EUROPEAN COMMISSION
Brussels,16.12.2003 C(2003)4705fin
Subject: State aid N 464/ 2003 – United Kingdom Company Neutral Revenue Support Scheme (CNRS)
Sir,
I. Procedure
1. By letter of 1 October 2003, registered at the Commission (Directorate-General for Energy and Transport) on 8 October 2003 (A/31568) the authorities of the United Kingdom notified to the Commission the above mentioned aid scheme in accordance with Article 88 (3) of the EC Treaty. The notification was registered by the Secretariat General of the European Commission on 6 October 2003 (SG(2003) A/9666) under No. N 464/2003.
2. On 15 July 2003 and on 18 September 2003, informal bilateral meetings were held in Brussels in order to discuss the envisaged aid scheme.
II. Description of the aid scheme
Background
3. Company Neutral Revenue Scheme (CNRS) is a new scheme in addition to the existing and previously approved Freight Facilities Grant (FFG) and Track Access Grant (TAG) schemes.
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 (+32-2)299.11.11. Telex: COMEU B 21877. Telegraphic address: COMEUR Brussels. 4. Freight Facilities Grant (FFG) is a capital grant originally designed to help companies to purchase and construct the equipment they require in order to switch the movement of freight from road to rail. The scheme was first introduced in 1974 and was authorised by the Commission in 1975.1 Grant is limited to the difference between total road costs and either the total rail costs or the imputed environmental benefit of the modal shift, if less.
5. In 1981, the scheme was extended to cover freight facilities for movements on inland waterways.2 It was further extended in 1983 to cover the then subsidiaries of British Rail: ‘Freightliner’ and ‘Sealink’.3 In 1993, the scheme was modified consequent upon the introduction of track access grant (see below) to reflect the changes wrought by railway restructuring in Great Britain. 4 The most recent changes to the scheme, to extend eligibility to freight facilities used in coastal shipping, were authorised by the Commission in 2001. 5
6. Track Access Grant (TAG), the second predecessor of CNRS was introduced in 1994, following the introduction in Great Britain of railway infrastructure charges payable to the infrastructure owner 6 for access to the network. The intended purpose of TAG was to help defray access charges for those traffics which could not even meet the short run marginal costs they imposed on the network, and thereby secure existing traffic on rail as well as attract new flows from road. Commission clearance was given in 1993.7
7. TAG as a revenue grant can be paid to support any rail traffic where there is a financial need and where the environmental benefit justifies it, on condition that the payments do not exceed the amount of money paid to Network Rail for the access to the network. TAG has been paid for many different types of rail traffic: intermodal has been the main beneficiary, but conventional and automotive traffic has also benefitted.
8. According to the British authorities, rail currently has a market share of some 25% for the movement of deep-sea and short-sea containers to inland destinations. The main rail haulier in this sector has been ‘Freightliner’with a 97% market share. However, other rail hauliers have started to make incursions in this sector. Rail's share of the purely domestic intermodal market has been and remains very small, freight on long distance corridors (so called ‘trunk’ movements), but the development of longer distance corridors for trunk hauls is seen as a priority in a sector with high potential for growth. EWS and Direct Rail Services (DRS) both operate in this sector, although the volumes moved are small. 8
1 S/75-026825. 2 SG(81) D/14170. 3 State aid case N 288/82 (Commission reference SG(83) D/1218). 4 State aid case N 162/93 OJ C 335, 13.12 1995 5 State aid case N 649/01, OJ C 45, 19.12.2002, p.2. 6 Now ‘Network Rail’, then ‘Railtrack’. 7 State Aid case N 162/93. 8 There are currently 4 rail freight operating companies who move intermodal traffic within the British rail market: (1) Freightliner: Formed by British rail and privatised in 1997, Freightliner currently haul
2 9. Hence, Freightliner is the main recipient under the current TAG aid scheme. Freightliner’s TAG contract was awarded in 1996 for a period of 5 years and, on its expiry, a new contract for 3 years was awarded. This contract expires in 2004. The aid takes the form of a large ‘block’ grant paid against the movement of a minimum number of containers between regions and smaller variable elements paid for individual movements between ports and terminals. Other operators also have been awarded TAG for specific flows of intermodal traffic, which is paid against individual movements.
10. However, the British authorities no longer consider TAG as a suitable form of grant- aid in the containerised sector. This is, first, because TAG requires a bespoke assessment and contract for each rail operator based on their specific arrangements and costs. That could lead to different grant rates being set for identical flows simply because of differences between rail operators which, in turn, would perpetuate inefficiencies and distort the market. The situation has become more acute as other railway undertakings have moved onto the domestic intermodal market. Second, because TAG is capped at the level of the track access charges paid to Network Rail, the support seems to be insufficient to incentivise the use of rail on short and middle distance flows. Finally, because TAG can only be paid to rail operators, and because rates are not published, it does not incentivise customers and shippers to consider rail as an alternative and therefore does not support growth in their usage of rail freight.
11. In the view of the British authorities, CNRS will enable grant to be paid in a more transparent and non-discriminatory manner, and encourage growth. For non- intermodal traffic, the costs are not homogenous and will vary considerably depending on the specific origin and destination or volume. For the time being, TAG will continue to be available in principle for these flows.
12. In summary, it may be said that Freight Facilities Grant is unaffected by the proposed CNRS scheme. However, CNRS will replace TAG for intermodal traffic, although it will remain available for all other commodities.9
The following tables give an overview on the historic and proposed future expenditure on FFG (table 1), TAG (table 2) and on the overall budget for all three aid schemes (table 3):
97% of the containers moved by rail within the UK and operate a number of inland terminals. (2) EWS (English Welsh & Scottish Railway): The remainder of British Rail freight was sold to EWS and essentially consisted of the movement of bulk commodities. However, EWS have recently begun to handle increased amounts of containerised traffic from ports. (3) GB Railfreight: The newest freight operating company within the UK currently runs two commercial intermodal services from Felixstone on behalf of Medite Shipping. (4) DRS (Direct Rail Services): The subsidiary of British Nuclear Fuels Ltd (BNFL) predominantly transports nuclear waste by rail. However, DRS have recently commenced commercial services with Malcolm Warehousing and Distribution to transport domestic intermodal traffic between Grangemouth and Daventry International Railfreight Terminal.
9 See table 7.
3 (1) Freight Facilities Grant (FFG) Year 94- 95- 96- 97- 98- 99- 00- 01- 02- 03-2004 1995 1996 1997 1998 1999 2000 2001 2002 2003 estimated England 2.80 4.00 2.77 6.96 9.46 5.81 19.88 n/a n/a n/a (Rail and water) England n/a n/a n/a n/a n/a n/a n/a 32.69 27.56 20.00 (Rail) England n/a n/a n/a n/a n/a n/a n/a 4.00 5.50 6.50 (Water) Scotland 0.00 0.00 0.00 0.00 0.00 6.10 2.40 8.50 2.60 12.00 (Rail and Water) Wales 2.10 0.20 0.40 0.60 0.10 0.20 0.00 0.00 0.44 1.20 (Rail) TOTAL 4.90 4.20 3.17 7.56 9.59 12.11 22.28 45.19 36.10 39.70 FFG (£ m) Table 1
(2) Track Access Grant (TAG) Year 94- 95- 96- 97- 98- 99- 00- 01- 02- 03-2004 1995 1996 1997 1998 1999 2000 2001 2002 2003 estimated England 0.00 0.00 12.23 21.34 18.91 16.74 13.88 19.89 20.77 20.00 Scotland 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.30 0.50 TOTAL 0.00 0.00 12.23 21.24 18.91 16.74 13.88 19.89 21.07 20.50 TAG (£ m) Table 2
(3) FFG, TAG and CNRS Year 2004-5 2005-6 2006-7 2007-8 2008-9 2009-10 2010-11 England 14.00 14.00 14.00 14.00 14.00 14.00 14.00 (Rail FFG and TAG) England 22.00 23.00 24.00 19.00 20.00 21.00 22.00 (CNRS) England 12.00 12.00 12.00 12.00 12.00 12.00 12.00 (Water FFG) Scotland 14.60 15.40 15.00 15.00 15.00 15.00 15.00 (Rail and Water FFG, and TAG) Wales 1.00 1.00 1.00 1.00 1.00 1.00 1.00 FFG, 63.60 65.40 66.00 61.00 62.00 63.00 64.00 TAG & CNRS (£ m) Table 3 (The table shows the budget projections for FFG, TAG and CNRS based on current best information. For 2007/8 onwards, values do not include the Network Constraint Element).
4 Legal basis of the aid scheme
13. The new aid scheme is based on the Transport Act 2000, Section 211 which empowers the Strategic Rail Authority to enter into agreements or other arrangements to secure the provision, improvement or development of railway services or assets. According to the law, no further legislation is required for the implementation of CNRS, but Ministerial authority has been granted for the scheme. 10
The objective of the aid scheme
14. The objective of the new aid scheme is to support the movement of intermodal containers by rail in the United Kingdom (Great Britain only11). The grant will provide continued support for the deep-sea and short-sea intermodal container business that currently moves by rail, and aims to secure growth in this sector, and in the movement of domestic intermodal freight12.
15. The aims of the scheme are therefore:
● To facilitate the retention of the deep-sea and short-sea intermodal rail sector and secure growth in that sector; ● To encourage growth in the domestic trunking of intermodal freight by rail; ● To incentivise shipping lines, ports, logistics providers and train operators to take or share demand risk and to grow their use of rail; ● To improve the structure of the grant support system in order to: facilitate fair competition between rail freight operating companies, terminal operators and other companies in the rail freight supply chain;
move away from bespoke company deals and hence remove any distortion between operators caused by TAG; enable a smooth transition from the current grant regime with minimal market cost and disruption.
Budget
The budget is proposed to be GBP 22 million (€ 32 million) per annum in 2004/05, GBP 23 million (€ 33 million) in 2005/06 and GBP 24 million (€ 34 million) in 2006/07. The increase in budget is associated with the expected growth in volume over the 3 years. The grant rates13 will remain fixed through the period.
10 SRA is s statutory government body whose role is to provide a clear strategic direction for rail transport in Britain, to promote rail passenger and freight transport and to encourage private investment in the rail industry. 11 See map, point 20. 12 Domestic traffic is defined as that having origin and destination within Great Britain, where neither origin nor destination is a port 13 See below under ‘calculation of grant rates’.
5 Duration
16. The notified scheme as such is limited for a period of three years. Before the end of this period, an evaluation report will be submitted to the European Commission that will allow assessing the prolongation of the scheme. British authorities expect that an extension will be necessary as support is likely to be needed for at least 10 years. In any event, the Network Constraint Element14 will only be included for the first three years.
Beneficiaries
17. Any company, whether or not owned or controlled by UK nationals, can apply for revenue support under the scheme if it is acting as the operator or contractor of an eligible rail service.
18. An operator or contractor in this context is any company taking commercial responsibility directly, or indirectly (through a subcontracted agreement) to pay track access charges to Network Rail for an eligible rail service. The operator is therefore the person taking the commercial (demand) risk to secure cargo for the rail service. UK legislation15 provides that any person may contract with Network Rail for infrastructure capacity. Applications for infrastructure capacity - and hence operators for the purpose of this scheme - are not restricted to railway undertakings.
19. It is therefore expected that grant will be paid to the following types of companies:
S Rail Operators (‘Railway Undertakings’) such as ‘Freightliner’ and ‘EWS’, where they operate a service and market this to a range of customers. These companies will be the major recipients of the grant.
S Shippers, such as ‘P&O’ and ‘Medite Shipping’. Such companies would be the recipient of grant where they take the commercial risk on a rail service, contracting with a rail operator for haulage only.
S End Customers. Particularly for domestic traffic, an end customer such as a supermarket, or a manufacturer could be the recipient of grant where they take the commercial risk on a rail service, contracting with a rail operator for haulage only.
Form of the aid
20. CNRS provides fixed grant rates which are payable in arrears for each container moved. The scheme divides the UK into 18 regions16, each of which has its own region-to-region fixed grant rate. Separate rates are available for port traffic and for
14 See below, point 29 to 32. 15 The Railways Act 1993. 16 The regions are the following: 1: London; 2: Ipswich; 3: Oakham; 4: Hull; 5: Leeds; 6: Durham; 7: Lockerbie; 8: Whitburn; 9: Montrose; 10: Inverness; 11: Warrington; 12: Wrexham; 13: Swansea; 14: Birmingham; 15: Bristol; 16: Totnes; 17: Winchester; 18: Ashford.
6 domestic traffic.17 These are presented in an 18 x 18 matrix showing the grant rate for each region-to-region pair which will be publicly available.18
Map 1
21. Within each region, the centre of economic activity has been defined and has been used to calculate the distance between regions. This is usually the largest town in the centre of the region. Region-to-region distances have been chosen in preference to individual origin and destination or county-to-county distances, in order to make the scheme both simple to understand and manage, and to remove - as far as possible - distortionary effects. Using larger regions rather than counties also ensures that there will not be competing destinations close to regional boundaries with different grant rates. Instead the boundaries follow Government Office regional boundaries where possible, with slight adjustments to ensure that boundaries do not cut through areas of significant economic activity and consumption.
22. In order to avoid abuses or unintended effects, the traffic flow for a given transport operation is measured on the basis of the shortest distance by rail between the point of departure and the place of destination. In the case of import and export traffic, the subsidy is paid to and from the frontier station.
17 The difference between them is the road leg at the start of the journey, which increases the financial need for domestic traffic. As a consequence, domestic rates are higher than port rates. See chapter ‘Eligible rail services’. 18 Tables are provided in Annex 3 of the notification.
7 Calculation of Grant Rates
23. The grant rates are based on the principle that a traffic flow is entitled to grant:
S If the environmental benefits justify it and S If the cost of using rail is greater than the cost of road (financial need).
24. Subject to the Network Constraint Element which is described below, grant will be limited to the least of these two factors, i.e. grant cannot exceed the environmental benefits, and cannot exceed the financial need for grant. In addition, aid intensity does not exceed 30% of the total rail costs as described below.
25. The grant rates are derived from four factors:
(1) The environmental benefit of moving traffic from road to rail;
(2) The financial need for grant based on the difference between road and rail costs;
(3) A Network Constraint Element;
(4) A terminal adjustment.
These are now described below.
(1) Environmental benefits
26. Environmental benefits are defined as the net unpaid external cost of road. The appropriate values for the unpaid external costs of road and rail have been reviewed by consultants on behalf of the SRA and in consultation with the Department for Transport. The values have been developed to reflect more accurately the impact of lorries on different roads and quantify the benefits of removing lorries from the road network.19 These rates will also be used to calculate the net unpaid external costs of road, rail and waterborne transport within the Freight Facilities Grant and Track Access Grant schemes administered by the SRA, the Department for Transport, the Scottish Executive and the Welsh Assembly Government.
19 The SRA has commissioned various pieces of research to look at both the methods and quantification of the externalities associated with road and rail. New values for the so called ‘Sensitive Lorry Mile’ (SLM) valuations have been developed which more accurately reflect the impact of lorries on different roads and thus the benefits of removing lorries from the road network. Work has been carried out by both Arup Transport Planning and I.E.K.
8 27. The research has lead to the following rates, derived by a range of road types: 20
Pence/mile Motorway by congestion band Conurbation Rural & Urban Trunk & Trunk & High Medium Low Other Other Principal Principal
(1) Accidents 1.5 1.5 1.5 3.8 3.1 3.8 3.1
(2) Noise 4.0 4.0 4.0 11.0 9.0 2.0 4.0
(3) Pollution 5.7 5.7 5.7 18.8 22.8 3.9 4.8
(4) Climate 2.7 2.7p 2.7 2.6 2.5 2.4 2.0 Change (5) Road Infra- 5.7 5.7 5.7 9.1 28.7 11.2 35.3 structure Costs (6) Road 79.0 37.0 6.3 121.9 135.5 45.8 10.6 Congestion (7) Unquanti- 8.0 8.0 16.0 8.0 9.0 21.5 22.0 fied Benefits (8) Lost -29.0 -29.0 -29.0 -29.0 -28.0 -29.0 -28.0 Taxation (9) External -8.8 -8.8 -8.8 -8.8 -8.8 -8.8 -8.8 Rail Costs
68.8 26.8 4.1 137.5 173.8 52.8 45.0 TOTAL Table 5
20 The calculation of the new values has considered research in the following areas: (1) Accident costs, representing the value of accidents prevented by removing lorries from the road. This includes the physical costs (e.g. road damage, health care) and the cost to society of fatalities; (2) Noise costs, representing the value to society of a reduction in lorry noise; (3) Pollution, representing the reduction in mortality and non fatal health effects from reduced road traffic; (4) Climate Change, representing the reduction in CO2 emissions; (5) Road Infrastructure Costs, representing the reduction in road damage from heavy traffic; (6) Road Congestion, representing the benefits to road users of reduced congestion; (7) Unquantified benefits which take into account where benefits are recognised, but there is insufficient evidence to support a value ( These include e.g. driver frustration/stress, fear of accidents, restrictions on cycling and walking, upstream and downstream effects, Community severance, or visual intrusion). Finally, two area are included representing the negative impacts of switching traffic from road to rail. These are: (8) Lost Taxation, representing the reduced taxation arising from a reduction in road traffic (road tax and fuel tax); (9) Rail External Costs, representing the negative impacts of rail transport, particularly relating to noise, pollution and climate change.
9 (2) Financial need
28. Financial need is determined by the amount of grant required to make rail and road costs equal. Grant is therefore limited to or below the financial need in every case. The financial need is assessed by comparing the total costs of moving a unit from origin to destination by road and the total costs of moving a unit from origin to destination using rail as the principle means. For rail, this includes both the trunk haul by rail and also the collection and delivery of units to the rail terminal which is generally by road. The financial need for grant is based upon a cost model which compares road and rail costs. This model has used generic costs derived from industry models, and published data rather than using specific costs from individual operators. 21
£ TOTAL Financial RAIL Need COSTS
TOTAL ROAD COSTS
Diagram 1
(3) Network constraint Element
29. Current rail costs are higher than they might be in the medium and long term as they reflect the present shortcomings of the rail network. These shortcomings restrict the economies that rail operators can achieve, and so keep costs artificially high. According to British authorities, for example, the rail network cannot currently accommodate trains of optimal length, and on certain flows, low volumes lead to additional costs for hubbing and for partial utilisation. Planned enhancements to the rail network will help to address this, as will improved competition between rail operators, and improvements in their own efficiency.
30. If these factors are not taken into account, the grant will understate the short term need for grant, which could result in traffic loss on the switch from TAG.22
31. Hence, British authorities propose to include in the calculation of grant a ‘Network Constraint Element’ which represents the difference between current rail costs, and the assessed future efficient rail costs by 2010. This is calculated through rail cost model by fostering factors such as utilisation, average loading and train length. The
21 See chapter ‘Eligible costs’, in particular table 8 and 9. 22 The current grant arrangements under TAG mask the impact of such factors, as the ‘block grant’ element means that the grant cannot be directly attributed in full to individual flows.
10 payment of the Network Constraint Element means that in some cases grant rates will exceed the value of the environmental benefits, but they can never exceed the financial need.
32. Although network enhancement will not be quickly resolved, it is considered that rail operators should be able to make changes to their business over three years to minimise these factors, and as such this element will only be considered for the first three years of the scheme. If CNRS is extended beyond this point, this element will be omitted from the calculation of new grant rates.
£ TODAY’S Network RAIL Constraint Element COSTS
FUTURE RAIL COSTS (2010)
Diagram 2
Examples of Grant calculation taking into account the first three elements
33. Grant is therefore the minimum of the financial need, and the sum of the environmental benefit and the Network Constraint Element.
34. In the example below, the financial need is lower than the environmental benefit and therefore grant is capped to the financial need. No part of the Network Constraint Element is paid.
Network £ Constraint Element
GRANT
ENVIRON- FINANCIAL MENTAL NEED BENEFIT
Diagram 3
11 35. In the example below, the financial need is greater than the sum of the environmental benefit and the Network Constraint Element. Grant is therefore capped to the sum of the environmental benefits and the Network Constraint Element, below the financial need.
GRANT NETWORK £ CONSTRAINT ELEMENT
FINANCIAL NEED ENVIRON- MENTAL BENEFIT
Diagram 4
36. In the example below, the financial need is greater than the environmental benefits, but less than the sum of the environmental benefits and Network Constraint Element. Grant is capped to the financial need. Only part of the Network Constraint Element is paid.
NETWORK £ CONSTRAINT ELEMENT GRANT
FINANCIAL ENVIRON- NEED MENTAL BENEFIT
Diagram 5
Finally, the table below sets out how the grant rate has been derived for a number of common traffic flows.
12 Flow Financial Environmental Network Grant (£) Need (£) Benefit (£) Constraint (Min of (E) (E) (F) Element (£) and (F+G)) (G) Felixstowe – Manchester (port) 22 88 34 22 Southampton – Manchester 23 70 30 23 (port) Felixstowe – Birmingham 61 59 29 61 (port) Southampton – Birmingham 64 37 24 61 (port) Southampton- Glasgow (port) 0 86 46 0 Southampton – Leeds (port) 16 52 32 16 Daventry – Mossend 37 51 37 37 (domestic) London – Cardiff (domestic) 87 26 29 55 Table 6
(4) Terminal Adjustment
37. As indicated above, the assessment of the environmental benefits is based on region to region flows. However, the individual location of the rail freight terminals can lead to a localised environmental disbenefit arising from lorry movements to and from the site. An adjustment is therefore made to the grant rate for each terminal location to account for this. The adjustment is calculated as the environmental disbenefit measured from the terminal to the nearest trunk road or motorway and multiplying by the appropriate sensitive lorry mile rate.23
38. Although this adjustment relates to environmental benefit, the adjustment is deducted from the final rate even it is not capped by environmental benefit. This is a conservative position, and allows standard rates to be published. The value of this adjustment will be published for any terminal where grant has been awarded.
23 See point 26.
13 £ STANDARD RATE FROM MATRIX
ADJUSTMENT GRANT ACTUALLY PAID
GRANT PAID
Diagram 6
Eligible rail services
39. An eligible rail service is a service which operates to a pre-agreed schedule and carries standard intermodal units (containers, swapbodies or piggyback trailers) on any Network Rail owned route. Eligible rail services can be either
S domestic rail services, where units are delivered by road to a rail terminal, trunk hauled by rail, and then delivered by road to the final customer; or
S rail services to and from deep and short sea ports, where units are loaded straight to rail at a port, trunk hauled by rail, and then delivered by road to the final customer.
40. Examples of services that would be eligible for CNRS grant are:
S A service conveying deep sea containers from Port of Felixstowe to customers in Manchester S A service conveying supermarket products in containers between two distribution depots within the UK S Containers from a short sea port carried on a ‘wagonload’ service (a service of mixed traffic for a range of customers).
41. For the time being, CNRS will not be available to other types of rail freight service. However, the SRA is mindful of the need to ensure non-discrimination and is currently examining the modalities for extending the company neutral methodology in principle to all freight movements in Great Britain within a reasonable timescale. The table below gives an overview of services that will not be eligible for CNRS grant in the immediate future.
14 Commodity Examples Finished cars/vans. Also includes car parts/panels where flows Automotive typically move in clearly defined part or full trainload volumes Channel Tunnel Traffic All commodities Where flows typically move in clearly defined part or full Chemicals trainload volumes Construction Materials Cement, clay, stone, granite, sand, timber etc Metals Coil, bar, aluminium, scrap etc Minerals Including power station coal, lime, potash, gypsum, rock salt etc Where flows typically move in clearly defined part or full Paper trainload volumes Petrochemicals Oil etc Waste Industrial, domestic, nuclear etc Table 7
Eligible costs
42. The eligible costs, used in calculating the grant rates are the total door-to-door costs of the rail-based traffic flows. Eligible costs include handling charges at terminals, rail traction costs, wagon hire/lease charges, track access charges and the cost of road collection and delivery as part of a rail-based transport chain.
43. The table below gives an overview of the elements which were included within the cost models for road and for rail haulage.
Road Costs Areas Included Fixed Costs S Depreciation and Interest S Vehicle Taxation S Fixed Maintenance S Overheads S Insurance S Profit Driver Costs S Wages, including National S Costs based on Insurance and Pensions number of shifts required Running Costs S Fuel costs including tax and S Maintenance consumption S Oil, tyres etc Table 8
15 Rail Costs Areas Included Fixed Costs S Traction costs S Overheads S Wagon costs S Profit S Depreciation and Interest S Insurance S Fixed Maintenance Driver and Groundstaff S Wages, including National S Costs based on Costs Insurance and Pensions number of shifts required Running Costs S Terminal lift costs S Local road S Track access charges distribution from S Maintenance terminal S Fuel costs and consumption
Table 9
Aid intensity
44. Grant will not exceed 30% of the total door-to-door rail-based costs.24
45. The table below demonstrates how aid intensity has been measured for some example flows.
Traffic flow Rail Cost Grant Rate (£) Aid Intensity Today (£) (%) Felixstowe - Manchester 285 22 8 Southampton - Manchester 269 23 9 Felixstowe – Birmingham 258 61 24 Southampton – Birmingham 236 61 26 Southampton- Glasgow 352 0 0 Southampton – Leeds 277 16 6 Table 10
Cumulation
46. The Company Neutral Revenue Support Scheme will replace the existing TAG scheme for intermodal services. TAG will continue to support all other sectors. The SRA will monitor the application of the Company Neutral Revenue Support Scheme to ensure there is no double-counting of environmental benefits relating to past or future FFG or TAG and other capital grant support schemes. British authorities also
24 Evidence is provided in Annex 8 of the notification.
16 confirmed that double funding is ruled out as a matter of principle and that other possible aid measures can be likewise excluded.
General conditions
47. Standard application forms will be used by applicants to apply for grant. The SRA will enter into contracts with each of the recipients of revenue support. These contracts will set out the basic conditions for payment of the grant. The contract terms will be standard for all applicants, varying only by the traffic flows and volume.
48. Standard claim for payment forms will be used in all cases. Grant will be paid in arrears against claims from companies awarded grant, supported by necessary evidence of the traffic which has moved.25
49. Repayment is only applicable in the event of fraud or error. The SRA will retain right of audit on matters relating to CNRS.
50. The notified scheme will not be put into force by British authorities until the Commission has reached a decision as to its compatibility with the EC-Treaty.
Monitoring and evaluation
51. Targets for environmental benefits generated and road mileages avoided will be drawn up before the start of the scheme. As the revenue support will be provided in arrears after the traffic has moved, records of traffic on individual rail-based flows will be monitored on an on-going basis.
52. The SRA will produce a monitoring report on an annual basis, with an assessment of forecast against actual benefits achieved and will sent it to the Commission. In addition, a formal independent evaluation will be carried out at least every three years to assess whether the scheme has met its targets and the evaluation report will be made available to the European Commission as part of any request to extend the scheme.
III. Assessment of the aid
Existence of aid
53. According to Article 87(1) of the EC Treaty shall, save as otherwise provided in the Treaty, any aid granted by a Member State in any form whatsoever, which distorts or threatens to distort competition by favouring certain undertakings be incompatible with the common market, insofar trade between Member States is affected.
54. The Commission takes note that the notified scheme for aid concerns financing from State resources given the fact that the subsidy scheme is implemented by Strategic Rail Authority (SRA).
25 Examples of the standard forms and contracts are provided at Annex 7 of the notification.
17 55. The aid scheme favours private undertakings, such as rail operators, shippers or end customers, e.g. supermarkets or manufacturers that wish to transport goods on British territory. Thus, the scheme provides a potential competitive advantage to the beneficiaries which fulfil the definition of an undertaking within the meaning of Article 87 (1) EC Treaty since they carry out an economic activity.
56. In addition, one aim of the scheme is to promote a modal shift from road to rail. The aid therefore benefits recipients to the detriment of competitors of other transport sectors than rail. The scheme is thus selective in nature.
57. The scheme also may distort or threaten to distort competition between the railway undertakings and competitors offering freight transport services by road or by vessel.
58. According to the jurisprudence of the European Court of Justice, the notion of effect on intra-Community trade presupposes that the undertaking(s) receiving the aid may be able to influence the trade flows between Member States by competing in intra- Community trade.26 Given the fact that in the railway sector access to infrastructure for licensed railway undertakings wanting to operate international freight services has been introduced27 and a comprehensive framework for capacity allocation and infrastructure charging has been set28, public financing may affect trade between Member States.
59. Therefore, the new aid scheme promoting the movement of intermodal containers by rail may distort or threaten to distort competition and affect trade between Member States.
60. In view of the above, the Commission finds that the notified aid scheme involves operating 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.
Compatibility of the aid 29
61. The aim of the notified aid scheme is to support the movement of intermodal containers by rail. The Commission considers that none of the exemptions of Article 87 (2) of the EC Treaty apply to the aid scheme. Nor is the State aid in question intended 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 within the meaning of Article 87 (3) (b), or to promote culture and heritage conservation in the meaning of Article 87 (3) (d).
62. According to Article 70 of the EC Treaty, the fundamental objectives of the Common Transport Policy are those of the Treaty itself. Within this context, Article 73 of the
26 European Court of Justice judgement of 17 September 1980, C 730/79, Philip Morris, ECR 1980, p. 2761. 27 Directive 2001/12/EC, OJ L 75, 15 March 2001, p.1. 28 Directive 2001/14/EC, OJ L 75, 15 March 2001, p.29. 29 This chapter refers to the aid based on the calculation of the environmental benefit, the financial need and the terminal adjustment. The so called ‘Network Constraint Element’ will be treated apart.
18 EC Treaty states, insofar it is relevant to this case, that aids shall be compatible with the Treaty if they meet the needs of co-ordination of transport. Aids that are found by the Commission to achieve such co-ordination are exempted ipso jure from the prohibition contained in Article 87 (1) by virtue of Article 73. The Commission has taken the position that the concept of aid meeting the needs of co-ordination of transport refers to the need for Government intervention arising in the absence of a competitive market or in the presence of market failures30.
63. The Commission recalls that the transport sector is suffering from negative externalities which are due to the fact that different modes do not pay the real costs they impose on society31. Consequently, intramodal competition is hampered and market failures are the consequence.
64. Accordingly, the Commission finds that there may be a need for State intervention for co-ordination measures in the railway sector, especially when taking into account the objective of the aid scheme to encourage growth in the domestic trunking of intermodal freight by rail. The Commission thus finds that Article 73 of the Treaty is the appropriate legal basis to analyse the support of the movement of intermodal containers by rail.
65. Council Regulation 1107/7032 implements Article 73 of the Treaty and provides for specific exemptions for aid, which is deemed to meet the needs of co-ordination of inland transport. In particular, Article 3 (1) (b) of Regulation 1107/70 stipulates that Member States may, until the entry into force of common rules on the allocation of infrastructure cost, provide aid to undertakings that have to bear expenditure relating to the infrastructure used by them while other undertakings are not subject to a like burden.
66. With regard to the rail sector, the Commission acknowledges that this exemption applies to the users of rail infrastructure and is aimed at compensating these users for the additional financial burdens they have to bear compared to users of other modes of transport.
67. Moreover, Article 10 of Directive 2001/14/EC of 26 February 2001 which is based on Article 71 of the EC Treaty, explicitly allows Member States to put in place a compensation scheme for the use of railway infrastructure for the demonstrably unpaid environmental, accident and infrastructure costs of competing transport modes in so far as these costs exceed equivalent costs of rail. Member States have to ensure that such a scheme is compatible with Article 73, 87 and 88 of the Treaty. Furthermore, the scheme has to be time-limited and granted on non-discriminatory terms. The methodology used and the calculations performed must be publicly
30 Commission decision of 22 October 1997, N 79/97 – The Netherlands, OJ C 377, 12 December 1997, p. 3; Commission decision of 21 April 1999, N 588/98 – Denmark, O.J. No. C 166, 12 June 1999, p. 6; Commission decision of 4 May 1999, C 21/98 – Italy, O.J. No. L 227, 28 August 1999, p. 12. 31 Commission decision of 20 June 2001, N 219/2001 – Austria, Umweltprämie für die Binnen- schiffahrt and Commission decision of 21 April 1999, N 588/98, Denmark, OJ C 166, 12.6.99. 32 Council regulation (EEC) 1170/70 of 4 June 1970 on the granting of aid for transport by rail, road and inland waterway, as amended.
19 available and it shall be in particular possible to demonstrate the specific uncharged costs of the competing transport infrastructure that are avoided. 33
68. Hence, in accordance to the Commission’s practice in the handling of State aid cases, the following requirements must be fulfilled, so that the aid meets the needs of co- ordination of transport within the meaning of Art. 73 of the EC-Treaty34, the requirement of its implementation by virtue of Article 3 (1) (b) of Regulation 1107/70 and the requirement of Article 10 of Directive 2001/14/EC:
(1) The aid is necessary in the interest of the Community and proportional to the minimum necessary for the realisation of the objective; (2) The aid that compensates unpaid external and infrastructure costs of competing transport modes does not exceed the equivalent cost of rail; (3) The aid scheme is granted on non-discriminatory terms; (4) The aid scheme is transparent and time-limited; (5) The aid does not give rise to a distortion of competition to an extent contrary to the common interest.
(1) Necessity and proportionality
69. The Commission notes that the aid scheme fulfils the criteria of necessity, since it can be demonstrated that the subsidies are necessary to achieve the purpose: to shift transport from road to rail in promoting the movement of intermodal containers by rail. Without the support of freight facilities since 1974 and the support of moving freight by rail since 1994, the market share of freight traffic by rail would probably not have increased. Without the new CNRS scheme, it will be difficult to fulfil the UK Government’s overall strategy which consists in an increase of 80% in rail freight volume during the period 2000-2010 such as set out in the document “Transport 2010: The 10 Year Plan”.
70. Article 2 of the EC Treaty states that ‘sustainable and non-inflationary growth respecting the environment’ is one of the major tasks of the Community. Article 2 is complemented by specific objectives contained in Article 174 where it reads that ‘Community policy on the environment shall contribute inter alia to preserving, protecting and improving the quality of the environment’. According to Article 174 (2) this policy shall be based on preventive action and shall make the polluter pay. The precautionary principle is also mentioned as an essential element of environmental policy. Article 6 of the EC Treaty further states that ‘Environmental protection requirements must be integrated into the definition and implementation of Community policies and activities referred to in Article 3, in particular with a view to
33 Directive 2001/14/EC of the European Parliament and of the Council of 26 February 2001 on the allocation of railway infrastructure capacity and the levying of charges for the use of railway infrastructure and safety certification, OJ No. L 75, 15 March 2001, p.36. 34 Commission decision of 19 September 2001, N 500/2001 – United Kingdom, Network Grants to Licensed Heavy Rail Infrastructure Managers, Commission decision of 21 April 1999, N 588/98 – Denmark, O.J. No. C 166, 12 June 1999, p. 6; Commission decision of 8 July 1999, N 121/99 – Austria, O.J. No. C 245, 28 August 1999, p. 2; Commission decision of 8 December 1999, N 412/98 – Italy (Marche), OJ No. C 55, 26 February 2000, p. 11; Commission decision of 22 December 1999, N 617/98 – The Netherlands (Utrecht), OJ No. C 71, 11 March 2000, p. 7. See also COM (2000) 5 final of 26.7.2000, Commission proposal for a regulation of the European Parliament and the Council concerning the granting of aid for the co-ordination of transport by rail, road and inland waterway.
20 promoting sustainable development.’ It follows that the environmental objectives of the Treaty as outlined above have to be pursued inter alia through the Common Transport Policy.
71. One of the explicit purposes of the notified scheme is to promote the transfer of freight traffic flows from road to rail. As outlined in the Commission’s White Paper on European transport policy,35 rail transport is a strategic sector, on which the success of the efforts to shift the modal balance towards more environmentally friendly modes of transport will depend, particularly in the case of goods. As the aid scheme is revitalising the railway sector for goods in the United Kingdom, it can be considered as an important element in achieving the Policy guidelines set out in the Commission’s White Paper. Accordingly, the Commission finds that the scheme pursues an objective that is in the interest of the Community.
72. The Community has for some time pursued a policy of achieving a balance between different modes of transport, as well as the fostering of the competitiveness of combined transport vis-à-vis road. The central aim of EC combined transport policy is a modal shift from road to other modes of transport. The White Paper on Transport Policy36 encourages the use of rail and other environmentally friendly modes of transport in order to become competitive alternatives to road haulage. The new « Marco Polo »37 programme also intends to help the transport and logistics industry to achieve sustained modal shifts of road freight to short sea shipping, rail and inland waterway. 38
73. In addition, the Commission acknowledges that the rules of the scheme are designed to ensure that, in the absence of grant, a rail-based solution would not be viable. To do this, the Strategic Rail Authority benchmarked viability of all potential rail-based flows against known road costs to determine the extent to which each flow requires revenue support.
74. Finally the calculated rates have been checked to ensure that the grant in every case is limited to 30% of the total current rail costs. 39 This is considered to be the minimum necessary. The aid scheme thus respects the principle of proportionality.
(2) Limitation to compensation of unpaid external costs of road
75. After having assessed the principles of necessity and proportionality, the Commission has to be satisfied that the aid for the transport of goods by rail that compensates unpaid external and infrastructure costs of competing transport modes such as road does not exceed the equivalent cost of rail.
35 White Paper (COM 2001/370), European transport policy for 2010: time to decide, European Commission, 2001, p. 15. 36 White Paper; European transport policy for 2010: time to decide. COM (2001) 370 37 Regulation (EC) No 1382/2003 of the European Parliament and of the Council of 22 July 2003 on the granting of Community financial assistance to improve the environmental performance of the freight transport system (Marco Polo Programme). Official Journal of the European Union L 196/1 of 2.8.2003. 38 See State aid decision N 64/03 – Italy (Trento) – Granting of aid in support of combined transport, point 28, not yet published. 39 Where the grant rate exceeded 30% of the total current rail costs, the grant was reduced to limit the aid to 30%. According to SRA, however, this only happened in one case.
21 76. In this respect, according to Article 3 (1) (b) of Regulation 1107/70 the Commission, while determining the amount of aid thus granted, has to take into account of the infrastructure costs which competing modes of transport do not have to bear.
77. But the assessment is not limited to the infrastructure costs. As it is stipulated in the Commission’s White Paper on Transport Policy, ‘the fundamental principle of infrastructure charging is that the charge for using infrastructure must cover not only infrastructure costs, but also external costs, that is, costs connected with accidents, air pollution, noise and congestion.’ 40
78. In this connection, it should be repeated, that the aid is not only limited to the environmental benefits, which means to unpaid net external costs of road. The aid is also limited to the financial need, i.e. to the amount of grant required to make rail and road costs equal, which is calculated by research institutes after having consulted a wide range of sources41. In other words: aid is limited to or below the environmental benefits and the financial need in every case. 42
79. Therefore, the Commission considers that the UK has provided evidence to demonstrate that the process used to estimate the value of external cost of transport was transparent and reasonable. The level of subsidy is based on a sound comparative cost analysis and was limited to an amount justified in terms of differences in unpaid external and infrastructure costs between rail and road transport.
80. The Commission concludes that the aid scheme is in line with Article 3 (1) (b) of Regulation 1107/70.
40 White Paper (COM 2001/370), European transport policy for 2010: time to decide, European Commission, 2001, p. 70. 41 “External Costs of Transport (accidents, environmental and congestion costs) in Western Europe” INFRAS/IWW University of Karlsruhe, 2000; “Efficient Transport for Europe, Policies for Internalisation of External Costs” European Conference of Ministers of Transport (ECMT), 1998; “Surface Transport Costs & Charges – Great Britain 1998” Institute for Transport Studies (ITS)/ AEA Technology Environment, 2001; “An Economic Analysis to Inform the Review of the Air Quality Strategy Objectives for Particles – A Second Report of the Interdepartmental Group on Costs and Benefits” DEFRA, 2001; “Guidance on Methodology for Multi Modal Studies” DETR, 2001. 42 In contrast to TAG, The CNRS rates are not limited to the Track Access Payments. They are limited, as described, by financial need and/or the environmental benefits. This means that in some cases, the CNRS payment will exceed the track access charges, and in some cases, payment will be lower than the track access charges, depending on the financial need / environmental benefits. On the longer distance flows SRA would generally expect the CNRS payment to be lower than the track access charge, whilst on the shorter distance flows SRA would generally expect the CNRS payment to be higher than the track access charge. The track access charges paid in to Network Rail average around £3 per 1000 gross tonne miles. However the actual rate for a particular train will depend on the wagons used, the time of day, and the type of locomotive used.
22 (3) Non-discrimination
81. The Commission notes that access to the aid is granted on non-discriminatory terms as it is structured irrespectively of the choice of the recipient and opens to all companies taking the commercial risk to be an operator or contractor of an eligible rail service. This means that any company, whether or not owned or controlled by UK nationals, can apply for the support under the scheme if it is acting as the operator or contractor of an eligible rail service. The aid scheme also assures non-discriminatory treatment as the granting of aid is not linked to individual evaluation of the beneficiary and does consequently not involve any descretion from the public authorities as regards the calculation of grants. The Commission also notes the SRA's undertaking to review current grant methodology in relation to non-eligible rail services and to ensure that the principle of company neutrality is applied across the network within a reasonable timescale.
(4) Transparency and time-limitation
82. The Commission notes that the methodology for calculating grant rates and the actual revenue support rates for the main existing rail freight corridors will be published in advance of awards being made.
83. In addition, the value of the terminal adjustment also will be published for any terminal where grant has been awarded. Finally, actual rates awarded to individual companies, whether for existing or new flows, will be publicly available.
84. Moreover, the aid scheme is limited to a period of three years. On a flow-by-flow basis the amount of revenue support provided will be reviewed at the end of this period. After this period of three years, the Commission will have the opportunity to re-assess any effects of the scheme on other transport modes such as short sea shipping and if the co-ordination of transport, that is in this case, a modal shift from road to rail, has effectively been achieved.
85. Hence, the aid scheme fulfils the requirements of transparency and time-limitation such as stipulated in Article 10 of Directive 2001/14/EC.
(5) Non-distortion of competition contrary to the common interest
86. In order to ascertain that there is no undue distortion of competition, the potential impact on the rail-road market has to be analysed. Road freight transport and rail freight transport can answer to similar user requests. Accordingly, these cargos could be placed in the same segment of the market. However, the aid scheme, rather than creating a distortion among both modes of transport, contributes to put their access costs at the same level and is therefore consistent with the wider Community objective of sustainable distribution and with the common transport policy, which wants to foster such a shift. Thus, the expected shift from road transport to rail resulting from the subsidy does not involve a distortion of competition contrary to the common interest.
23 87. The revenue support would lead directly to transfer of freight from road to rail and so any market distortion is consistent with the wider Community objective of sustainable distribution.
88. Another issue is whether the scheme negatively affects other transport modes, such as short sea shipping which is generally considered to be environmentally friendly.
89. For flows over about 400 kilometres for port traffic and about 575 kilometres for domestic traffic the grant rates are zero. This is because, as a result of the calculation method applied, over such distances, the road and rail costs are equal and no grant is justified. As such, no revenue support will be available for intermodal rail services between the South East of England and Scotland, which would be in competition with existing short sea or coastal shipping services between Scotland and the South East of England or Continental mainland ports.
90. Hence, the Commission concludes that the aid scheme does not give rise to a distortion of competition to an extent contrary to the common interest since the potential impact that the aid may have on distorting the competition is outweighed by the wider benefits the scheme will provide in transferring freight traffic flows from road to rail, thus encouraging a modal shift towards a more sustainable transport system.
91. It flows, from the description given above and in particular paragraph 28 of this decision, that the grant rates will – even though the net external unpaid cost for road will be exceeded in some cases – never exceed the financial need. Therefore, the grant, also including the network constraint element, will always be limited to the extra costs of using rail compared to using the road. Thus, Art. 3(1) (b) of Regulation 1107/70 is complied with. Moreover, the final grant rates are reduced by the so called terminal adjustment. Also, all grant rates will in any case not exceed 30% of the total door-to-door rail based costs.
92. It should also be noted that the Network Constraint Element will be a temporary measure, regardless of a possible prolongation of the overall scheme after three years.
93. Moreover, it should also be noted that the total amount of CNRS that will be provided in 2004 will be approximately the same as the amount of TAG currently provided to existing eligible traffic. According to British authorities, the financial need for grant will fall as increased competition within the rail freight industry increases efficiency and reduces costs and improvements are made to the rail freight infrastructure in Great Britain.
Conclusion
94. In the light of the foregoing considerations, the Commission finds that the notified scheme, including the so called ‘Network Constraint Element’, is compatible with the Treaty by virtue of Art. 3 (1) (b) of Regulation 1107/70.
24 IV. Decision.
The Commission has accordingly decided:
- to consider the notified aid scheme to be compatible with the common market 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 Rue de la Loi/Wetstraat, 200 B-1049 Brussels Fax No: 0032 (0)2 2964104
Yours faithfully,
For the Commission
Loyola de Palacio Vice-president
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