State Guarantee for Capital Borrowings by Coràs Iompair Eirann (CIÉ) for Infrastructure Investment

EUROPEAN COMMISSION

Brussels, 07.VI.2006 C (2006)2095 final

Subject: State aid No N 478/2004 – Ireland

State guarantee for capital borrowings by Coràs Iompair Eirann (CIÉ) for infrastructure investment

Sir,

Procedure

1. By letter dated 10 September 2004, registered at the European Commission on 14 September 2004 (A/30519), the Irish authorities notified to the Commission, in accordance with Article 88 (3) of the EC Treaty, its intention to authorise the Minister for Finance to guarantee capital borrowings of up to € 800 million by Coràs Iompair Eirann (CIÉ)1 for infrastructure investment. The notification was registered under State aid case No. N 478/2004.

2. However, the notification was considered incomplete and by letter of 18 November 2004 (D/20889), the Commission requested the Irish authorities to provide additional information. The requested information was received by letter dated 21 June 2005, registered on 28 June 2005 (A/16124).

3. On 5 October 2005, a technical meeting between the Irish authorities and the Commission took place in Brussels, in the course of which the Commission requested further information. This information was received by the Commission on 17 February 2006 (A/14169).

1 Corás Iompair Eireann is a national statutory responsible for the provision of public transport in Ireland.

Mr Dermot AHERN Ministry of Foreign Affairs St. Stephen's Green 80 Dublin 2 Ireland

Commission européenne, B-1049 Bruxelles – Belgique/Europese Commissie, B-1049 Brussel – België Telephone: 00-32 (0) 2 299 11.11.

Facts

General background

4. Ireland has one of the most limited rail networks in the EU. The National Development Plan (NDP) 2000-2006 seeked to address the deficiencies in Irish public transport and rail is made a priority. In particular, the Economic and Social Infrastructure Operational Programme (ESIOP), prepared within the framework of the NDP 2000-2006, set out, amongst others, the Government’s Public Transport Policy, which focuses on the development of the public transport infrastructure to provide for increased capacity and frequency of services. A key objective of this plan is to give Ireland a rail system up to the most modern EU standard.

5. In November 2005, the Irish Government launched Transport 21, which follows up on the NDP and addresses transport investment requirements for the next ten years, at an estimated cost of €34.4 billion. As far as CIE is concerned, the investments will concern mainly the Railway Development Plan.

Beneficiary

6. CIÉ is the national statutory corporation entrusted with the provision of public transport in Ireland. It is wholly owned by the Irish Government.

7. CIÉ has three main subsidiaries established for operational purposes. Iarnród Eirann (Irish rail), Bus Eirann (Irish Bus) and Bus Átha Cliath (Dublin Bus). Each of these subsidiaries is a limited liability company, wholly owned by CIÈ. The notified measure relates exclusively to the activities of Iarnród Eirann.

8. Iarnród Eireann is active both as network operator and as railway undertaking. It owns the totality of the railway infrastructure in Ireland, and is currently the only undertaking providing rail services, both passengers and freight, in Ireland.23

The notified measure

9. Currently the Minister for Finance is empowered to guarantee borrowings by CIÉ of up to IR£ 250 million (approx. € 320 million) for any purpose.4 This guarantee was communicated by the Irish government to the Commission on 3 July 2000, in reply to a letter sent by the Commission to Ireland following the adoption of the Commission’s “Notice on the application of Article 87 and 88 of the EC Treaty to State aid in the form of guarantees.

2 Directive 95/18/EC on the licensing of railway undertakings was transposed into Irish law by S.I. 238/1999. Nevertheless, to date no applications to run rail services in Ireland has been received by the relevant Irish authorities and today Einród Eireann is the only railway undertaking operating in Ireland. 3 The Dublin – Belfast “Enterprise” link is jointly operated by Iarnród Eureann and Northern Ireland Railways. On this link, only passenger service is offered. 4 Section 4 of the Transport Act 1974 in conjunction with Section 5 of the Transport Act 1964.

2 10. The notified measure will increase this guarantee with respect to investments into rail infrastructure and allow the Minister for Finance to guarantee capital borrowings by CIÉ for the purpose of capital investment in respect of railway infrastructure of up to € 800 million.

11. The increased guarantee will be provided for by an amendment to Section 5 of the Transport Act 1964, which will provide the following.

“(1) The Board may from time to time borrow money, including money in a currency other than the currency of the State, to defray expenditure incurred by it that is properly chargeable to capital […].

(2) The aggregate at any one time of borrowings under this section which have not been repaid shall not exceed € 800,000,000. Without prejudice to the foregoing, the aggregate at any one time of borrowings which are not made for the purpose of capital investment in respect of railway infrastructure shall not exceed € 317,434,510.61 [being the equivalent of IR£ 250,000,000]

(3) For the purpose of subsection (2), railway infrastructure shall be defined as comprising any land, buildings, structures, equipment, and systems, used in connection with, or necessary or incidental to, the railway.”

12. The guarantee in question will be provided to CIÉ free of charge and cover the borrowed amounts in full (100%).

13. The Guarantee will be administered at the level of central Government by the Department of Finance.

14. The Guarantee will be used to support borrowings raised in the open market according to open and non-discriminatory tendering procedures. A notice was published in the Official Journal of the European Union on 15 October 2002 seeking expression of interest in providing CIÉ’s financial requirements for the next three years. Applicants were, in particular, required to demonstrate that they had the capacity, resources, experience and financial stability to provide the services required. Provided that all other terms of references are met, the relevant contract will be awarded to the lending institution that has quoted the lowest cost.

15. Iarnród Eireann has a small infrastructure construction department, which carries out standard maintenance work and minor up-grading of existing infrastructure, such as safety up-grades of level crossings. The department does, however, not have the resources to carry out major infrastructure work.

16. Accordingly, all major infrastructure work is procured on the construction market, through call for tenders published in the Official Journal of the European Union and adjudicated according to the relevant rules of EC public procurement law.

17. The infrastructure constructions which will be covered by the State guarantee consist in major infrastructure work. The vast majority of the works will thus be procured through tender procedure; minor works may be carried out by Iarnród Eireann in house construction department.

3 18. The projected investments in railway infrastructure under the National Development Plan and under Transport 21 relate to borrowings drawn down up to 31 December 2015. The repayment terms might stretch beyond that date; on the basis that CIÉ will repay the borrowings raised under the guarantee in the ten years subsequent to 2016, Ireland does not anticipate that it will grant authority to guarantee these loans beyond 2026.

Objective of the measure

19. The objective of the notified measure is to assist CIÉ and Iarnród Eirann in raising the finance needed to implement the Railway Development Programme. Ireland has confirmed that the notified guarantee will not be used to support borrowings for any purposes other than investment in railway infrastructure, as set out in the Railway Development Plan.

20. Consequently, the capital borrowings made with support of the notified measure will only be used for the development, construction or upgrading of fixed assets in Ireland.

21. Einród Eireann is obliged to keep separate accounts with regard to costs, receipts and revenues related to activities in the areas of railway infrastructure operation, railway passenger operation and railway freight operations.5 In addition, it is obliged within the framework of separated accounts to keep independent accounts of activities covered from public funds and it may not redistribute between its different activities. Accounts for business relating to the provision of transport services and those for business relating to the management of railway infrastructure are kept separate.6 Public subsidies paid to either one of these two areas may not be transferred to the other.

Appreciation of the measure

22. According to Article 87(1) 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.”

23. It thus has to first to be assessed whether the measure the Irish government envisages constitute State aid in the sense of Article 87 (1), and then, should it constitute State aid, whether such an aid is compatible with the common market.

Presence of State aid

24. The measure notified by the Irish government is a guarantee for loans which CIÉ takes out in order to co-finance investment into railway infrastructure. The measure can only constitute State aid if the construction of railway infrastructure is to be considered an economic activity, and thus the body carrying out this activity is to be considered an undertaking in the sense of Art. 87 (1) EC Treaty.

5 Article 10 of Act No 77/2002 6 In accordance with Article 6 of Directive 91/440

4 25. The Court of Justice considers “any activity consisting in offering goods and services on a given market is an economic activity”.7

26. In the light of this jurisprudence, the Commission has considered in past Commission decisions and practice that the construction of a transport infrastructure by public authorities does not constitute an economic activity, provided that it is open to all potential users on equal and non-discriminatory terms.8

27. Where the construction of transport infrastructure is carried out by a private company, the Commission has decided in the past that this operation constitutes an economic activity that may give rise to State aid issues. 9.

28. Therefore,, it is first necessary to establish whether CIE and Iarnrod Eirann are to be considered as a public authority, insofar as their involvement in the construction of railway infrastructure is concerned. The Commission firstly notes that the CIE and Iarnrod Eirann have the task to control that the infrastructure investment decisions of the Irish government are carried out as planned. In order to carry out the construction of the infrastructure, they rely in the vast majority of cases on outside contractors, which are chosen through a tender procedure according to EC public procurement law.

29. Secondly, the Commission notes that the CIE and Iarnrod Eirann have the exclusive competence for implementing the Irish government’s decisions regarding the construction of railway infrastructure. As explained above, Iarnrod Eirann has to keep the accounts for its infrastructure-related tasks separate from its accounts for its passenger transport and freight transport activities.

30. In the light of these elements, the Commission considers that the CIE and Iarnrod Eirann act as public authority, as far the financing and the supervision of the construction of the railway infrastructure which is covered by the notified guarantee is concerned.

31. Accordingly, the construction of the railway infrastructure under the auspices of CIE and Iarnrod Eirann does not constitute an economic activity, if the infrastructure is open to all potential users on equal and non-discriminatory terms.

7 ECJ Case C 180-184/98, Pavel Pavlov, n° 75 ; Case C-35/96 Commission v Italy, n° 36; Case 118/85, Commission v Italy, n° 7. 8 See most recently Commission decision N 284/2005 Irish Broadband, point 34, decision of 8 March 2006 and the following earlier Commission decisions: C 42/2001 Terra Mitica SA, point 64; N 355/2004 PPP Antwerp Airport, point 34; N 550/2001 Partenariat public privé pour la construction d’installations de chargement et de déchargement, point 24; N 649/2001 Freight Facilities Grant, point 45; N 356/2002 Network Rail, point 70; N 511/1995 Jaguar Cars Ltd. See for the soft law, 1994 Guidelines on State aid in the aviation sector, point 12; 1998 White book on infrastructure charges (COM (1998) 466 final of 22 July 1998, paragraph 43; 2001 Communication on improving the quality of European ports (COM (2001) final of 13 February 2001, p. 11. See also reply of the Commission to written question No 28 of Mr Dehousse of 10 April 1967, OJ No 118, 20. 6. 1967, p. 2311/67. See for academic literature Koenig/Haratsch, ‘The logic of infrastructure Funding under EC State Aid Control’, in: EStAL 3/2004, p. 393. 9 See Commission decision C 42//2001 Terra mitica SA, point 64; N 550/2001 Partenariat public privé pour la construction d’installations de chargement et de déchargement, point 24; see also the new “Guidelines for the financing of regional airports”, OJ C 312/1, 9.12.2005, p. 1, point 30 and following.

5 32. As explained above, up to today no railway undertaking has applied for a licence for offering railway services on the Irish railway lines. Nevertheless, should an undertaking apply, then it could use the Irish rail infrastructure under the conditions set out in Directive 91/440/EC, as amended by Directive 2001/12/EC, on the development of the Community’s railways, which guarantee an access on equal and non discriminatory terms.

33. The Commission therefore considers that the railway infrastructure to be financed under the guarantee and constructed under the auspices of CIE and Iarnrod Eirann is open to all potential users on equal and non-discriminatory terms.

34. The Commission thus concludes that the construction of railway infrastructure under the auspices of the CIE and Iarnrod Eirann does not constitute an economic activity. Accordingly, the foreseen public guarantee for the financing of the construction of new railway infrastructure in Ireland does not constitute a State aid.

Decision.

The Commission has accordingly decided:

To consider the notified measure not to be State aid in the sense of Article 87 (1) EC Treaty and thus not to raise any objections.

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.htm. Your request should be sent by registered letter or fax to:

European Commission Directorate-General for Energy & Transport Directorate A Rue De Mot/De Motstraat 28 B-1040 Brussels Fax No: 0032 (0)2 2964104

Yours faithfully,

For the Commission

Jacques Barrot Vice-president