project Appraisal & Selection (i) Preliminary Screening 18. All projects will be subject to this screening, which aims to assess if the project has sufficient merit to justify a full detailed appraisal. This would take the form of a screening process to ensure that proposed projects are broadly consistent with the objectives of the scheme and that sufficient information has been provided to allow for detailed appraisal. 19. Essential or urgent safety & security projects and minor development works could be approved at this stage, depending on nature and scale of projects, without reference to the capital appraisal process set out below.

4 (ii) Capital Appraisal 20. Once the project has been approved for further consideration the type and depth of further examination to which it will be subject is dependent on the size and nature of the proposed project and will be proportionate to its anticipated scale. The resources to be spent on appraisal will be commensurate with the estimated cost of the project, the nature of the project and with the degree of complexity of the issues involved.

(iii) Economic Appraisal

21. At this stage the Department must carry out a detailed economic analysis including • Evidence of demand, locally, for additional new scheduled air services. • Commitments from airlines (if any) to meet that demand and airport charges implications of such commitments. • Assessment of Business Plan, including ƒ Projected increase in passenger numbers arising from the capital expenditure and a quantification of economic activity generated by such growth ƒ Increased inbound tourism and employment data. ƒ Other economic benefits to airport and/or region • Account should also be had to safety issues as set out in the Technical & Safety Requirements of the ICAO Annex 14

(iv)Financial Appraisal

22. Finally a financial appraisal of the airport’s financial position has to be carried out having regard to the following • General Financial position of Airport, including Financial projections • Availability of funds for ‘matching’ funding (10% / 25%) as necessary. • Revenue implications of project including impact on airport charges and commercial revenues. • Management and technical capability of the Airport company and Governance arrangements • Access to and availability of alternative sources of funding.

Monitoring and Reporting

23. The regional airports which are the recipients of aid under the scheme are responsible for implementing the approved projects. Cost overruns will be met by the airport company concerned. 24. In relation to monitoring and reporting arrangements, the airport companies should establish suitable project management structures and each regional airport in receipt of funding will provide a quarterly report to the Department of Transport on • procurement, • project implementation and

5 • expenditure profiling, specifically highlighting any existing or anticipated problems. Ex-post control 25. The Department of Transport reserves the right to inspect projects ‘on-site’ at any stage of implementation. To this end the project premises, equipment, machinery, facilities and all books and record relating to the project must be made available for inspection to the Department. The airport company must provide all necessary cooperation for such inspections and will comply with all directions which may be given by the department on foot of such inspection. The airport company is obliged to insure and keep insured the airport as a condition of the grant of the aid. 26. The Minister of Transport may, at any time revoke, cancel or abate the grant in the event of any one or more of the following events arising • Insolvency/bankruptcy • When the airport ceases operation for any reason • Where there is a sale or change of use of the airport

Necessity for and justification of the measures 27. In the opinion of the Irish authorities the primary objective of the measure is the development of transport infrastructure. A ten-year strategic policy and investment framework is set out in Transport 21 which commenced in January 2006. The basis of this framework is multi-faceted and takes account of the major economic, social and demographic changes in Ireland over the past decade, the impact of these changes on transport demand, the strategic policies developed for areas relating to and impacting on transport, and the need to provide a modern transport network for the future. 28. The key transport objective is the ongoing delivery of a modern, state-of-the-art transport network within the timeframes set out under Transport 21. A core aspect of the approach is the enhancement of connectivity at national, regional and local level. The availability of an efficient, predictable and sustainable national transport network is a key factor underpinning economic growth and competitiveness. Transport 21 will enhance the provision, maintenance, integration and, where appropriate, expansion and improvement of the national transport network, comprised of the road network, airports, seaports, the public transport network ( and rail) and the services which run on them. Among the priorities of Transport 21 is capital investment in the six regional airports which is the subject of the current decision. 29. The secondary objective cited by the Irish authorities for the measure is that of regional development. The National Spatial Strategy 2000-2020 proposes that the national spatial structure be supported by a national transport framework, providing an improved network of roads and public transport services, enhancing access and connections throughout the country. This framework will be internationally connected through key points such as airports with links to Northern Ireland, the UK, EU and the broader global economy. Projects selected will be consistent with National Spatial Strategy objectives and thereby

6 • complement and give a more regional focus to the investment planned under Transport 21. • Improve access for tourists and business visitors to the Regions and • Encourage inward investment 30. It is recognized that the six regional airports play a complementary role to the major airports at Dublin and Shannon that serve Ireland’s primary airport needs. Total passenger numbers at the six regional airports currently represent only about 5 % of air passengers overall. Currently traffic levels are as follows State Airports Passengers in 2005 Dublin ………………………… 18,451,000 Cork ………………………… 2,730,000 Shannon ………………………… 3,302,000 State Airports total 24,483,000

Regional Airports Donegal () ………………………… 47,776 Sligo (Border region) ………………………… 39,593 Knock-(West region) ………………………… 530,084 Galway (West region) ………………………… 253,309 Kerry (South West region) ………………………. 382,678 Waterford-(South East region) …………………….. 74,357 Regional airports total 1,327,797

Grand total 25,810,797

31. All six airports which are eligible for funding under the present scheme have less than 1 million passengers per year and are therefore considered as category D “small regional airports”, under the Community guidelines on financing of airports and start- up aid to airlines departing from regional airports”.1 32. The catchment areas of the six regional airports come within the scope of the Southern & Eastern and the Border, Midland & Western Regional Operational Programmes – NUTS Level 2. 5 of the 6 airports eligible for funding under the scheme are located on or near the western seaboard of Ireland while 4 of the airports (Donegal, Sligo, Knock and Galway are located within Objective 1 regions, while the other two airports are located within Objective 2. 33. In the case of the Border region Sligo and Donegal airports are expected to promote accessibility to the north-western seaboard, which is an attractive location for tourism. Sligo has been identified in the National Spatial Strategy as a new gateway to drive development through enhanced critical mass, accessibility and capacity for development. 34. As regards the west region the National Spatial Strategy envisages that Galway city’s roles as a gateway will be at the heart of extending balanced regional development to the west region (counties Galway, Mayo and ), this means that improved

1 OJ C312/1 of 9.12.2005 (points 53 to 63)

7 communication links through will become more important. In the case of Knock airport is seen as contributing to regional development in a relatively sparsely populated area of North West Ireland. 35. With regard to the South West region, the National Spatial Strategy emphasises the development of Co. Kerry as critical to this region. The towns of and are identified as hubs that can support development in the region and Kerry Airport is close to both towns. Kerry Airport is also seen as essential to the national tourism product and Kerry is a prime destination for inbound tourism. 36. Finally serves Waterford city, which the National Spatial Strategy identifies as a major gateway for the South-eastern region. 37. As an indication of the regional dimension of the airports in question, the Irish government provides subvention under the Public Services Obligation (PSO) regime, which is administered under Regulation 2408/92 of 23 July 1992 on access for Community air carriers to intra-Community air routes. The Department has established compensated PSO routes linking with the airports in Kerry and Galway (3 return services daily), Knock (1 return service daily) and Sligo and Donegal (2 return services daily). 38. In the opinion of the Irish authorities these regional airports are small sub regional airports in relatively remote locations, which nonetheless have an important role to play in promoting accessibility to catchment areas and localities that would benefit from enhanced inward investment and inbound tourism. In their opinion the small scale and complementary nature of their operations are such as to ensure that the provision of aid under the proposed scheme would neither distort competition nor have an adverse effect on intra-community trade. 39. In the opinion of the Irish authorities the infrastructure and safety improvements to be financed by the measure will permit better use to be made of the existing infrastructure, whilst contributing towards the achievement of wider regional development objectives. III. Assessment of the notified measures Existence of aid 40. By virtue of 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.” 41. The criteria laid down in Article 87(1) are cumulative. Therefore, in order to determine whether the notified measures constitute State aid within the meaning of Article 87(1) of the Treaty all of the following conditions need to be fulfilled. Namely, the financial support: - is granted by the State or through State resources, - favours certain undertakings or the production of certain goods, - distort or threatens to distort competition, and - affects trade between Member States.

8 42. The concept of State aid applies to any advantage, granted directly or indirectly, financed out of State resources, granted by the State itself or by any intermediary body acting by virtue of powers conferred on it. In this context the decision of the Irish authorities to grant investment aid to a number of regional airports to finance infrastructure improvements at these airports seems to constitute a grant of State resources. 43. In the present case the public funding is not a general measure as it is directed at a number of regional airports. The funding is directed at undertakings engaged in an economic activity involved in air transport between Member States and covers the Common Market and it may distort or threaten to distort competition inside this market being directed at only specific undertakings which are in competition (albeit limited) with other airports within the Community. 44. In relation to the financing by public authorities of airports the Commission has put in place “Community guidelines on financing of airports and start-up aid to airlines departing from regional airports”2 (hereinafter the 2005 guidelines). These guidelines are designed to provide a framework for determining if public financing of airports gives rise to issues of state aid concern. 45. As regards the existence or otherwise of State aid, the 2005 guidelines provide that what is determining is whether the beneficiary is engaged in an economic activity3. 46. In assessing whether the operation of an airport is such an activity the European Court of Justice ruled in the “Aéroports de Paris” case4, that airport management and operation activities consisting in the provision of airport services to airlines and to the various service providers within airports are economic activities because they consist in the provision of airport facilities to airlines and the various service providers, in return for a fee at a rate freely fixed by the manager, and when the latter is public, do not fall within the exercise of its official powers as a public authority and are separable from its activities in the exercise of such powers. Thus, the airport operator, in principle, is engaged in an economic activity within the meaning of Article 87(1) of the EC Treaty, to which the rules on State aid apply. Therefore once an airport engages in economic activities, regardless of its legal status or the way in which it is financed, it constitutes an undertaking within the meaning of Article 87(1) of the EC Treaty, and the Treaty rules on State aid therefore apply5. 47. However, independently of its legal status not all the activities of an airport operator are necessarily of an economic nature. It is necessary to distinguish between its activities and to establish to what extent its activities are of an economic nature6. 48. The European Court of Justice has held that activities that normally fall under State responsibility in the exercise of its official powers as a public authority are not of an

2 OJ C312/1 of 9.12.2005 (points 53 to 63) 3 According to Court of Justice case law, any activity consisting in offering goods and services on a given market is an economic activity. See Case C-35/96 Commission v Italy [1998] ECR I-3851 and Cases C-180/98 to 184/98 Pavlov [2000] ECR I-6451. 4 Case T-128/98, Aéroports de Paris v Commission of the European Communities [2000] ECR II- 3929, confirmed by Case C-82/01 [2002] ECR I-9297, points 75-79. 5 Cases C-159/91 and C-160/91, Poucet v AGF and Pistre v Cancava [1993] ECR I-637. 6 Case C-364/92 SAT Fluggesellschaft v Eurocontrol [1994] ECR I-43.

9 economic nature and do not fall within the scope of the rules on State aid. Such activities include security, air traffic control, police, customs, etc. Commission Decision N309/2002 of 19 March 2003 Aviation security - compensation for costs incurred following the attacks of 11 September 2001 49. Generally speaking, the financing of these activities must be strictly limited to compensation of the costs to which they give rise and may not be used instead to fund other economic activities7. As explained by the Commission in its Communication of 10 October 20018 following the attacks of 11 September 2001, “It goes without saying that, if certain measures are imposed directly on airlines and other operators in the sector such as airports, suppliers of groundhandling services and providers of air navigation services, the financing of such measures by the public authorities must not give rise to operating aid incompatible with the Treaty.” 50. Therefore the practice of the Commission9 is that in relation to functions falling within the public policy remit, the financing of these functions or of infrastructure directly related to these functions does not constitute State aid. 51. Accordingly, in as much as the measures being financed fall within the ambit of the public policy remit and are concerned with security, air traffic control, police or customs etc. these will not be considered as giving rise to issues of State aid concern and are not considered to be State aid.

52. In relation to all other activities, the guidelines provide that, in relation to the financing of airports airport activities can be categorised as follows10: i. construction of airport infrastructure and equipment (runways, terminals, aprons, control tower) or facilities that directly support them (fire-fighting facilities, security or safety equipment); ii. operation of the infrastructure, comprising the maintenance and management of airport infrastructure; iii. provision of airport services ancillary to air transport, such as groundhandling services and the use of related infrastructure, fire-fighting services, emergency services, security services, etc; and iv. pursuit of commercial activities not directly linked to the airport’s core activities, including the construction, financing, use and renting of land and buildings, not only for offices and storage but also for the hotels and industrial enterprises located within the airport, as well as shops, restaurants and car parks. As these are not transport activities, public financing of them is not covered by these guidelines and will be assessed on the basis of the relevant sectoral and general rules.

7 Case C-343/95 Calì & Figli v Servizi ecologici porto di Genova [1997] ECR I-1547. Commission Decision N309/2002 of 19 March 2003, Commission Decision N438/2002 of 16 January 2002, Aid in support of public authority functions in the port sector. 8 COM (2001) 574 final of 10 October 2001. 9 Commission Decision N309/2002 of 19 March 2003 Aviation security - compensation for costs incurred following the attacks of 11 September 2001 10 Cf footnote 6 Paragraph 53

10 53. In the notification which is the subject of the present decision, the public authorities intend to partially (75% or 90%) fund a system of capital investment for a number of regional airports. As the activities which will receive the financing do not fall within the remit of categories (ii), (iii) or (iv) they must then be considered as constituting the construction of airport infrastructure and equipment as provided for in paragraph 53(i). 54. In relation to the financing of airport infrastructure and equipment or facilities the guidelines11 go on to provide that any “airport operator engaging in an economic activity” “should finance the costs of using or building the infrastructure it manages from its own resources. Consequently, the provision of airport infrastructure to an operator by a Member State (including regional or local authorities) not acting as a private investor without adequate financial consideration or the granting to an airport operator of public subsidies intended to finance infrastructure can give that airport operator an economic advantage over its competitors and must therefore be notified and examined in the light of the rules on State aid”. 55. In this case the public authorities concerned cannot make use of the principle of the private market economy investor principle. This principle provides that the public financing will not amount to state aid where “in similar circumstances a private shareholder, having regard to the foreseeability of obtaining a return and leaving aside all social, regional-policy and sectoral considerations, would have subscribed the capital in question”12. In the present case the Member State concerned does not have any expectation of a financial return on the money in question and although it is their intention to make the airports more attractive to users and therefore more profitable they are not exclusively guided by prospects of profitability in the longer term13. Rather the stated aim of the public financing is (i) the development of safe and viable transport infrastructure and (ii) regional development. 56. Therefore as the measure involves public money, directed at an undertaking engaged in an economic activity affecting trade between Member States and as it may distort or threaten to distort competition inside this market being directed at only one undertaking which is in competition with other airports, it may fall to be considered a State aid within the meaning of Article 87(1) of the EC Treaty. Legal basis for appraisal 57. It is therefore necessary to examine this measure in the light of Articles 87 paragraphs (2) and (3) of the EC Treaty which provided for exemptions to the general rule of incompatibility set out in Article 87(1). 58. The exemptions in Article 87(2) of the EC Treaty do not apply in the present case because the aid measure does not have a social character and is not granted to individual consumers, nor do they make good the damage caused by natural disasters or exceptional occurrences nor are they granted to the economy of certain areas of the Federal Republic of Germany affected by its division.

11 Cf footnote 6 paragraph 57 12 Case 40/85 Kingdom of Belgium v Commission [1986] ECR I-2321. 13 Case C-305/89 Italy v Commission (“Alfa Romeo”) [1991] ECR I-1603, point 20. Case T 228/99 Westdeutsche Landesbank Girozentrale v Commission [2003] ECR II-435, points 250-270.

11 59. Further exemptions to the general prohibition on State aid are set out in Article 87(3). In this regard, the applicable Community framework for deciding on compatibility of these measure (i.e. the 2005 guidelines) provide that if it is confirmed that a measure involves State aid that such a measure may be found compatible with the common market “in particular pursuant to Articles 87(3)(a), (b) or (c) or 86(2) and, where applicable, their implementing provisions” 60. In this regard the 2005 guidelines provide the Commission with a number of factors which it should take into account in determining compatibility. 61. The Commission will in particular examine whether: – construction and operation of the infrastructure meets a clearly defined objective of general interest (regional development, accessibility, etc.); – the infrastructure is necessary and proportional to the objective which has been set; – the infrastructure has satisfactory medium-term prospects for use, in particular as regards the use of existing infrastructure; – all potential users of the infrastructure have access to it in an equal and non- discriminatory manner; – the development of trade is not affected to an extent contrary to the Community interest. i. construction and operation of the infrastructure meets a clearly defined objective of general interest (regional development, accessibility, etc.)

62. As previously described the primary motivation of the public authorities in granting the financial support provided for in this scheme is the development of safe and viable transport infrastructure. The secondary objective is regional development. In the view of the Irish authorities while the three state airports of Dublin, Shannon and Cork will continue to handle the vast bulk of air transport, regional airports have an important complementary role to play in promoting regional integration. The Irish government’s policy on regional airports is to assist in optimising the contribution that the airports can make to balanced regional development. Through a number of financial support mechanisms (including the measure which is the subject of the present decision) the Department of Transport seeks to facilitate, where practicable, the continued safe and viable operations at the airports and to encourage maximum commercial autonomy and initiative by the airports concerned. 63. Under the Transport 21 investment framework drawn up in 2005, in addition to the continuation of support for safety and security measures, a new targeted development programme is to be devised and implemented in the period 2006-2010. Under the revised scheme, it is proposed that carefully targeted investments in some regional airports would receive grant assistance, where demand for additional air services can be demonstrated and where an economic case can be made to justify increased investment. Priority would continue to be given to projects deemed necessary by the

12 Irish Aviation Authority (IAA) for compliance with safety standards set down in ICAO Annex 14. 64. Within the system of European Structural Funds the catchment areas of the six regional airports come within the scope of the Southern & Eastern and the Border, Midland & Western Regional Operational Programmes – NUTS Level 2. 65. In addition the airports of Donegal and Sligo fall within a region which benefits from a special EU Programme for Peace and Reconciliation in Northern Ireland and the Border Region of Ireland (“PEACE programme”). Thirty years of violent conflict in Northern Ireland have had a negative impact on the development of the region. Economically this has resulted in low levels of private inward investment and tourism, business cautiousness and little labour mobility associated with low productivity and high long-term unemployment. Accordingly the Commission can conclude that the public funding provided for by the present scheme for the capital infrastructure construction and development at these airports meets the clearly defined objectives of regional policy and or improving safe and viable transport infrastructure.

ii. the infrastructure is necessary and proportional to the objective which has been set 66. The measure provides for capital investment funding for two types of projects Measure 1 covers what are called essential safety and security projects. Essential safety and security projects are defined as those works which are necessary for compliance with the standards and recommendations of the Irish Aviation Authority (IAA) or Aviation Security Division (ASD) of the Department of Transport. Measure 2 relates to projects for the expansion of services/operations and upgrading of existing infrastructure 67. In the case of Measure 1 projects the scheme will provide 90% of the funding necessary to finance these projects to improve the safety and security of the airport in question. The necessity of and control over these projects will be established in association with the competent regulatory agencies either the Irish Aviation Authority or the Aviation Security Division of the Department of Transport and a case will have to be made for the investment in question. 68. The infrastructure projects to be financed under this heading relate exclusively to safety and security improvements required by and mandated by the appropriate regulatory bodies. These improvements may well be necessary for the airports in question to remain operational. It should however be noted that these type of improvements will not ordinarily lead to any increase in the earning capacity of the airports. Accordingly, given their relatively small turnover the airports in question might well struggle to obtain financing for these necessary improvements, the Commission can therefore conclude that a level of public financing at 90% of funding necessary is appropriate. 69. With regard to Measure 2 projects for the development of the airports, the scheme will provide 75% of the funding for the development of these airports to allow them to make better use of their infrastructure, to improve their facilities and thereby to contribute to the regional development of their catchment areas. The airports in question are all category D with low passenger numbers and therefore low earnings

13 and are mostly located in relatively remote parts of Ireland far from the main population centres as such their possibilities of sourcing investment capital on the commercial markets are severely limited. The fact that a detailed multi-stage appraisal and evaluation process will have to be carried out in respect of this type of investment means that a business case for public financing will have to be made. The airports themselves will also have to contribute 25% to any investment project and therefore participate significantly in the risk. Having regard to the location and size of these airports, the necessity of public capital financing for infrastructure projects is established. Given that the airports will themselves contribute to a higher level (25%) in the financing of the infrastructure project (than in Measure 1) and will therefore assume higher level of the risk, the percentage of 75% of public participation for investments of this type is also acceptable to the Commission. 70. The Commission can therefore conclude that the infrastructure is necessary and proportional to the objective that has been set.

(iii) the infrastructure has satisfactory medium-term prospects for use, in particular as regards the use of existing infrastructure; 71. The objective of the funding is to provide small regional airports with the capital they need to carry out essential safety and security developments and to improve their facilities to develop their potential and make better use of their existing infrastructure. This should allow these small airports to be fully compliant with current and known future airport safety requirements and to develop and to more fully meet the transport needs of its catchment area. 72. Given their very limited size and their geographical situation, none of the airports eligible for funding under this scheme compete with each other or with other existing infrastructure in any meaningful way, this means that the capital projects to be financed under this scheme are destined to improve the existing of each airport and will not negatively impact on any other. In addition, a commercial and or safety/security case will have to be made for each project in receipt of funding and the Department of Transport will ensure that all projects are necessary or have a satisfactory prospect for use. The Commission can therefore conclude that this requirement is satisfied.

(iv) all potential users of the infrastructure have access to it in an equal and non- discriminatory manner; 73. As previously indicated all potential users (airlines) will have access to the improved infrastructure on an equal and non-discriminatory basis. The risk that infrastructure will be financed and constructed for the exclusive benefit of one operator is thereby eliminated.

(v) the development of trade is not affected to an extent contrary to the Community interest. 74. As previously indicated all six airports which are eligible for funding under this scheme are Category D airports for the purposes of the 2005 Guidelines. In relation to Category D airports which are “small regional airports” with a passenger volume of

14 less than one million passengers per year, the 2005 Guidelines state that14 “funding granted to small regional airports (category D) is unlikely to distort competition or affect trade to an extent contrary to the common interest”. 75. In the present case 3 of the airports concerned (Donegal, Sligo and Waterford) have through-flows of less than 100,000 passengers per year while only one (Knock) even exceed the half million mark (530,084 passengers in 2005). Accordingly the six beneficiary airports may even be regarded as small by category D standards. 76. Five of the six airports are located on or near the western seaboard of Ireland an area which is typically sparsely populated and poorly served by transport infrastructure. None of the six regional airports in question competes with each other in any meaningful way and the only competitor airports for the six airports are the three “State” airports of Dublin, Cork and Shannon all of which are at least one hour or more by road from any of the airports within the present scheme. Between them all six regional airports accounted for 1.3 million passengers in 2005 while the “State” airports had a through flow of almost 25 million passengers in 2005. 77. Therefore it is the Commission’s view that neither the competitive situation of these six regional airports nor traffic flows to and from the airport will be significantly altered as a consequence of the public financing afforded by the scheme in question. On the contrary, the competitive impact of these measures can be considered inconsequential. In this respect, the Commission takes particular note of the fact that the measures are simply designed to make the best use of the existing infrastructure, to improve connectivity, regional development and to comply with the current and known future safety requirements. The financed measures are designed to ensure that these six regional airports can continue to operate efficiently and safely to guarantee the connections of this remote regions with the rest of Europe 78. Consequently, the Commission considers that the measure in question, which provides for a capital investment expenditure scheme for six regional (category D) airports in accordance with the conditions described previously, is not prejudicial to the common interest and that the five criteria set out in the 2005 guidelines have been satisfied in the present case. Decision The European Commission has therefore decided not to raise any objections to the measure in question on the grounds that the aid is compatible with the Common Market under Article 87(3)(a) and (c) of the EC Treaty.

14 Paragraph 39 thereof

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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://ec.europa.eu/community_law/state_aids/index.ht

Your request should be sent by registered letter or fax to: European Commission Directorate-General for Energy & Transport Directorate A, unit A4 Rue Demot 28 B-1049 Brussels Fax No: +32 2 296 41 04

Yours faithfully, For the Commission

Jacques Barrot Vice-president of the Commission

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