22.2.2008   

EN

Official Journal of the European Union

L 49/1

(1)

In the course of 2002 (2) and 2003 (3) the Commission received several complaints alleging that the public funding system in place for Dutch public broadcasters constitutes unlawful and incompatible state aid within the meaning of Article 87(1) of the EC Treaty.

(2)

In the course of the preliminary investigation of the complaints, the Commission received additional information from the complainants (4), as well as the Dutch authorities (5).

(3)

Following the preliminary assessment of the alleged aid measures, the Commission informed the Netherlands, by letter dated 3 February 2004, that it had decided to initiate the procedure laid down in Article 88(2) of the EC Treaty with respect to certain measures which could be qualified as new aid.

(4)

The Commission decision to initiate the procedure was published in the Official Journal of the European Union  (6). The Commission invited interested parties to submit their comments on the aid.

(5)

The Netherlands responded to the decision to open proceedings by letter dated 30 April 2004. Moreover, the Commission received comments from 11 interested parties (7). By letter of 29 April 2004 the Commission forwarded the comments to the Netherlands. The reaction by the Dutch authorities was received by letter dated 13 August 2004.

(6)

The Commission asked additional questions to the Dutch authorities by letters of 4 January 2005 and 25 May 2005, to which the Dutch authorities responded by letters of 27 January 2005 and 25 July 2005. Further information was received from one of the complainants (De Telegraaf) on 25 July 2005 and from the Dutch authorities on 2 September. The Commission asked the Dutch authorities for further clarification by e-mails on 22 November 2005, to which the authorities responded on 25 November 2005. The Commission decided after a meeting with the authorities that further clarification was necessary. To this end a request for information was sent to the Dutch authorities on 22 December 2005, to which the Dutch authorities, having been granted a delay, responded on 3 February 2006. Regarding this reply further e-mails were exchanged between the Dutch authorities and the Commission in February 2006 and April 2006.

(7)

A meeting between the Dutch authorities and the Commission took place on 24 September 2004. A meeting with De Telegraaf took place on 27 October 2004. A meeting with Broadcast Partners took place on 5 January 2005. A meeting between RTL and the Commission took place on 27 July 2005 and between VESTRA and the Commission on 23 September 2005. The Commission had another meeting with the Dutch authorities on 1 February and 14 February 2006.

(8)

In addition to this procedure on ‘new aid’, the financing of the public service broadcasters through annual state payments and the Stimulation Fund (Stifo, Stichting Stimuleringsfonds Nederlandse Culturele Omroepproducties) (8) is being assessed in a separate ‘existing aid’ procedure (cf. state aid No. E-5/2005). In this Decision the Commission refers to the measures which are the object of the ‘existing aid procedure’ only insofar as necessary to provide an overall picture of the financing of public broadcasting. This Decision does not, however, concern the issue of compatibility with state aid rules of the regular annual payments and of the payments from the Stimulation Fund.

(9)

This Decision will also be limited to assessing the financing of the public service broadcasters' core activities (the so-called main tasks). Side activities, like the new media services, the provision of SMS and i-mode, are not, therefore, examined. Similarly, this Decision will not deal with the investment by NOS in the network operator Nozema, which according to complaints might not have been done on market terms. These issues will be dealt with separately.

(10)

Finally, the decision to open the formal investigation procedure covered the procedure as from 1992. Nevertheless, it appears that the first ad hoc payments were made only in 1994. Furthermore, figures up to 2005 are now available and should be taken into account. The period covered by the decision would therefore range from 1994 — when the first ad hoc payment was made — to 2005, the last year for which final figures are available. It should be noted that the Dutch authorities invited the Commission also to take into account 2006. However, the figures for 2006 are only provisional and cannot, therefore, be taken into account.

(11)

Section 2.1 of this Chapter presents the actors in the (public) broadcasting sector. This is followed in section 2.2 by a description of the different elements of the financing system for the Dutch broadcasting sector in general. In connection with this, the legal provisions entrusting the broadcasters with a public service mission are described, the different financing mechanisms (annual payments and ad hoc payments) are spelled out and, finally, the reserves the public broadcasters have built up and use for the fulfilment of their public service mission are explained. The commercial activities of the Dutch public broadcasters are then discussed in section 2.5. Section 2.6 explains the acquisition of football rights by the NOS and section 2.7 deals with the relation between broadcasters and cable operators. Finally, section 2.8 sets out which measures are the subject of this procedure.

(12)

The public service broadcasting system consists of different organisations, including eight private associations (private broadcasters with members entrusted with a public service mission) and ten private foundations (private broadcasters without members entrusted with a public service mission) (9).

(13)

Besides the broadcasters mentioned in paragraph 12, the public service broadcasting system includes another actor — the NOS — which performs a dual role. The first role is that of a public service broadcaster, responsible for TV and radio programmes (under the name of ‘NOS RTV’). The second role is that of coordinator of the entire public service broadcasting system and is carried out by the management board of the NOS (the so-called ‘Publieke Omroep’ hereinafter ‘PO’). The PO, whose functions and tasks are enshrined in the Media Act, stimulates cooperation between public broadcasters, coordinates the three public TV channels and reports twice a year on the public broadcasters' activities to the Media Authority.

(14)

The NOS receives funding from the media budget for both the tasks performed as PO and those performed as NOS RTV.

(15)

The public service TV-programmes are broadcast by the public service broadcasters over three public channels (10).

(16)

The Dutch Broadcast Production Organisation (Nederlands Omroepbedrijf, hereinafter ‘NOB’) is also part of the public broadcasting system. The NOB carries out the recording, transmission preparation and actual transmission of sound, moving pictures and data to all possible distribution channels. The NOB provides these services to commercial broadcasters and public service broadcasters. The services provided to the public service broadcasters are considered as public services by the Dutch government and are publicly funded (11).

(17)

A separate foundation (Stichting Ether Reclame, hereinafter ‘STER’) is exclusively responsible for the sale of advertising space and the broadcasting of advertising on the public channels. The STER is responsible for the broadcasting time which it has been allocated. The revenues generated by the STER are transferred directly to the State.

(18)

In addition to the national public service broadcasters, there are several commercial broadcasters operating on a national level. Examples of these commercial broadcasters are RTL (RTL 4, 5 and 7, all from the CLT-UFA group), SBS6, NET5 and Veronica (from the SBS Broadcasting group) and Talpa (Talpa Media Holding). They generate their revenues mainly through TV advertising.

(19)

The broadcasting sector is currently regulated by the Media Act of 21 April 1987 (Stb. 1987, 249) and the Media Decree. Public broadcasters are allowed by law to perform four categories of activities, which are defined in the current Media Act as ‘main task’, ‘side tasks’, ‘side activities’ and ‘association activities’. The public broadcasters are eligible for state funding for the ‘main task’ and ‘side tasks’.

(20)

Article 13(c)(1) of the Media Act describes the ‘main task’ of the public service broadcasting as being:

(21)

Article 13c(2) of the Media Act lays down the general requirements for the programmes to be broadcast by the public broadcasters. The programmes must ‘give an image of society in a balanced way and of interests and viewpoints on society, culture and philosophy within the population; and

(22)

In addition, the total programming time which should be allocated to different categories, such as culture, education, and entertainment, is regulated by means of prescribed percentages (12).

(23)

Article 16 of the Media Act provides that certain tasks shall be performed by the NOS RTV and lays down the details of these tasks. The provision of sports coverage, including, but not limited to, competition and cup matches and international events is covered. The percentage of total broadcasting time which should be devoted to such sports events is not pre-determined by statute. In practice the NOS RTV aims to devote 9-11 % of total broadcasting time to sports programmes (13).

(24)

Broadcasting associations are entitled to broadcasting time for the provision of national TV-programmes and have the right, under Article 31(4) of the Media Act, to receive state funding for providing the programme.

(25)

In accordance with Article 13c(3) of the Media Act, which was introduced in 2000, the public broadcasting system ‘can also fulfil its task, as mentioned in the first paragraph, by providing means of supply and distribution of programme materials, other than those included within paragraph (1)(a)’. In other words, the public service broadcasters can broadcast the public service content, mentioned in paragraph 20 as a main task, on other media platforms, such as the Internet.

(26)

These so-called ‘side tasks’ must comply with a number of conditions. According to Article 55 of the Media Act, for example, they must not serve to make profits for third parties. Maintaining a website or a theme channel are examples of these side tasks.

(27)

It should also be mentioned that the exploitation of both the ‘main’ and the ‘side’ tasks generate revenues for the public service broadcasters to be used for public service purposes (14).

(28)

The Dutch public service broadcasters can also perform activities which are defined as side activities and association activities. Side activities (15) must comply with a number of statutory conditions. Examples of such side activities include the sale of programme guides, sponsoring, sale of programme rights and programme-related material, leasing office space and organising drive-in shows.

(29)

Other activities are the ‘association activities’, which are activities performed by the broadcasting associations for their members. They include publishing magazines, and organising and selling travel arrangements.

(30)

An independent Media Authority (Commissariaat voor de Media) is responsible for ensuring compliance with the programming and financial requirements of the Media Act and the implementing legislation (Article 9 of the Media Act).

(31)

The Media Authority has a legal duty, laid down in Article 134 of the Media Act, to ensure that the public broadcasters fulfil their obligations, including the quota laid down for different types of programmes. The Media Authority can impose fines if the obligations are not respected. It also checks whether the broadcasters are complying with the legal restrictions on sponsoring and advertising.

(32)

On the basis of the accountants' reports submitted, the Authority checks every year whether the annual accounts of the public broadcasters comply with the requirements of the Media Act, the Media Decree and the Financial Reporting Manual. If they do, the Authority approves the budgeted amounts for regular programme provision (Articles 100 and 101 of the Media Act).

(33)

The public service broadcasters' main sources of funding are the annual payments received by the State. In order to absorb budgetary fluctuations, public service broadcasters are allowed to keep certain reserves. In addition, the public service broadcasters have, since 1994, received ad hoc payments.

(34)

Since the assessment of the compatibility of the ad hoc funding cannot be carried out without taking into account the other sources of public funding, the following description covers both the annual payments and the ad hoc payments, even though the annual payments and the payments from the Stifo are not subject to this Decision (see paragraph 8).

(35)

The Dutch public broadcasters receive annual financial contributions from the State's media budget. Over the period 1994-2005, these payments totalled approximately €7,1 billion. From this amount, approximately €819,6 million was transferred to the PO for its management and coordinating role; the remaining €6,3 billion was paid to the individual broadcasters. The media budget is funded from several sources: the State Broadcasting Contribution (collected from taxpayers), advertising revenues from STER and interest revenues from the General Broadcasting Fund (Algemene Omroepreserve, hereinafter ‘AOR’) (16). The level of the media budget sets a ceiling on the amount of annual funding that could be made available to the public broadcasters and the other media organisations.

(36)

In addition to the annual payments, the public broadcasters have received payments from Stifo (Stimulation Fund for Cultural Productions). The funds granted from Stifo qualify as a state aid measure, but the measure was approved by the Commission (NN 32/91). The Stifo aid measure is thus to be considered as existing state aid. The Stifo payments to the individual public service broadcasters (the PO did not receive any payments from Stifo) amounted to €155 million in the period under review.

(37)

In addition to the transfers mentioned in paragraphs 34 and 35 — which are considered to be the public service broadcasters' regular sources of funding, the public broadcasters were granted several payments on an ad hoc basis. These were either made directly to the broadcasters or channelled through special funds and reserves.

(38)

The matching funds are an earmarked part of the media budget. In the period 1996-1998, an amount of € [...] (17) million was transferred from the matching funds to NOS RTV. The matching funds were introduced in 1996 to co-finance increased programme right prices. The conditions under which the funds can be distributed were adopted by mutual agreement between the State and the public broadcasters. If the public broadcasters are unable to fund the purchase of rights which have increased excessively in price from their regular budget, the State will make a contribution, i.e. co-finance the acquisition of these rights by providing a matching amount.

(39)

In 1998 the Minister of Education, Culture and Science was given the possibility, under Article 106a of the Media Act, of transferring money on an ad hoc basis from the AOR, which is managed by the Media Authority, to a fund intended to finance specific initiatives of the PO and the public service broadcasters. The fund, referred to as the FOR, was established in 1999 and is controlled by the PO.

(40)

The principle is that, if the AOR exceeds €90,8 million, there is scope for a transfer to the FOR. This, however, is not an automatic process. Each year the Minister of Education, Culture and Science decides whether a transfer is possible and if so, how much can be transferred. Where such a transfer is approved, the rules are laid down in a protocol. Such protocols were established in 1999 and 2001. On the basis of Article 99 2(d) of the Media Act, the budget must also contain a description of how the Board of Management proposes to spend the money. Based on this proposal, the Minister can then make available to the PO funds from the FOR, which can be used for purposes established by the Minister when making the money available (18). Although the FOR is a fund dedicated to PO initiatives, it is not a reserve that is part of the assets of the PO.

(41)

The funds available in the FOR make it possible for the PO to give a qualitative impetus, improve programming and invest in the public broadcasters in general. More specifically, the goal of the FOR is to:

(42)

By 2005 the public broadcasting system had received €191,2 million from the FOR, of which €157,4 million was transferred to the individual public service broadcasters and €33,8 million to the PO.

(43)

The Co-Production Fund (Coproductiefonds Binnenlandse Omroep: hereinafter ‘CoBo Fund’) was created to finance co-productions between Dutch public broadcasters and other programme producers. Its income comes from revenues generated by the copyright payments paid by Belgian and German cable operators for the distribution of the three Dutch channels in Belgium and Germany. The Fund was established by the public broadcasters and is managed through a foundation. The board of the Fund consists of managers from the public broadcasters.

(44)

In 1994 the Dutch authorities decided to make payments to two sub-funds managed by the CoBo Fund, the ‘Film Fund’, which finances co-productions of films and documentaries, and the ‘Telefilm’ project, which aims to stimulate the production of high-quality television films.

(45)

The individual public service broadcasters received €31,7 million of public money from the CoBo Fund in the period 1994-2005. The PO did not receive any payments from the CoBo Fund.

(46)

Each public service broadcaster maintains certain reserves, which are, typically, a programme reserve and either an association or a foundation reserve, depending on whether the public service broadcaster is a foundation or an association.

(47)

Individual public service broadcasters are allowed to increase their reserves when total revenues exceed total costs. These programme reserves can be used to cover programme costs in future years.

(48)

According to the Dutch authorities, the value of programmes which have been produced but not yet broadcast is added to the programme reserves (19). The programme reserves thus also reflect the value of programmes already produced. In 2005 the total programme reserves held by the individual public broadcasters amounted to €78,6 million.

(49)

In 2005 the PO also decided that part of the programme reserves should be transferred to the PO itself, but the broadcasters were allowed to maintain reserves of up to 5-10 % of their annual budget. The public broadcasters transferred to the PO an amount of €42,457 million.

(50)

The public service broadcasting associations originated as private law entities. Over the years they have built up their own association reserves from contributions and legacies received from their members. The association reserves thus originated from private resources. In 1993 the Dutch government decided to ‘freeze’ the association reserves. As of that moment, in principle (20), the profits generated by association activities and other non-public activities had to be used for public service activities and could no longer be transferred to the association reserves. In 2005 the public service broadcasters in the Netherlands had a total association reserve of approximately €131,1 million.

(51)

The NOS RTV, NPS and other smaller broadcasters without members (Article 39f of the Media Act) hold a ‘foundation’ reserve’ (‘stichtingsreserve’). The overall level of the foundation reserves was €42,2 million in 2005 (21).

(52)

As explained in paragraph 17, the STER is responsible for selling advertising time on public service channels.

(53)

The other main companies selling TV advertising time which are active on the Dutch market are IP and SBS. IP sells advertising time on behalf of the commercial broadcasters RTL4, RTL5 and Yorin. SBS sells advertising time for its commercial broadcasters SBS6, Net 5 and Veronica. In addition to IP and SBS there are a few other commercial broadcasters who also sell advertising time (22). The rates charged by the STER are calculated on the basis of forecasts from advertising agencies, competitors' rates and price history.

(54)

Table 1 below shows the evolution of the audience share of the public service broadcasters for which STER manages the sale of advertising. The audience share of viewers aged 13+ has declined in recent years from 38,8 in 1997 to 35,4 % in 2005. For the 20-49 category, the audience share is even lower, at 27,2 %.

Table 1:

Audience share 13+ and 20-49 years old (18.00h - 24.00h), 1997 - 2005

(55)

Since 1994, the gross revenue (based on list prices) and net revenue (taking into account discounts granted) generated by the commercial broadcasters on the advertising market have exceeded the revenue generated by the public broadcasters.

Table 2:

Gross revenues from TV advertising 1994 - 2005 (amounts x €1 million)

Table 3:

Net revenues from TV advertising, 1994 - 2005 (amounts x €1 million)

(56)

As can be inferred from Tables 1, 2 and 3, there is a difference between gross revenues from TV advertising and revenues net of discounts. According to the Dutch authorities, not only are the published tariffs of the public service broadcasters higher, but also the discounts that they grant are lower in comparison with commercial broadcasters (23).

(57)

During the period under investigation the NOS RTV obtained broadcasting rights for several important football events (24). The commercial broadcaster Canal+ (pay-TV) obtained the rights for the live matches of the Dutch premier league. The rights for the Champions League were also partly sublicensed to Canal+ by the NOS RTV. The commercial broadcaster SBS obtained the broadcasting rights of two national football cups. It also obtained the rights to the Dutch first division matches and the qualification matches of the Dutch team for the European Championship 2004. The broadcasting rights for various foreign football competitions are held by CLT-UFA, Europe's largest broadcasting group (the parent company of e.g. RTL).

(58)

Traditional cable transmission is seen as a separate publication for the purpose of copyright under Dutch law. In principle, the permission of all copyright holders is required, and the copyright holder may claim a payment from the cable operator for the publication. Since 1985 there has been an agreement between the VECAI (representing the cable operators) and the NOS RTV (representing the public broadcasters) under which the cable operators are exempted from making copyright payments to the public broadcasters (the copyright holders) when their programmes are transmitted via cable (25). This agreement was made at the request of the Dutch Government, on the grounds that citizens already paid a contribution for public broadcasting. It was considered that a copyright payment from cable operators, which could result in higher cable subscription fees, would be undesirable. Commercial broadcasters have not asked for copyright payments from the cable operators either. However, this is not related to the aforementioned agreement with the public service broadcasters.

(59)

It should be noted that cable operators are legally obliged to transmit all the public broadcasters' radio and TV programmes (‘must carry’ obligation) and cannot charge broadcasters for the transmission costs.

(60)

As set out in the decision to open the formal investigation procedure (26), the following measures are the subject of this Decision:

(61)

After its initial investigation, the Commission concluded that certain measures, with the possible exception of the ‘must carry’ obligation, constituted state aid within the meaning of Article 87(1) of the EC Treaty. The Commission also expressed doubts about the compatibility of such state aid under Article 86(2) of the EC Treaty.

(62)

Regarding the proportionality of the funding, the Commission doubted whether costs and revenues were allocated according to clearly established cost accounting principles. The Commission doubted whether non-public service revenues were fully taken into account when calculating the need for state funding, leading to a risk of funding going beyond the net costs of the public service.

(63)

Furthermore, the Commission considered that the level of funds in the FOR and the programme reserves was an indication of structural over-compensation. The Commission noted that, of the total ad hoc payments, an amount of €110 million (based on figures of 2001) had not been used.

(64)

Moreover, the Commission expressed its intention to investigate whether competition in commercial markets had been unlawfully distorted. The Commission stressed that such distortion of competition could occur in the markets for advertising, intellectual property rights for cable transmission and football transmission rights.

(65)

Finally, the NOB is not allowed to charge the public broadcasters for the services it provides, but receives payments for this task directly from the State. The Commission noted that the provision of technical facilities free of charge could constitute aid to the public broadcasters.

(66)

The following comments relevant for this Decision were provided.

(67)

The Dutch public broadcasters argued that the measures in question should be considered existing aid because they constitute part of the general financing system for public broadcasting. Moreover, they remarked that the Commission should assess the financing of public broadcasting only in the light of the Protocol on the system of public broadcasting in the Member States, annexed to the EC Treaty (hereinafter ‘Amsterdam Protocol’), and should not apply the criteria of the Altmark judgment (27) or Article 87(1) or 86(2) of the EC Treaty.

(68)

CLT-UFA noted that it was not until 2002 that the accounts of the public service broadcasting system could be verified and approved by an independent accountant.

(69)

The public broadcasters commented that there is no over-compensation of €110 million as stated by the Commission. First of all, the public broadcasters and the government work with different accounting systems. The government works on a cash receipts basis of accounting and the public broadcasters work on the basis of costs and revenues which are entered in the accounts at the moment of the transaction. This causes discrepancies. In addition, the revenues of the FOR are, according to the public broadcasters, earmarked for specific future goals. Moreover, they commented that the excess financing cannot lead to distortions in other markets, as this financing can only be used for the public service activities.

(70)

ACT stated that STER behaves in an anti-competitive manner by undercutting prices in the advertising market. It argues that since the total annual advertising time of public broadcasters is more limited than that of commercial broadcasters, the STER should charge higher prices than commercial operators.

(71)

SBS Broadcasting confirmed that prices in the Dutch television advertising market are set for GRP (Gross Rating Point) category 20-49. However, as the public broadcasters attract more viewers than commercial broadcasters outside this viewer group, advertisers would be willing to pay a premium on the GRP 20-49. Therefore, a comparison of the GRP 20-49 would not convey the economic reality of the product. Moreover, SBS remarked that for GRP 13+ public broadcasters set lower prices than commercial broadcasters. To support its comments SBS submitted overviews of the average gross GRP 13+ prices for the different channels during prime time in 1995-2004 and per month in 2003 and 2004, which show that those of public broadcasters are lower than those of most commercial operators.

(72)

According to CLT-UFA the NOS RTV has paid excessive prices for football rights. The prices were far above market prices. CLT-UFA submitted calculation models (28) to show how they calculate the prices for football rights and concluded on this basis that the bid made by the NOS RTV for the rights for the Champions League matches of 2002 was significantly higher than that made by CLT-UFA. ACT and CLT-UFA considered, moreover, that the Commission should not reach the conclusion that there is insufficient evidence of overpayment of football rights on the basis of one example where a commercial operator may have overbid.

(73)

The association of cable operators, VECAI, raises two issues. First of all, it considers that the cable operators who are subject to the ‘must carry’ obligation should be able to ask for a payment from the relevant broadcasters. Due to the ‘must carry’ obligation, the public broadcasters have not paid a fee for the transmission of the signal over the cable networks.

(74)

Secondly, VECAI argued that the cable operators actually do pay a fee to the organisations which manage rights on behalf of the NOS RTV, but the NOS RTV and the Dutch Government regard this as a management fee. According to the VECAI it is a fee for intellectual property rights in disguise.

(75)

The Dutch authorities state that the Commission's assumption that the relevant measures are not part of the regular, annual financing of the public broadcasters as part of the state funding is erroneous. The financing which is the subject of the investigation stems from the regular financing mechanism and was an integral part of the budget planning which led to the payments to the public broadcasters. According to the authorities, the FOR, the matching funds, the CoBo Fund and the payments to the NOB are part of the regular, annual financing mechanism.

(76)

The Dutch authorities finally remind the Commission that the assessment should take into account the specific context in which the public service broadcasters operate. The authorities request the Commission to take into account the Amsterdam Protocol. If necessary, the subject of the present procedure should be qualified as compatible aid within the meaning of Article 86(2) of the EC Treaty, within the context of the principles laid down in the Amsterdam Protocol.

(77)

The amount provisionally indicated by the Commission as possible over-compensation is erroneous. This was inferred from the resources of funds which were wrongly qualified as reserves. Since the use of these funds is pre-determined and is subject to control there cannot be over-compensation. Moreover, the authorities argue that if the measures concerned are deemed to be state aid, the aid should be considered to be existing state aid within the meaning of Article 88(1) of the EC Treaty.

(78)

The Dutch authorities point out that the accounts of the individual public broadcasting associations have always been subject to approval by an independent accountant.

(79)

The Dutch authorities consider that broadcasts of popular and less popular sports fall within the definition of the main task of the public broadcasters. The Dutch authorities consider that, when determining their bid for transmission rights, public broadcasters did not pay more than was necessary to secure the acquisition of important rights in relation to their public service mission and overall programming.

(80)

The authorities reiterate that the public service mission of the NOB is part of the public broadcasting system. The fact that NOB does not charge the public broadcasters for the service it provides does not imply that aid is granted to the public service broadcasters.

(81)

The Dutch authorities state that, given that the commercial operators do not demand copyright payments from cable operators either, the NOS RTV could be said to be acting as a normal market operator in the circumstances of this particular market.

(82)

Article 87(1) of the Treaty lays down the following conditions for the presence of state aid. First, there must be an intervention by the State or through state resources. Second, it must confer an advantage on the recipient. Third, it must distort or threaten to distort competition. Fourth, the intervention must be liable to affect trade between Member States.

(83)

The payments referred to in Articles 106a and 170c of the Media Act, which are categorized by the Commission as ad hoc payments, can be divided into matching fund payments, FOR payments and CoBo Fund payments.

(84)

In the case of the matching funds, money is first set aside within the AOR — which is a fund whose resources are owned by the State and managed by the Media Authority — for the purpose of matching certain types of higher than foreseen expenditure of public service broadcasters. In a second step, the state resources represented by the matching funds of the AOR are transferred to the NOS RTV.

(85)

The payments made by the FOR fund are considered state resources. Although the FOR is a fund administered and managed by the PO, the money comes from the AOR, which is part of the media budget.

(86)

More importantly, as described in section 2.3.3.2, the PO distributes the money on the basis of agreements that are made in advance on the use of FOR money. Although it is the PO which proposes how the money should be used, it is the Minister of Education, Science and Culture who ‘adopts the proposal’ and establishes for which purposes the money can be used. The PO can only take the decision to spend the money once the Minister has established the criteria for the distribution of the money. The PO has to take into account the rules laid down by the Minster. It can therefore be considered that the transfer of state resources takes place when the payments are made from the FOR to the individual broadcasters. This is a transfer of state resources, which is moreover imputable to the State (30).

(87)

In the period under investigation the public broadcasters received an amount of €191,2 million from the FOR and an amount of €[...] million from the matching funds.

(88)

The payments by the CoBo Fund are considered state resources. As described in paragraph 43, the money in the CoBo Fund comes from direct contributions from the media budget and the revenues generated by the copyright payments paid by Belgian and German cable operators for the distribution of the three Dutch channels in Belgium and Germany. The Commission takes the view that not only the direct contributions from the media budget, but also the copyright payments can be considered state resources. Indeed, the copyright payments should have been used to finance the public service costs of the broadcasters. Setting them aside in the CoBo Fund had the effect of increasing the need for public funding proportionally. The copyright payments are therefore equivalent to resources forgone by the State.

(89)

Moreover, although the CoBo Fund is owned and managed by a foundation (the board of which is governed by the public service broadcasters), the transfers from the CoBo Fund are only made available to the public service broadcasters under conditions which are determined by the State.

(90)

The public service broadcasters received an amount of €31,7 million from the CoBo Fund in the period under investigation. This is a transfer of state resources to the individual broadcasters.

(91)

The ‘must carry’ obligation imposed on cable operators does not involve any transfer of state resources, nor can the forgone revenues of cable operators be regarded as constituting a transfer of state resources (31). The Commission has no information to suggest otherwise. Accordingly, the preliminary view that the measure does not constitute a state aid within the meaning of Article 87(1) of the EC Treaty can be confirmed.

(92)

The public company NOB receives payments from the State for the services it is obliged to deliver to the public broadcasters. These payments involve the direct transfer of state resources. They ultimately benefit the public broadcasters who get the services free of charge (32). Indeed the Dutch authorities themselves have stated that the NOB simply acts as a ‘vehicle’ for transferring state funding to the public service broadcasters who receive the services of the NOB.

(93)

The ad hoc financing (payments to FOR and via the matching funds), the transfers to the CoBo Fund and the provision of free technical facilities provide an economic advantage to the Dutch public service broadcasters, in the sense that these measures relieve them from operating costs that they would otherwise have to bear.

(94)

The Dutch Government and the public broadcasters have argued that the measures under investigation compensate the public broadcasters for the net costs of discharging their public service mission. This would imply that the measures would therefore not provide an advantage to public service broadcasters and not constitute aid, in line with the Altmark judgment (33).

(95)

State measures compensating for the net additional costs of a SGEI do not qualify as state aid within the meaning of Article 87(1) of the EC Treaty if the compensation is determined in such a way that a real advantage cannot be conferred on the undertaking. In the Altmark judgment the Court of Justice laid down the conditions that have to be satisfied for compensation not to be classified as state aid. These conditions are as follows:

(96)

The Commission considers that in the present case the last three conditions set out in paragraph 95 are not fulfilled. First, the transfer of funds from the FOR, the matching funds and the financial contribution from the CoBo Fund to the public service broadcasters is not based on objective and transparent parameters established in advance.

(97)

Moreover, neither the ad hoc financing measures nor the payments from the CoBo Fund take into account all the relevant receipts of the public service broadcasters. Nor do they include the necessary safeguards to exclude over-compensation. Indeed, as will be assessed in more detail below, the ad hoc funding actually resulted in considerable over-compensation.

(98)

Finally, the Dutch public broadcasters were not chosen as providers of a SGEI on the basis of a tender, nor was any analysis carried out to ensure that the level of compensation was determined on the basis of an analysis of the costs which a typical undertaking, well run and adequately provided with the means of production so as to be able to meet the necessary public service requirements, would have incurred in discharging those obligations. The same is true of the financing of the technical facilities made available to the public service broadcasters by the NOB.

(99)

Consequently, the Commission considers that not all conditions set out in the Altmark judgment are fulfilled in this case.

(100)

The advantage provided by the ad hoc financing, the transfers to the CoBo Fund and the provision of free technical facilities to the Dutch public service broadcasters are not available to any other undertaking in a comparable situation. Given that competition is distorted whenever state aid reinforces the competitive position of the beneficiary undertaking vis-à-vis its competitors, the advantage is capable of distorting competition between the public service broadcasters and other undertakings (34).

(101)

When state aid strengthens the position of an undertaking compared with other undertakings competing in intra-Community trade, the latter must be regarded as affected by that aid (35) even if the beneficiary undertaking is itself not involved in exporting (36). Similarly, where a Member State grants aid to undertakings operating in the service and distributive industries, the recipient undertakings need not themselves carry on their business outside the Member State for the aid to have an effect on Community trade (37).

(102)

In line with this case law the 2001 Communication from the Commission on the application of state aid rules to public service broadcasting (hereinafter: ‘the Broadcasting Communication’) (38) explains that:

‘Thus, state financing of public service broadcasters can generally be considered to affect trade between Member States. This is clearly the position as regards the acquisition and sale of programme rights, which often take place at an international level. Advertising, too, in the case of public broadcasters who are allowed to sell advertising space, has a cross-border effect, especially for homogeneous linguistic areas across national boundaries. Moreover, the ownership structure of commercial broadcasters may extend to more than one Member State (39).’

(103)

In the present case, the Dutch public broadcasters are themselves active on the international market. Through their membership of the European Broadcasting Union they can exchange television programmes and participate in the Eurovision system. Moreover, their programmes are broadcast in Belgium and Germany. Furthermore, the Dutch public broadcasters are in direct competition with commercial broadcasters that are active on the international broadcasting market and that have an international ownership structure.

(104)

The Commission concludes on these grounds that the ad hoc financing, the funds provided to the CoBo Fund and the provision of free technical facilities are such as to affect trade between Member States within the meaning of Article 87(1) of the EC Treaty.

(105)

Since all conditions laid down in Article 87(1) of the EC Treaty are fulfilled and the conditions set out by the Court of Justice in the Altmark judgment have not been met in their entirety, the Commission concludes that the ad hoc financing (financing from FOR and the matching funds), the funds granted through the CoBo Fund and the provision of free technical services and facilities to the Dutch public broadcasters must be deemed to be state aid within the meaning of Article 87(1) of the EC Treaty. On the other hand, the advantage deriving from free access to the cable network does not involve a transfer of state resources and does not constitute state aid.

(106)

Pursuant to Article 1(b) of the Council Regulation (EC) No 659/99 of 22 March 1999 laying down detailed rules for the application of Article 93 of the EC Treaty (40), ‘existing aid’ means, inter alia:

(107)

As stated before, a distinction may be made between the annual payments, which are not the subject of this Decision, and the ad hoc payments.

(108)

The annual payment are made on the basis of Article 110 of the Media Act, which states that ‘entities which have been awarded time to broadcast are entitled to funding from the general budget’. The level of funding and the availability are laid down in the same Media Act. This system of funding existed prior to the entry into force of the Treaty and is regarded as existing aid, as acknowledged by the Commission in procedure E-5/2005 (41).

(109)

The ad hoc payments possess a number of characteristics which distinguish them from the regular annual payments and argue against their classification as existing aid:

(110)

The public service broadcasters have received free technical facilities from the NOB since the entry into force of the Media Act 1987. In that year the NOB started providing facilities to the public service broadcasters, whereas originally these facilities had been provided by the NOS. The NOB has been entrusted with a service of general economic interest. It provides the facilities to the individual public service broadcasters free of charge and receives payments from the State directly. This measure can thus also be considered to be a new aid measure.

(111)

The ad hoc financing (payments from the FOR to the individual public broadcasters and from the matching funds), the transfers from the CoBo Fund and the provision of free technical facilities should all be deemed to be new aid rather than existing aid.

(112)

On the basis of the characteristics of the measures the only possible grounds for compatibility is Article 86(2) of the EC Treaty which states that: ‘undertakings entrusted with the operation of services of general economic interest (…) shall be subject to the rules contained in this Treaty, in particular to the rules on competition, insofar as the application of such rules does not obstruct the performance, in law or in fact, of the particular tasks assigned to them. The development of trade must not be affected to such an extent as would be contrary to the interests of the Community’.

(113)

The Court of Justice has consistently held that Article 86(2) of the EC Treaty may provide for a derogation from the ban on state aid for undertakings entrusted with a SGEI. The Court's Altmark judgment implicitly confirmed that state aid that compensates for the costs incurred by an undertaking for the provision of a SGEI can be found to be compatible with the common market if it meets the conditions of Article 86(2) of the EC Treaty (43).

(114)

In line with settled case-law of the Court of Justice (44), Article 86(2) of the EC Treaty constitutes a derogation that should be interpreted restrictively. The Court has made clear that, in order for a measure to qualify for such a derogation, all of the following conditions must be fulfilled:

(115)

The Broadcasting Communication sets out the principles and methods which the Commission intends to apply in order to ensure that the conditions referred to above are complied with. It must therefore examine whether in the present case:

(116)

In this context, it should be mentioned that the ad hoc financing and the free provision of technical facilities were designed to support activities which are part of the general public service remit. An assessment of the overall level of funding of the public service broadcasters is thus necessary, but, with the exception of the specific measures referred to above, this Decision does not intend to assess the mechanism and conditions under which state funding is provided. Nor does this Decision concern the organisation of the public service broadcasting system as a whole.

(117)

As stated in paragraph 33 of the Broadcasting Communication, it is for the Member States to define the public service remit of a public broadcaster. Given the specific nature of the broadcasting sector, however, the Commission considers ‘a “wide” definition entrusting a given broadcaster with the task of providing balanced and varied programming in accordance with its remit, to be legitimate under Article 86(2) EC, in view of the interpretative provisions of the Protocol. Such a definition would be consistent with the objective of fulfilling the democratic, social and cultural needs of a particular society and guaranteeing pluralism, including cultural and linguistic diversity’.

(118)

Although the definition may be broad, it should be sufficiently clear and precise to leave no doubt as to whether a given activity performed by the entrusted operator is intended by the Member State to be included in the public service remit or not. As stated in paragraph 36 of the Broadcasting Communication, the role of the Commission is limited to checking whether the public service definition in the broadcasting sector contains any manifest error.

(119)

The main task of the Dutch public broadcasters is to provide high quality and varied programmes for general broadcast on the public channels, in the general interest, as laid down in Article 13c of the Media Act. Specific programming requirements relating to the categories of content to be covered and the amount of broadcasting time to be devoted to each category are also contained in the legislation.

(120)

CLT-UFA stated that the Dutch public broadcasters broadcast too much sport in general and too much football in particular. The complainants claimed that the NOS RTV broadcasts the majority of all sports events in the Netherlands. As stated above, the ad hoc financing was intended to finance activities which are part of the general public service remit and were thus also meant for the acquisition of sports rights.

(121)

The Commission is of the opinion, however, that broadcasting sports programmes, within a limit of around 10 % of total broadcasting time, does not constitute a manifest error. Sports can be part of the broadcasters' public service mission, and devoting 10 % of broadcasting time to sports is not inconsistent with the remit of offering a balanced and varied public service programming mix.

(122)

The Commission is of the opinion that the main task, as defined in Article 13c(1) of the Media Act, is rather broadly defined, but can be considered to meet — in accordance with the wording of the Amsterdam protocol — the ‘democratic, social and cultural needs’ of Dutch society. Thus, the definition in the legislation is sufficiently clear and precise in relation to the main task, and does not contain any manifest errors.

(123)

Paragraph 40 of the Broadcasting Communication states that in order to benefit from the exemption under Article 86(2) of the EC Treaty, the public service remit should be entrusted to the Dutch public broadcasters by means of an official act. The Commission notes that the Media Act formally entrusts the NOS with the task of performing the public service task defined in Article 13c and the supporting legislation. The public broadcasters are given the right to broadcast programmes on the public channels by Article 31 of the Media Act, and the Commission considers that the main task of broadcasting programmes is clearly entrusted to the public broadcasters.

(124)

In Chapter 6.3 of the Broadcasting Communication, it is explained that the proportionality test that the Commission must carry out is twofold (45).

(125)

On the one hand, the Commission has to calculate the net cost of the public service task entrusted to the Dutch public broadcasters and verify whether or not this cost has been over-compensated. When compensating an undertaking, the state aid must not exceed the net costs of the public service mission. To arrive at the net cost, account should also be taken of other direct or indirect revenues derived from the public service mission. Therefore, the net benefit of the exploitation of the public service activities will be taken into account in assessing the proportionality of the aid.

(126)

On the other hand, the Commission has to investigate any information at its disposal suggesting that public broadcasters have distorted competition in commercial markets more than is necessary for the fulfilment of the public service mission. For example, a public service broadcaster, in so far as lower revenues would be covered by the state aid, might be tempted to depress prices of advertising or of other non-public service activities on the market, so as to reduce the revenue of competitors. Such a practice would require additional state funding to compensate for the revenues forgone from commercial activities and would therefore indicate the presence of over-compensation of public service obligations.

(127)

The Commission first needs to determine the cost of the SGEI. As the Dutch public broadcasters also carry out non-public service activities, they are required by Commission Directive 80/723/EEC of 25 June 1980 on the transparency of financial relations between Member States and public undertakings (46), as amended by Commission Directive 2000/52/EC (47), to keep separate accounts for the different activities carried out. Costs and revenues must be correctly assigned on the basis of clearly established, objective cost accounting principles. Costs that are entirely attributable to public service activities, while benefiting also commercial activities, need not be apportioned between the two and can be entirely allocated to public service (48).

(128)

The Transparency Directive has been implemented in the Netherlands through an amendment of the Competition Act (‘Mededingingswet’) (49). Moreover, a special Decree (50) obliges public broadcasters to keep separate accounts for all side activities and association activities. On the basis of this, the Dutch authorities have provided information on the costs and revenues of public broadcasters in the period 1994-2005.

(129)

Under the Transparency Directive, Member States are required to ensure not only that separate accounts are kept for public service and non-public service activities, but also that all costs and revenues are correctly allocated on the basis of consistently applied and objectively justifiable cost accounting principles and that the cost-allocation principles according to which the separate accounts are maintained are clearly established.

(130)

However, the Commission notes that the Decree does not determine how the public broadcasters have to allocate costs that are shared by the public service and the non-public service activities. Information from the Dutch authorities confirms, moreover, that the public broadcasters use different methods to allocate costs. The authorities argue that on an individual level the allocation is correct, but that due to the choices individual broadcasters make regarding the allocation, the allocation may differ from one broadcaster to the other. The Commission finds, however, that the fact that there is no consistency between the different broadcasters is an indication that the Decree does not sufficiently prescribe how the cost allocation should take place.

(131)

Therefore, on the basis of the information submitted by the Dutch authorities, it cannot be concluded that the costs are correctly allocated on the basis of accepted cost-allocation methods. Consequently, the Commission considers that all the net revenues of the commercial activities of the public service broadcasters should be taken into account in determining whether state funding has been proportional to the public service costs. This is also consistent with the Dutch legislative framework that applies to the public service broadcasting system and which obliges broadcasters to use for public service purposes all of their profits, including those from commercial activities (51).

(132)

According to paragraph 57 of the Broadcasting Communication, state aid must not exceed the net costs of the public service incurred by the broadcaster. Thus, after having determined the net costs of the public service it has to be established whether the total amount of state funding does not exceed this figure.

(133)

If a complete or meaningful cost allocation has not taken place, the net revenues of all the activities that have benefited directly or indirectly from public funding have to be taken into account for the calculation of the net public service costs (52). Only the revenues of the commercial ‘stand-alone’ activities do not have to be taken into account in establishing the net costs of the public service mission. These are activities which have not benefited directly or indirectly — for example by way of cheaper production inputs — from state funding or which have paid the full value of inputs which they share with or result from the public service activity.

(134)

In the Dutch public service broadcasting system, there is neither the concept of ‘stand-alone’ activities nor a meaningful and complete allocation of resources between different activities of broadcasters. Moreover, the Media Act stipulates that all the net revenues of main and side tasks (53), side activities and association activities (54) have to be used for the fulfilment of the public service mission (55).

(135)

Consequently, the net costs of the public service activities are determined by taking into account the revenues from all activities of the public service broadcasters. The calculation is therefore as follows:

(136)

The sum of all the above items determines whether or not the total state funding exceeds the total net public service costs or, in other words, whether or not there has been over-compensation of the public service tasks.

(137)

As regards the free provision of technical services and facilities by the NOB, the measure should, in principle, be taken into account in the assessment of the over-compensation. However, it is not necessary to explicitly include the measure in the calculations, since the benefits from the free technical service can be considered to be compensating costs that would otherwise have had to be financed. Thus, having to pay the costs in question would have increased by the same amount the costs of the public service entrusted to the Dutch public broadcasters. The inclusion of these costs would therefore not alter the final net result (57).

(138)

In the decision to initiate the procedure, the Commission quantified over-compensation, on a preliminary basis, as €110 million. The calculation was based on incomplete figures on the actual amount of transfers to the reserves and of the level of reserves held by the public service broadcasting system as a whole during the years 1992-2002. The authorities had not at the time provided complete data on individual broadcasters.

(139)

After initiating the procedure the Commission received the cost and revenue figures of the individual broadcasters, which are more detailed than the overall figures provided at the time of the opening of the procedure. Moreover, the new information provides actual data up to 2005 and also includes an estimate for 2006.

(140)

This Decision concerns the ad hoc payments which were paid as of 1994 and covers the period up to 2005. As regards the end date, the Dutch authorities invited the Commission to take into account the figures from 2006 too. However, the Commission does not consider this to be appropriate, since figures from 2006 are only estimates for the ongoing budget year.

(141)

It appears that 14 out of the 19 public service broadcasters were over-compensated in the period 1994-2005. The over-compensation generated €32 million profits, which were generally transferred to their programme reserves.

(142)

However, in some cases part of the over-compensation was used to balance under-compensation in the period before 1994. At the beginning of 1994 some broadcasters had a negative programme reserve (58). Broadcasters were only allowed to register negative programme reserves when the public service costs exceeded the various sources of public service funding. In other words, negative programme reserves could only result from under-compensation of public service costs.

(143)

On the other hand, any possible loss from commercial activities had to be financed through the association reserves and could not be reflected in the programme reserves. According to the Dutch authorities, the association reserves were built up with private funds.

(144)

There are also cases in which the under-compensation of public service costs was temporarily financed with association reserves. In 1993, the association reserves were ‘frozen’ by the Dutch authorities; as of that moment, revenues from public service and commercial activities could no longer be added to these association reserves. However, an exception was made for the reimbursement of payments made out of association reserves before 1994 to cover for unfunded public service costs. According to the Dutch authorities, this is the only circumstance in which funds were still added to these reserves after 1994 (59).

(145)

The Commission considers that the negative amounts recorded in the programme reserves and the positive variations of association reserves after 1994 only occurred as a result of previous ‘under-compensation’ of public service costs. The consequent balancing of these sums is therefore considered to constitute eligible costs of the public service task. The corresponding amounts therefore do not have to be taken into account for the establishment of the over-compensation.

(146)

As stated in paragraph 141, the over-compensation generally flowed into the programme reserves. In 2005 the PO decided for the first time, on the basis of Article 19a(1)h and Article 109a of the Media Act, that reserves held by the individual broadcasters in excess of 5-10 % of their annual budget should be transferred to the PO (60). This transfer is also considered part of the ad hoc measures and is taken into account in determining the proportionality of the compensation. As a result, this transfer has reduced the overall compensation of the individual public service broadcasters, while increasing the over-compensation of the PO.

(147)

By subtracting — for each year from 1994 to 2005 — the net cost of the public service from the overall funding received from the State, in the way described in section 8.3.2, the Commission comes to the conclusion that none of the individual broadcasters has received public funding in excess of 10 % of its annual budget. Since the costs of public broadcasting may vary every year, the State may indeed wish for budgetary reasons to keep the fluctuations in state financing to a minimum and permit a certain percentage of the annual over-compensation to be carried forward to the next year. The Commission recognised this principle in the Danish public broadcasting case (61).

(148)

In the Danish state aid case the Commission stated that these reserves must be established for a specific purpose and that they must be regularised on a fixed date, i.e. being deducted from the next year's compensation if over-compensation has been found. Thus, if the over-compensation does not exceed 10 % of the amount of the annual compensation, such over-compensation is compatible with the EC Treaty and may be carried forward to the next annual period and deducted from the amount of compensation payable in respect of that period.

(149)

The Dutch authorities have decided that each individual public service broadcaster can only maintain a dedicated reserve of a maximum of 5-10 % of its annual budget (62). In view of this constraint, the PO ordered the transfer of €42,457 million of reserves from the individual broadcasters to the PO in 2005. The authorities have also committed themselves to carrying out regular monitoring of the reserves and ordering the reimbursement of the excess amounts above 10 % of the annual compensation as of 2006 (63). The Commission therefore considers that the conditions are fulfilled for accepting as compatible an amount of over-compensation provided that this does not exceed 10 % of the annual budget of the public service broadcasters (64).

(150)

Since the over-compensation does not exceed the 10 % margin of the annual budget, it can therefore be considered justified for the fulfilment of the public service mission and the aid is thus considered compatible with Article 86(2) of the EC Treaty.

(151)

The PO has also received compensation for its role in managing and coordinating the broadcasting system. The PO performs this role as a separate organisation, which, internally, keeps separate accounts. The Dutch authorities have stated that although the NOS RTV and the PO are parts of a single legal entity and also present consolidated accounts, under no circumstances could they have access to each other's funds.

(152)

On the basis of the separate accounts for the PO and according to the accounting method described above, the Commission concludes that the PO has received a total over-compensation of €55,908 million, not including the reserves which were transferred in 2005 from individual broadcasters. The transfer of the reserves amounted to €42,457 million. When this transfer is taken into account, the total over-compensation of the PO amounts to €98,365 (€55,908 + €42,457) million.

Table 4:

Overview of annual funding of PO (1994-2005) amounts x €1 million (65)

(153)

In the Commission's view, the over-compensation of €98,365 million is not necessary for the functioning of the public service and it cannot, therefore, benefit from the Article 86(2) derogation from the prohibition on state aid. The over-compensation is consequently not considered compatible aid and should in principle be recovered from the PO.

(154)

Nevertheless, it appears that the over-compensation exceeds the total ad hoc payments accrued to the PO. The PO has received €33,870 million as ad hoc payments from the State's media budget, plus the ad hoc transfer of €42,457 million from the other broadcasters. This gives a total of €76,327 million of payments received from ad hoc measures. In addition, the ad hoc payments have also generated interest, which should be taken into account in determining the amount of funds which were not received in the context of the ‘existing aid measures’. The recovery would, therefore, have to be capped at €76,327 million plus interest, because the ‘remaining’ over-compensation was granted through existing aid and cannot be recovered.

(155)

As explained in the Broadcasting Communication, the Commission is of the opinion that anti-competitive conduct by public service broadcasters cannot be considered necessary for the fulfilment of the public service mission. In the decision to initiate the formal investigation procedure the Commission mentioned the following possible market distortions:

(156)

The model contract concluded between broadcasters and cable operators in 1985 stipulates, at the request of the Dutch government, that cable operators do not pay any intellectual property rights for transmission of Dutch public television programmes. It is legitimate to question whether, by forgoing intellectual property rights payments from cable operators, the PO acted as a normal market operator, since it waived commercial income.

(157)

The Dutch authorities argue, however, that the fact that the PO does not claim a fee for intellectual property rights is not necessarily contrary to market behaviour. After all, commercial broadcasters do not require a fee from the cable operators for the transmission of their programmes either (66).

(158)

Indeed, the commercial agreements between the broadcasters and the cable operators can take various forms, particularly in view of the fact that the transaction involves an exchange of transmission services for availability of content, which is valuable to both parties. The Commission finds accordingly that there are no clear indications that the PO acted contrary to market behaviour and that by renouncing commercial revenues it increased the need for state funding.

(159)

At the opening of the formal investigation procedure, the Commission did not have sufficient evidence that the STER had actually undercut prices. Nevertheless, the information which was submitted after the opening of the investigation by the complainants and the Dutch authorities has to be assessed.

(160)

Paragraph 58 of the Broadcasting Communication indicates that public service broadcasters might be tempted to depress the prices of advertising so as to reduce the revenue of competitors. However, one should keep in mind that the public broadcasters in the Netherlands do not directly carry out advertising activities, but the advertising activities are carried out by a separate organisation, the STER. According to its mission statement, the STER must exploit the time available for advertising in such a way as to deliver an optimal contribution to the central financing of the public service broadcasters. It functions as an intermediary, with the job of maximising profits from the sale of the advertising space of the public broadcasters. As already mentioned in paragraph 17, the STER transfers the advertising revenues directly to the media budget.

(161)

Any undercutting behaviour by the STER might be inferred from some or all of the following circumstances: STER's prices being lower than its competitors', an increase in market share and loss of revenues for the STER.

(162)

First, as the Commission also indicated in the decision to open the formal investigation procedure, a comparison between the prices of the public and private advertising sales companies could be regarded as a meaningful measure of the criteria set out in paragraph 58 of the Broadcasting Communication.

(163)

In order to compare prices, the target group of 20-49 year-olds is the most relevant one. As can be inferred from Table 5, there are different sub-groups, many of which target viewers in the 20-49 age range:

Table 5:

Percentage of target GRP's (gross rating points) acquired by the STER in 2004

(164)

Table 5 indicates that the STER predominantly sells advertising for viewers. Since 1999, the STER's market share in advertising and the audience reached by the public service broadcasters for the target group aged 20-49 has decreased. The gross prices charged to the advertisers for the 20-49 target group were as follows:

Table 6:

Gross prices per GRP for the target group of 20-49 year-olds (18.00h - 24.00h), 1995 - 2005 in €

(165)

On the basis of the data provided above, the STER's list prices for GRP for the 20-49 target group have been only slightly lower than the commercial broadcaster's list prices. According to the Dutch authorities the broadcasters and the STER grant quite substantial discounts. The commercial broadcasters seem to have granted much higher discounts, especially since 1998. These discounts are listed below:

Table 7:

Actual discounts granted in 1994-2005 in %

(166)

Even though the STER has a less attractive audience than the commercial broadcasters — it has a low selectivity and is thus less able to offer a very specific target group — and has a lower audience and advertising market share (see Table 9 below), its net prices are higher than those charged by the commercial broadcasters.

Table 8:

Net prices per GRP for the target group of 20-49 year-olds (18.00h - 24.00h), 1995 - 2005 in €

(167)

From Table 9 it can, moreover, be inferred that there is a clear correlation between the decrease in audience share and advertising share for the public broadcasting service. There is no evidence that the STER is increasing its market share by possible price dumping, or even maintaining its market share despite the decrease in the audience share of its client broadcasters. On the contrary, the STER is losing advertising market share at a similar pace as the public service broadcasters are losing audience.

Table 9:

Audience and advertising market shares

(168)

Finally, there is no evidence of the STER losing advertising revenues in order to increase its market share.

Figure 1:

Development of gross and net revenues

(169)

From Table 7 and Figure 1 it can be concluded that the STER has offered considerable discounts. Nevertheless, from Figure 1 it can also be concluded that, despite these discounts, the net revenues from the sale of advertising space remained relatively constant. The use of discounts has not led to a major change in revenues.

(170)

Consequently, none of the circumstances which typically accompany price undercutting behaviour — that is: lower prices, increase in market share and temporary loss of revenues — seems to have taken place in the Dutch advertising market. Again it should be emphasised that the STER is a company independent of the public service broadcasters and its revenues go directly into the media budget. Accordingly, the Commission must conclude that there are no indications that the STER has undercut prices to an extent which has led to an undue loss of revenues which increased the need for additional state funding of the public service broadcasting system.

(171)

SBS Broadcasting BV argued that ‘just the price comparison between the prices of GRP 20-49 paid to the STER or to the IP and/or SBS cannot be an exclusive criterion for establishing whether or not the STER undercuts the price’.

(172)

SBS also states that, first of all, advertisers are willing to pay an additional premium for the GRP 20-49 offered by the STER because it also reaches people outside the target group. In addition, the prices of the STER for GRP 13+ (the category of teenagers) for real delivery are actually much lower than the prices of the commercial competitors for GRP 13+. These issues were submitted by the Commission to the Dutch authorities (67).

(173)

Regarding the first issue, it should be made clear from the outset that marketing companies intend to reach a target group when advertising their products. Audiences outside the target group are irrelevant. One of the criteria for acquiring advertising time is selectivity of the target audience. If the advertising slot is not selective, i.e. there is a lot of so-called ‘waste’ (advertising reaching people outside the target group), then the advertising slot becomes less interesting. Due to the fact that the advertising space sold by STER has a low selectivity — it attracts a broad range of viewers — it is, according to the Dutch authorities, actually difficult for the STER to maintain its advertising tariffs. Secondly, the GRP 13+ is of less importance than GRP 20-49. The information in Table 5 shows the relatively low importance of GRP 13+ and clearly indicates that the GRP 13+ is not decisive when establishing a comparison of prices. As the Dutch authorities stated, the GRP 20-49 is much more relevant. The fact that the price of GRP 13+ is lower at the STER does not in itself prove that there is a general undercutting of prices by public service broadcasters.

(174)

Consequently, despite the fact that the STER has offered considerable discounts, the total revenue stemming from advertising space has not decreased but has remained stable. Having assessed the other arguments and the answers of the Dutch authorities, the Commission concludes that there is currently no evidence that the STER did not attempt to maximise its advertising revenues and that its behaviour would have led to an increased need for state funding.

(175)

When it initiated the procedure, the Commission stated that there were no clear indications to conclude that broadcasters paid a price for football transmission rights which was structurally above the market value. One of the reasons was that public service broadcasters offered higher amounts during the negotiations than the commercial broadcasters were willing to offer. CLT-UFA complained that the Dutch public broadcasters paid high prices for football rights. The Commission indicated that it would assess this situation further.

(176)

The subsequent investigation did not provide evidence that the public broadcasters have outbid the commercial broadcasters, nor that public service broadcasters have acquired rights to a football event to an extent liable to close the market off to the competitors. Indeed, examples were found of important football rights held by commercial broadcasters during the period under investigation (see paragraph 55).

(177)

However, as no specific anti-competitive practices could be identified in the present procedure, the issue of whether the system as such offers sufficient safeguards against the possibility of anticompetitive behaviour will be examined in procedure E-5/2005 on existing aid.

(178)

For the reasons set out above, the Commission concludes that there has been over-compensation of the NOS for the functions it performs as PO amounting to €98,365 million and that this sum was granted through state aid measures that cannot be considered compatible with the common market on the basis of Article 86(2) of the EC Treaty and should therefore be recovered from the NOS.

(179)

Nevertheless, because the over-compensation exceeds the total ad hoc payments to the NOS for the functions it performs as PO, which amounted to a total of €76,327 million, the recovery would have to be capped at €76,327 million plus interest, because the ‘remaining’ over-compensation was granted through existing aid and cannot be recovered,

(1)

Revenues from association activities: these are generally in the form of contributions by members, revenues from association magazines and legacies received;

(2)

revenues from capital: these are revenues from interest, leasing and holdings;

(3)

revenues from programme magazines: revenues from publishing programme magazines (magazines with programme details, reviews, advertising, etc.);

(4)

revenues from other activities: revenues from sales of CDs and DVDs, sales of programme formats.

22.2.2008   

EN

Official Journal of the European Union

L 49/25

(1)

On 3 May 2005 the Commission decided to authorise rescue aid (N69/2005) for Cyprus Airways Public Ltd. (Decision 2005/1322).

(2)

By undated letter registered by the Commission on 9 November 2005 (DG TREN A/28405) in accordance with Article 88(3) and with undertakings given in the context of the notified rescue aid referred to above, the Cypriot authorities notified the Commission of a restructuring plan for Cyprus Airways Public Ltd. On 14 November 2005 the Secretariat General of the Commission registered the notification under reference SG(05)A10041 and the case was given the number N 555/2005.

(3)

On 18 November 2005 (D(05)125084) the Commission asked the Cypriot authorities for additional clarifying information. The Cypriot authorities answered the Commission's questions by letter dated 23 January 2006, registered on 24 January 2006 (under reference DG TREN A/11819). On 14 December 2005 a meeting took place in Brussels between representatives of the Republic of Cyprus and the Commission. A subsequent high-level meeting took place on 30 January 2006 in Brussels to discuss progress on the case.

(4)

By decision of 22 March 2006, notified to the Cypriot authorities by letter dated 23 March 2006 (SG-Greffe (2006) D/201246), the Commission initiated the procedure laid down in Article 88(2) of the Treaty. The procedure has been registered under C 10/2004.

(5)

The Commission decision to initiate the formal investigation procedure was also published in the Official Journal of the European Union  (2). The Commission invited interested parties to submit their comments on the subject. Cyprus forwarded comments to the Commission by letter dated 20 April 2006.

(6)

Within the timeframe provided for in the published opening of procedure, the Commission received one comment from interested parties. This comment was then submitted to the Cypriot authorities (D(2006) 213376) for their observations and the observations of Cyprus were received on 28 July 2006 (registered on 1 August 2006 under reference A/28810). Further clarifications were received from the Cypriot authorities by fax dated 19 December 2006 (registered on 31 December 2006 under reference A/40766). Further clarifications and commitments were received by fax on 28 February 2007.

(7)

Cyprus Airways Public Ltd.was established in 1947 as a public company, its principal activities are the transportation by air of passengers and cargo and other airline related services. The main shareholder of the company is the Cyprus government (69,62 %) while the balance of the shares is held by some 4,200 small private investors.

(8)

Cyprus Airways Public Ltd. (hereinafter Cyprus Airways) is part of the Cyprus Airways group (hereinafter the Group).

(9)

Cyprus Airways currently provides scheduled services in Europe and the Middle East operating a fleet of 11 aircraft, two A319 delivered in 2002 owned by Cyprus Airways; seven A320–200s delivered between May 1989 and March 1993; owned by Cyprus Airways; one aircraft of which was previously wet-leased to Eurocypria and two A330-200, delivered in 2002 & 2003 (leased).

(10)

At the time of notification of the restructuring plan the other companies within the Group, all 100 % owned by Cyprus Airways Public Ltd were:

(11)

This company (hereinafter Eurocypria) operates charter flights from over fifty European airports, Eurocypria's fleet is composed of five aircraft, four leased Boeing 737-800, acquired between February and April 2003 each with a capacity of 189 passengers as well as an A320 aircraft (A320) on ‘wet lease’ from Cyprus Airways.

(12)

Hellas Jet SA (hereinafter HellasJet) was incorporated in Athens on 1 July 2002 beginning operations on 24 June 2004. Hellas Jet was conceived as a new Athens-based European airline. It operated three leased Airbus A320s based at Athens International Airport. However, business plans were not met and scheduled operations were suspended as of May 2005. The results of this venture were therefore financially damaging, costing the Group an accumulated amount of CYP 29,5 million (EUR 51,4 million) as of June 2005.

(13)

This subsidiary company (hereinafter Zenon) provides services to Cypriot travel agents. Specifically, Zenon provides and distributes electronic information that allows travel agents to make air seat reservations and ticketing as well as hotel and car reservations.

(14)

This company commenced its operations in 1996 when it took over the operation of the Duty Free Shops in Larnaca and Paphos airports. At the time of notification of the restructuring plan it was intended that the Duty Free Shops at Larnaca and Paphos airports will be taken over by the new airport concessionaire and no longer form part of the Group. This happened in June 2006.

(15)

The decision of the Commission to open the procedure provided for under Article 88(2) was based on a number of issues arising from its examination of the restructuring plan. The Commission expressed doubts as to whether the plan was compatible with the applicable community framework, i.e. the Community guidelines for the State aid for the Rescue and Restructuring of Firms in Difficulty of 2004 (3) (hereinafter the R & R guidelines).

(16)

The central plank of the restructuring plan is a loan on commercial terms with a guarantee from the Cyprus government for a ten year period, and will in the first case be used to repay the short-term loan of CYP 30 million (EUR 51 million) made following the rescue aid approval in May 2005. Thereafter the balance will be used to restructure the airline.

(17)

In the first 24 months of the restructuring plan the main focus was to be on cost cutting and selected revenue enhancement. The government and management estimated that total costs needed to be reduced by 13 %. This was to be achieved by cutting staff numbers by some 20 % and at the same time reducing salary levels by an average of 15 %. This means that of a staff of 1 840 as of 1 September 2005, 385 were to be made redundant under the restructuring plan; these redundancies were to lead to annual savings of approximately CYP 7 million (EUR 12 million); further economies of some CYP 4,6 million (EUR 8 million) will be cut from ongoing staff costs.

(18)

The Commission expressed doubts regarding whether the plan would restore the long-term viability of the company in the shortest possible time and without need for additional aid in the future. It also stated that it did not have enough information to be able to take a position on whether the amount of the aid element of the restructuring plan has been kept to a minimum. The Commission also questioned the need for the long-term loan to be paid off over 10 years. The Commission said that it did not have enough information to be able to say if the financial projections are reasonable or if the assumptions on which these are based are valid and it would be particularly interested in having the opinion of Cyprus Airway's competitors on the plan.

(19)

The restructuring plan envisaged the sale of Eurocypria, the charter subsidiary of Cyprus Airways to the government at a price to be determined by an independent expert. The price was initially estimated at CYP 15 million (EUR 26 million). Eurocypria would therefore be separated from the Cyprus Airways group and operated as a completely distinct entity. The proceeds of the sale (paid by the government to Cyprus Airways) would be used by the latter to fund its restructuring. The Commission expressed doubts regarding the sale and how the sales price would be arrived at. If the price paid for Eurocypria were not to be a market price then it would be State aid.

(20)

A further part of the restructuring plan, intended to take place 18 months after the plan has been initiated is a capital increase of CYP 14 million (EUR 24 million). All shareholders (State and private shareholders) will participate in proportion to their shareholding. The State will put up CYP 9,8 million (EUR 17 million) while the private shareholders' contribution in this capital increase will be around CYP 4,2 million (EUR 7,3 million). In opening the procedure the Commission indicated that it could not exclude that the State participation in this capital increase could amount to State aid.

(21)

The Commission expressed doubts as to whether the compensatory measures proposed in the restructuring plan would be sufficient to remedy the market distortion caused by the aid. The plan included relatively small reductions in the fleet and route network for Cyprus Airways. The charter arm Eurocypria was to be sold off and another subsidiary HellasJet was to be closed down and its three aircraft released. The Commission expressed doubts in particular as Eurocypria was to be sold to Cyprus Airway's principal shareholder. The Commission invited comment from Cyprus Airway's competitors in this regard.

(22)

Normally with a company of the size of Cyprus Airways the level of own contribution to the restructuring costs should be in the order of 50 %. The Commission expressed doubts regarding the level of own contribution and as to what should be considered as constituting an own contribution.

(23)

The Cypriot authorities replied to the opening of procedure by seeking to clarify certain issues raised by the Commission.

(24)

In relation to the issues concerning the restoration of long-term viability of Cyprus Airways, the restructuring plan provided that the restructuring costs (financed by the long term loan of CYP 55 million as well as the proceeds of the sale of Eurocypria were to be spent as follows

(25)

In relation to the future operation of the company, both the Cypriot authorities and the airline have acknowledged that the strategic and operational model that served Cyprus Airways in the past is not sustainable in the competitive environment where the company operates today. The basic misalignment lies in the fact that Cyprus Airways operates at a cost level of a fully fledged network carrier while the reality of the liberalized leisure-dominated Cyprus market only allows for revenue levels which are at par with those of charter and/or low cost airlines, which are in fact Cyprus Airways' real competitors.

(26)

In the current business environment and given the full liberalisation of the air transport market in Cyprus, Cyprus Airways has only limited options for further growth or revenue enhancement. Even the predicted growth in the aviation market of over 4 % would not allow Cyprus Airways to get out of its current difficult situation without additional action. Therefore the company has undertaken a hard restructuring in which drastic cost cutting is unavoidable.

(27)

In the restructuring plan the company had estimated that total costs need to be reduced by 13 %. This was to be achieved by cutting staff costs by around 20 % and at the same time reducing salary levels on average by 15 %.

(28)

In addition to this cost cutting the company has to undertake other elements of the restructuring plan which is ongoing and which argues at this early stage for the long term viability of the company. It is now intended that the company will be in a position to successfully reposition itself in a manner that would allow the airline to survive and create an acceptable Return on Investment (ROI) in the medium term, without any further subsidy or aid. It is intended that during 2007 that a second round of cost cutting will be undertaken, focusing on outsourcing and industry best practice.

Profit and loss evolution Cyprus Airways (forecast)  (4)

(29)

The future turnaround of the airline is based on consolidating the benefits accruing from these reduced costs and steadily growing the airline. In this respect the restructuring plan foresees passenger traffic evolution for the period 2004-2010 as follows

Cyprus Airways Passenger Traffic evolution (forecast)  (4)

(30)

In relation to the sale of Eurocypria, the government clarified that in addition to the evaluation previously carried out by PricewaterhouseCoopers on behalf of Cyprus Airways to establish a market price for Eurocypria a second valuation on behalf of the government had been commissioned from HSBC to determine a sales price under well established and accepted methodology. The sale of Eurocypria to the State would therefore be carried out at arms length.

(31)

PwC have carried out a valuation of the company using the Discounted Cash Flow (DCF) methodology and comparing the implied valuation multiples to the market approach they have also taken into consideration transactions involving the purchase and sale of comparable companies in the industry.

(32)

PwC report that the revenue of the company is derived from the sale of aircraft seats to tour operators, the total of passengers carried in 2005 amounted to 662 561 and this is expected to increase to 829 092 during 2006, it should be noted that the forecasted revenue for 2006 has already been contracted. The major components of operating costs for 2005 were aviation fuel (30 %) aircraft lease rentals (22 %) airport and en-route costs (15 %) crew costs (11,5 %) and maintenance/engineering costs (9,5 %).

Key performance indicators

(33)

For the financial year 2005 Eurocypria anticipated a profit in the region of CYP 440,000 this amounts to a drop in performance compared to previous years and to the projected figures due to a steep increase in fuel prices experienced in 2005 which could not be passed on to passengers due to the nature of the agreements with tour operators.

(34)

The DCF method gives an indication of the value of a business based on the value of the free cash flows that the business can be expected to generate in the future, it is designed to find the present day value of future cash flows arising to investors, the resulting cash flows must be discounted at the required rate of return to arrive at an estimate for the present value of the business.

(35)

Four year (2006-2009) financial projections were prepared by the management of Eurocypria, these provided for a ‘terminal value’ of the company representing the amount that an investor would pay today for the rights to the cash flows of the business for years subsequent to the four year projection. A terminal value of CYP 14,54 million was arrived at; this was then discounted by a ‘weighted average cost of capital’ of 9,35 % to arrive at a ‘net present value’ of the company of CYP 14,21 million.

(36)

This net present value was then subject to a number of sensitivity analyses to take account of possible varying parameters such as differing USD/CYP exchange rates, (many of the company's costs are in US dollars while its earnings are in other currencies) differing growth prognostics and differing fuel prices. The sensitivity analyses highlighted the high sensitivity of Eurocypria (in common with most Community airlines) to fluctuations in exchange rates and fuel prices.

(37)

On the basis of the analysis described above PwC arrived at an indicative range of values for Eurocypria of between CYP 12,5 million to CYP 16 million.

(38)

PwC have also carried out a market comparable analysis of the value comparing Eurocypria with other companies in similar lines or similar types of business. This is considered as a valid additional comparison method as the conditions and prospects of similar businesses depend on common factors such as overall demand for their products and services as well as cost structure and operating environments.

(39)

Owing to the lack of publicly quoted charter airline companies PwC used a mix of low cost carriers and mixed scheduled and charter carriers. A calculation made on the basis of the current and projected earnings before interest, tax, depreciation and amortization (EBITDA) led to an indicative value of the company's equity of between CYP 12,5 and CYP 13,5 million. PwC note that this result converges towards the result of the DCF methodology.

(40)

PwC have also carried out a third and final valuation of Eurocypria based on recent transactions, in their view this applies a reasonableness test to the two previously mentioned methodologies. The theory behind this approach is that the price achieved at arm's length between a willing buyer and a willing seller is a good indicator of value. PwC have made use of data available to their global network and have come up with an indicate value using this method of approximately CYP 10,5 to CYP 13 million for Eurocypria. PwC point out that this result also converges towards the result of the DCF methodology.

(41)

Accordingly and on the basis of the analyses mentioned above, PwC reach the conclusion that the indicative value for Eurocypria in the range CYP 12,5 to CYP 15,5 million.

(42)

PwC also add that their valuation of the Eurocypria is based on financial projections for the company where Eurocypria would retain some type of affiliation with Cyprus Airways. According to PwC, such an affiliation would give rise to certain hindrances to expansion most notably; restrictions on growth due to the fact that Eurocypria is a subsidiary of Cyprus Airways; Eurocypria's status as a subsidiary of Cyprus Airways limits its possibilities to achieve competitive pricing with respect to outsourcing of services. If Eurocypria were to stay part of the Group it is also likely that it could not compete on the same routes with Cyprus Airways.

(43)

On this basis PwC conclude that the price for Eurocypria as a separate entity free of these restraints could probably be higher.

(44)

A second evaluation has been carried out by HSBC. HSBC have adopted a similar approach to that carried out by PwC. Their initial conclusion is that Eurocypria has a total equity value of CYP13 million. HSBC have then carried out a comparative value assessment looking at publicly quoted companies which are comparable to Eurocypria, in so doing they have arrived at a valuation of CYP 11,8 for Eurocypria.

(45)

HSBC refer to the sensitivity of the company in particular to variations in fuel pricing and arrive at a weighted average value of the company in the range of CYP 12,3 to CYP 13,8 million.

(46)

With regard to the capital increase, this would be designed to address the negative net worth arising from accumulated past losses which have eroded Cyprus Airway's equity. The equity increase will be made by way of a rights issue which will be offered pro-rata to the shareholders with 70 % being offered to the State and 30 % to the private shareholders. In the opinion of the Cyprus government this equity increase will be an investment similar to that made by a market economy investor.

(47)

On the issue of compensatory measures the Cypriot authorities reiterated their view that the airline has in effect been restructuring its operations since 2004. In this respect at the end of 2004, the airline reduced its fleet by two aircraft and gave up a number of routes while at the same time reducing its frequency on other routes. In the context of a 12 aircraft airline in 2004 this reduction was, in their view, very significant and a further reduction in size at this stage would have a negative impact on the airline's long-term viability.

(48)

The Cypriot authorities also contend that the decision to sell HellasJet and the decision not to renew HellasJet's leases on three leased aircraft constitutes a significant Group capacity reduction which should be seen as a compensatory measure. Similarly the sale of Eurocypria as the Group fleet will be reduced by 6 further aircraft, after the sale the two companies would be legally and financially independent.

(49)

In the view of the Cypriot authorities there is no further scope in this restructuring for further compensatory measure which would not risk imperilling the object of the restructuring. The Cypriot authorities stress that Cyprus Airways is a very small player in the Community aviation market and its actions are unlikely to influence the competitive situation in this matter.

(50)

The Cypriot market, which is mainly a destination market has been liberalised for some time and currently some 99 airlines operate scheduled and charter services in to and out of Cyprus. On closer examination 80 % of traffic is intra-Community/EEA and therefore not subject to restrictions of any kind. A further 8-9 % is made up of charter services from third countries which are fully liberalised. The remaining 10-11 % is made up of traffic from the Middle East and Gulf regions where the aero-political context is driven by bilateral arrangements between Cyprus and these countries. In this context the Cypriot authorities feel that there is very limited scope for further liberalisation of the Cypriot aviation market on the basis of actions taken at the national level.

(51)

In relation to the issue of own contribution the Cypriot authorities wished to clarify on a number of issues. In relation to the Cyprus Airways owned fleet, the company had not been able to place its aircraft as security against borrowing from commercial banks due to the relative age of the aircraft (the 7 A320 aircraft owned by Cyprus Airways were delivered to the company between 1989 and 1993). Efforts had been made in this regard and the replies received from a number of commercial banks had been negative. In similar vein the government explained that the sale of part of the fleet was not considered as a real alternative as this would render the company incapable of continued operations. The only real alternative therefore was the sale of Eurocypria and they argue that the sale of this subsidiary should be regarded as an own contribution.

(52)

In relation to HellasJet this company ceased operations as a scheduled airline in May 2005 and transformed its business from a scheduled carrier to an aircraft broker and charter operator by entering into an agreement with a Greek company called Trans World Aviation. 51 % of the equity of the company had already been sold and the government were in negotiations to sell the rest of the company.

(53)

The Cyprus authorities also consider that the capital increase planned for mid-2007 constitutes an own contribution to the restructuring. In their opinion should be added the sale of an aircraft in 2005 (CYP 5 million), the sale of a spare A320 aircraft engine (CYP 1,7 million) and the sale of spare parts (CYP 0,7 million), leading to a further contribution of CYP 7,4 million.

(54)

Finally, in relation to the level of own contribution to the restructuring the Cypriot authorities draw the attention of the Commission to point 56 of the R & R guidelines which provide

‘In assisted areas, however, and unless otherwise stipulated in rules on state aid in a particular sector, the conditions for authorising aid may be less stringent as regards the implementation of compensatory measures and the size of the beneficiary's contribution’

(55)

They go on to point out that for the period 2000-2006 that the whole of Cyprus is considered as one region falling under Article 87(3)(a) of the EC Treaty, and that Cyprus Airways is particularly valuable to the tourism-based economy of Cyprus and further capacity reduction in the airline either through further compensatory measures or through an extremely high proportion of own contribution is bound to have far reaching repercussions on the tourism sector and on regional development generally.

(56)

Following the publication of the letter addressed to the Cypriot authorities in the Official Journal comments were received from one interested party within the time allowed.

(57)

The Commission notes that no competitor submitted comments within the context of the opening of procedure.

(58)

The Comment was received from the Pancyprian Airline Pilots Union (PASYPI), who wished to give their opinion on the restructuring plan for Cyprus Airways and on the proper and efficient management of the company. They expressed the opinion that if the current restructuring plan was to be approved under the ‘prevailing management thinking’ that this might be ‘very disastrous’ for the company.

(59)

In the opinion of PASYPI Cyprus Airways had not presented a proper and viable business plan to its employees since the Commission had authorised rescue aid for the company. No restructuring of either the management or the operations of the company had taken place and this was due to political interests and interference.

(60)

The union assert that the airline is overstaffed and that plans put in place by the company management had failed to reduce the number of staff to staffing levels consistent with international standards and benchmarking, political pressure and considerations were cited as reasons for this failure.

(61)

PASYPI point out that the private shareholders of the company do not contribute to its survival and that the only stakeholders who contribute to the reduction in costs are the employees.

(62)

The pilots' union also criticises the company management in relation to the treatment of two subsidiaries Eurocypria and HellasJet. In relation to Eurocypria they question whether the sale of this company will have adverse effects and limitations on the future of and expansion of Cyprus Airways. With respect to HellasJet the union takes issue with the fact that the management has never revealed to the staff the losses incurred by HellasJet and whether this company is still operating.

(63)

In conclusion the pilots' union states that there is a need for a new business plan for the airline and that the airline needs to be privatised.

(64)

The Cypriot authorities reply to the comments received from the pilots' union was firstly to assert that the statements made were neither substantiated nor based on any solid business rationale or background.

(65)

The government firmly refutes the allegation of political interference in the company and stated that while the majority of the Board are appointed by the government that these members have the same responsibilities as those of the Board members of any publicly listed company. The decisions taken by the Board are motivated only by the company's best interests.

(66)

In relation to the restructuring plan the government states that this was being implemented and that change within the company was already visible. Savings on an annual basis were in line with those foreseen by the plan at CYP 19,5 million. The core of the plan is to reduce costs so as to give the airline the ability to restructure its operations more competitively. As labour costs were a significant factor this has meant that the staff had been unavoidably affected either through redundancy or through reduced earnings.

(67)

With regard to the issue of overstaffing the government rejects the allegations made by PASYPI and states that the number of staff to be made redundant due to leave the company by the end of 2006 is approximately 414 rather than the 385 persons envisaged in the restructuring plan.

(68)

Concerning the increase in capital, the government explain that this will take place in mid-2007 when tangible results from the implementation of the restructuring plan are evident. It is intended that the ratio of private/public shareholding in the company will be maintained.

(69)

The government explained that the sale of Eurocypria was taken to enable Cyprus Airways to meet the own contribution requirements of the Community R & R guidelines. They stated that that the sale of Eurocypria at an independently evaluated price of CYP 13,425 million was to take place in early August 2006.

(70)

In relation to HellasJet the government explained that following a tripartite agreement between Cyprus Airways, HellasJet and Trans World Aviation SA (trading in Greece as Air Miles) Cyprus Airways had arranged for the sale of HellasJet to Trans World for EUR 2 million (CYP 1,16 million). They stated that Cyprus Airways's intention had been to mitigate as far as possible the operating losses of HellasJet and to extract itself from this venture once the corporate guarantees previously provided by Cyprus Airways in connection with HellasJet's fleet had expired and argued that this sum should be considered as an own contribution.

(71)

The government rejected the pilots' union call for a new restructuring plan and affirm that the current business plan does not require any revision. The government do not exclude the possibility of privatising the company should an attractive offer be made.

(72)

In relation to the capital increased planned for mid-2007 and at the request of the Commission, the Cypriot authorities provided further information by letter dated 19 December 2006. They explained that according to the provisions of Cypriot company law a public company may not issue shares below nominal value. As Cyprus Airways shares were at that time being traded on the Cyprus Stock Exchange at a value in the range of CYP 0,15-0,16 while they had a nominal value of CYP 0,50 per share. As it was felt that any issue at or above par value would be successful it would be necessary to reduce the nominal value of the share capital.

(73)

The procedure for the reduction of nominal share capital has already been undertaken and the company will reduce this value by writing off accumulated losses (as permitted by the Company's articles of association). The Board of Directors of Cyprus Airways in its meeting of 12 December 2006 began the procedure for the capital increase by organising the underwriting of the issue. To guarantee its success a commercial investment bank Cisco (a subsidiary of the privately-owned Bank of Cyprus) has indicated its willingness to underwrite the proposed issue. Cisco will be paid a fee for underwriting the Cyprus Airways' capital increase and this fee will be at market price for such transactions. A copy of the letter of intent of the investment bank has been furnished to the Commission services.

(74)

The next steps were that in mid-January 2007 a Special Resolution for the Reduction of the share capital was approved by a 75 % majority of the shareholders preset at an extraordinary general meeting. Such a resolution would then have to be ratified by the District Court in Cyprus and registered with the Registrar of Companies. The whole of this procedure is expected to take 6-7 months (allowing a three month period for the Court).

(75)

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 threaten to distort competition by favouring certain undertakings or the production of certain goods, shall, in so far as it affects trade between the Member States, be incompatible with the common market.

(76)

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.

(77)

In the context of the opening of procedure the Commission identified three elements of the restructuring plan which could potentially amount to state aid, the Commission must therefore examine these elements to determine if these constitute State aid.

(78)

The restructuring costs of Cyprus Airways will be partially and temporarily covered by a CYP 55 million (EUR 96 million) loan granted by a commercial bank at market conditions. As explained in the decision to open the investigative procedure, the Cypriot authorities intend to grant to Cyprus Airways a State guarantee covering this loan.

(79)

The Commission Notice on the application of Articles 87 and 88 of the EC Treaty to State aid in the form of guarantees  (9) sets out criteria which ensure that a guarantee does not constitute State aid (see paragraph 4.2). Two essential cumulative conditions are:

(80)

In the present case neither of these criteria is fulfilled, Cyprus Airways does not pay the state any premium for the guarantee it benefits from and, given its parlous economic situation and the fact that it had already received rescue aid, it is very unlikely that the company would have received such a guarantee on its own.

(81)

Furthermore, the guarantee is one of State resources as it is granted directly by the State. It is directed at one company (Cyprus Airways) which is in competition with other Community airlines in particular since the entry into force of the third stage of liberalisation of air transport (‘third package’) on 1 January 1993. It will affect inter-state trade since it concerns a company involved in the activity of transport between Member States and covers the Common Market and as it may distort or threaten to distort competition inside this market.

(82)

The State guarantee therefore falls to be considered a State aid within the meaning of Article 87(1) of the EC Treaty. Moreover, this conclusion is accepted by the Cypriot authorities as in relation to the guarantee they have sought to fulfil the conditions established in the R & R guidelines.

(83)

While the initial plan provided that the Cypriot authorities would guarantee the CYP 55 million loan in full, in the course of the procedure, in order to limit aid to the minimum and to ensure a sufficient contribution of the company to cover its own restructuring costs, the authorities decided to reduce the part of the restructuring loan covered by the guarantee to a maximum of CYP 45 million. In addition, the Cypriot authorities specified that the guaranteed and the non guaranteed part of the loan will be independent and in particular that there will be no subordination of the latter to the former. This means that at least CYP 10 million of the CYP 55 million commercial loan will be obtained by the airline without any guarantee or other State intervention.

(84)

The Cypriot authorities have indicated that the sale of Eurocypria has been completed in August 2006 and that the company has been sold to the State for CYP 13,425 million. The Commission must therefore examine how this price has been arrived at to verify its validity and to determine if there was any State aid involved in the transaction. Paragraph 59 and following of the decision to open the investigative procedure recalls that this might be the case, in particular, if the price paid is too high in comparison to the market price of the company.

(85)

In this regard, the Commission notes that this figure has been arrived at following two expert assessments carried out on behalf of both vendor and purchaser. Having carried out a detailed analysis of the expert valuations the Commission can conclude this price corresponds to fair market price; it also notes that the final sales price is, in any event, lower than the CYP 15 million foreseen in the restructuring plan and in the opening of the investigative procedure. The Commission therefore concludes that Eurocypria's sale does not amount to State aid to Cyprus Airways because the company has not been sold at more than its true value.

(86)

The Commission also notes the Cypriot authorities' stated intention that that Eurocypria will be operated as a completely independent company outside of the Cyprus Airways group; the Commission considers that as Eurocypria remains government owned the risk arises that it may not be operated truly independently of its former mother company. Accordingly and to address these concerns the Commission intends to impose conditions on Cyprus to ensure that the two companies are and remain separate for a sufficient period of time and that they conduct any business between them at arm's length.

(87)

A further aspect of the restructuring plan is that in mid 2007 some 18 months after the start of restructuring the capital of Cyprus Airways will be increased by some CYP 14 million. It is the intention of the Cypriot authorities that this capital increase will take place in proportion to the current shareholding and that the public/private ownership ration will be maintained. This will mean that the State will contribute CYP 9,8 million (EUR 17 million or 70 %) while the other shareholders' will add CYP 4,2 million (EUR 7,3 million or 30 %).

(88)

The Commission has therefore to determine if in this situation the public part of this proposed capital increase constitutes State aid. In doing so it bases its judgement on the ‘market economy investor principle’ an approach which has been confirmed by the jurisprudence of the Court (10). According to the case law of the Court, to examine whether a public capital injection constitutes State aid, it is appropriate to take account of the real possibilities that the beneficiary company has to obtain equivalent financial resources in resorting to the normal capital markets. There is no State aid when new public capital is contributed under conditions which would be acceptable for a private investor operating under normal conditions of the market economy.

(89)

The behaviour of the public investor has therefore to be compared with the supposed behaviour of a private investor, such as a private holding or of a private group of companies pursuing a structural, overall or sectoral policy, and guided by prospects of long-term profitability (11). Accordingly, the Commission considers that capital contributions from public funds are not State aid when private shareholders take part in the operation firstly at least proportionally to the number of their actions, secondly under conditions identical to those of the public investor and finally if the proportion of shares subscribed to by the private investors has a real economic significance; the Commission considers that parity for the participation of public and private investors is guaranteed when a commercial bank or investor has agreed to guarantee in advance and at market conditions the participation of the private investors in the capital increase, at the same conditions as those offered to the public investor. This approach, based on the concomitance of contributions, has been regularly upheld by the Court of First instance and the ECJ (12).

(90)

In the present case, a commercial investment bank, Cisco has agreed at market conditions to underwrite the private investors to the extent of 30 % of the proposed recapitalisation. It is also specified by the Cypriot authorities that all shareholders will purchase the shares at the same value, to be determined jointly by Cyprus Airways and Cisco, and under the same market conditions as the private investors.

(91)

In this connection, the Commission has received a copy of the letter of intent dated 14 December 2006 sent to Cyprus Airways by Cisco where the bank accepts to conclude a contract to underwrite or have underwritten the success of the recapitalisation operation. In addition, before committing itself in respect of the investment vis-à-vis private investors, Cisco has carried out a detailed study of the restructuring plan and of the operation. Furthermore, before concluding the final contract, as is usual market practice, it will carry out (or have carried out on its behalf) a due diligence operation which any investor should carry out before initiating the operation. In this way the bank surrounds itself with all the guarantees and securities enabling it to adjust its offer to the risks taken. It should be noted that this bank is not controlled, directly or indirectly, by the Member State concerned. The final guarantee contract with Cisco will be concluded close to the beginning of the offer period and will contain the standard provisions and undertakings in force in this type of contract and in accordance with best national and international practices.

(92)

The conditions to which the conclusion of the final guarantee contract are subject may be grouped together in two blocks; the first concerns relatively standard elements with no direct influence on the Commission's assessment but only on its actual implementation. They include:

(93)

On the other hand, the second block of conditions set out in the bank's letter of intent are liable to affect the assessment of the operation by the Commission; they should be analysed in detail, these mainly concern:

(94)

So far as concerns the subscription price for the new shares, Cisco and Cyprus Airways have agreed that the price or price range for the issue of the new shares will be defined jointly in accordance with market practices in the light of the stock market conditions prevailing at the time of the launch of the operation. Cyprus has confirmed to the Commission that a single price will be charged for all the subscribers involved and that no specific discount will be granted to the guarantor.

(95)

So far as concerns, secondly, the remuneration of the banks through commissions, the latter are based on the value of the proportion of the operation (30 %) to be subscribed by the market. The Cypriot authorities have indicated that the fee to be paid to Cisco is in accordance with market principles on the main European stock markets so as to guarantee the successful completion of a comparable share placement operation. The Commission can conclude therefore that the transaction between Cyprus Airways and Cisco is in accordance with market conditions for this type of operation and that it does not amount to a discount on the price paid by the bank for the shares that it may be called upon to subscribe. Consequently, the fee paid to the bank does not have the effect of enabling it to participate in the operation on more favourable conditions than the State or the other shareholders.

(96)

So far as concerns, thirdly, the requirement by both State and bank that the other participate in the capital increase, the Commission would point out that the requirement of both parties that the other participate in the exercise is an essential decisive element to guaranteeing the success of the capital increase.

(97)

The Commission notes the undertaking given by the Cypriot authorities to transmit the final contracts with the bank containing these formal and unconditional subscription obligations to the Commission immediately after conclusion and before subscription of the new capital increase by the public authorities. A second undertaking given by the Cypriot authorities is to submit a report containing the actual subscription levels for this capital increase once the operation has been carried out. In this connection, the Commission considers that it goes without saying that there cannot be collateral or implicit agreement whereby the State would exonerate the bank from their obligation if the recapitalisation offer was insufficiently subscribed. The Commission will pay the utmost attention to strict compliance with these undertakings so as to ascertain that the terms of the present decision will be properly adhered to.

(98)

This operation enables the private market to subscribe to a significant extent (30 %) in respect of the shares newly issued under the same conditions as the public shareholders given that the share prices will be identical and the rights attaching to each share will be the same for all shareholders.

(99)

In summation, in view of this analysis and of the constant practice of the Commission and the case law of the Court as regards the qualification of State participation in capital increases together with private investors, looked at on its own merits and independent of the other restructuring measures, the capital increase planned for mid-2007 amounts to a concomitant participation of public and private shareholders and therefore the participation of the State would not amount to State aid if the conditions set out above, relating to the fact that the capital increase will be underwritten by a commercial investment bank in a way ensuring effective concomitance of public and private subscription and to the ratio of public to private ownership, are complied with.

(100)

Nevertheless, the Commission notes that the jurisprudence of the European Courts indicates that ‘the mere fact that a public undertaking has already made capital injections into a subsidiary which are classed as aid does not automatically mean that a further capital injection cannot be classed as an investment which satisfies the private market economy investor test.… Nevertheless, it is the Court's view that in a case such as this, which concerns three capital injections made by the same investor over a period of two years the first two of which brought no return, the Commission must determine whether the third injection could reasonably be severed from the first two and classed, for the purposes of the private investor test, as an independent investment.

The Court considers the following considerations to be relevant in making such a determination: the chronology of the capital injections in question, their purpose, and the subsidiary's situation at the time when each decision to make an injection was made’ (13).

(101)

In the present case, the Commission notes that while the State and the private shareholders will subscribe to the capital increase at the same price and all the new shares will have the same rights, the fact is that the State acts, at the same time, as the guarantor of a significant loan to the beneficiary and that this will extend far beyond the moment of the capital increase, and purchases a subsidiary of the company being restructured. However, it is not necessary to assess with precision whether, given the cumulation of the capital increase with these two measures, the State participation and the private shareholders’ participation in the capital increase actually happen on similar terms since at any rate, the Commission considers that, as is clear from the following analysis, even if the State participation in the capital increase were to be considered as State aid that this aid would be considered as compatible with the common market.

(102)

Having concluded that the long term loan of CYP 55 million guaranteed by the state to finance part of the restructuring of Cyprus Airways constitutes State aid and that the State participation in the capital increase could contain elements of State aid, the Commission must examine its compatibility with the common market.

(103)

It is therefore necessary to examine the compatibility of the aid in the light of Articles 87 (2) and (3) of the EC Treaty which provided for exemptions to the general rule of incompatibility set out in Article 87(1).

(104)

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 in that it 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.

(105)

The exemptions in Articles 87(3)(a), 87(3)(b) and 87(3)(d) do not apply in this case because the aid does not promote the economic development of areas where the standard of living is abnormally low or where there is serious unemployment, it does not promote the execution of an important project of common European interest or remedy a serious disturbance in the economy of a Member State nor does not promote culture and heritage conservation.

(106)

Therefore only the exemption provided for in Article 87(3)(c) may apply. Article 87(3)(c) provides that state aid can be authorised where it is granted to promote the development of certain economic sectors and where this aid does not adversely affect trading conditions to an extent not contrary to the common interest.

(107)

In this respect, the applicable community framework for deciding on compatibility are the R & R guidelines of 2004 as well as the previously mentioned 1994 guidelines.

(108)

The Commission has therefore to assess whether the restructuring plan complies with the provisions of the applicable guidelines. The basic principle (point 31 of the R & R guidelines) of which is to ‘allow the grant of restructuring aid only in circumstances in which it can be demonstrated that it does not run counter to the Community interest. This will only be possible if strict criteria are met, and if it is certain that any distortions of competition will be offset by the benefits flowing from the firm's survival…and that, in principle, there are adequate compensatory measures in favour of competitors.’

(109)

The guidelines then set out a number of conditions under which restructuring aid can be granted.

(110)

First, the Commission must determine if Cyprus Airways is eligible for restructuring under the terms of the R & R guidelines. Point 9 of the guidelines states that there is not a Community definition of a company in difficulty, and add that ‘the Commission regards a firm as being in difficulty when it is unable, whether through its own resources or with the funds it is able to obtain from its owners/shareholders or creditors, to stem losses which without outside intervention by the public authorities, will almost certainly condemn it to going out of business in the short or medium term’.

(111)

Subsequently the guidelines (point 10) clarify that ‘a firm is, in principle and irrespective of its size, regarded as being in difficulty for the purposes of these Guidelines in the following circumstances (a) in the case of a limited liability company where more than half of its registered capital has disappeared and more than one quarter of that capital has been lost over the preceding 12 months’.

(112)

In point 11 it is also stated that ‘Even when none of the circumstances set out in Point 10 are present a firm may still be considered to be in difficulty in particular where the usual signs of a firm in difficulty are present, such as increasing losses, diminishing turnover, growing stock inventories, excess capacity, declining cash flow, mounting debt, rising interest charges and falling or nil net asset value’.

(113)

The Commission has noted in the opening of procedure that Cyprus Airways is a company with limited liability which has already lost a significant part of its authorised capital. At 31 December 2003, Cyprus Airways had an authorised capital of CYP 55,5 million (EUR 95 million) but by 31 December 2004 it had lost CYP 26,2 (EUR 44,8 million), close to 50 % of its share capital, in the previous 12 months.

(114)

The Commission noted that losses of the Group (mainly caused by Cyprus Airways) went from CYP 20,9 million in 2003 to CYP 39,4 million by the end of 2004. The shareholder equity of Cyprus Airways had therefore declined from CYP 55,6 million (EUR 95 million) in 2003 to CYP 14,4 million (EUR 25 million) in 2004. It is therefore highly unlikely given its parlous financial state that the company would be able to secure any source of commercial finance.

(115)

In its decision of 3 May 2005 on ‘Cyprus Airways (Rescue aid)’ the Commission concluded therefore that Cyprus Airways is well and truly a company in difficulty within the meaning of the R & R guidelines. This was also the conclusion reached by the Commission in opening the procedure. Cyprus Airways is therefore eligible for restructuring under the terms of the R & R guidelines.

(116)

The second condition (as set out in point 35 of the R & R guidelines) to be complied with is that the “restructuring plan, the duration of which must be as short as possible, must restore the long-term viability of the firm within a reasonable timescale and on the basis of realistic assumptions as to future operating conditions.

(117)

The same guidelines (point 37) go on to provide that ‘The plan must provide for a turnaround that will enable the company, after completing its restructuring, to cover all its costs including depreciation and financial charges. The expected return on capital must be enough to enable the restructured firm to compete in the marketplace on its own merits.’

(118)

Thus far in the restructuring the company has reduced its costs by CYP 19,5 million and has shed more staff than were foreseen by the restructuring plan. The plan foresaw a reduction of 385 staff (out of 1800) and eventually 414 persons availed of the possibility to leave the company. This significant downsizing in the cost base together with the negotiated decreases in salary for remaining staff as well as increases in productivity and work practices will provide major savings and should give the company the necessary flexibility and the adaptability going forward to achieve its objectives.

(119)

The Commission considers that Cyprus Airways should be capable of making a success of its restructuring within the prescribed time limit. Indeed, although only 18 months has elapsed since the grant of rescue aid (May 2005) the results for the company are already slightly better than anticipated. For further improvement attention should be paid to employees' opinions on how to manage the necessary restructuring. In cases of this type the management of the restructuring is very important and the third party comment received shows that this may be especially so in this case.

(120)

In relation to the long-term loan of CYP 55 million (EUR 96 million) partially guaranteed by the State, the Cypriot authorities have demonstrated that this sum will be used (along with the sales proceeds for the sale of Eurocypria) to repay the rescue aid to restructure the airline over the coming years. The capital increase of CYP 14 million planned for mid-2007 will be used to reduce the outstanding amount of the loan. The restructuring plan is closely linked with a cost cutting plan so as to maximise revenue. Over time it is intended to grow the revenue of the company and to thereby repay the remaining amount of the loan to the bank from revenue.

(121)

The Commission must also evaluate if the assumptions on which the restructuring has been based are reasonable in the circumstances and if the predictions and forecasts correspond with what is required in the guidelines. The R & R guidelines provide (point 35) that ‘The plan must be submitted in all relevant detail to the Commission and include, in particular, a market survey. The improvement in viability must derive mainly from internal measures contained in the restructuring plan; it may be based on external factors such as variations in prices and demand over which the company has no great influence, but only if the market assumptions made are generally acknowledged.’

(122)

In this respect it can be verified that this part of the restructuring plan has developed as predicted. In the present case, with regard to the traffic flows and development of the market the Commission refers to the two independent studies carried out in relation the valuation of Eurocypria in as much as these relate the development of the Cypriot aviation market.

(123)

According to the restructuring plan Cyprus air traffic is assumed to increase by 3,5 % on average per annum over the years 2005-2010, while Cyprus Airways traffic projections will grow at a rate of 2,4 % on average per annum over the years 2005-2010. In the report prepared by PwC the overall growth for Cyprus air traffic is forecast by IATA (the International Air Transport Association) at 4,3 % over the 2006- 2008 period, this suggests that the assumptions taken into consideration in the plan were reasonable. Therefore, the forecasts of the restructuring plan in terms of Cyprus Airways' results appear plausible, having regard to the other rationalisations carried out by the company.

(124)

In the light of the above-mentioned factors, the Commission considers that Cyprus Airways will be able to find its financial viability within a reasonable time, as foreseen by the business plan.

(125)

The R & R guidelines also provide (point 38 thereof) that ‘In order to ensure that the adverse effects on trading conditions are minimized as much as possible, so that the positive effects pursued outweigh the adverse ones, compensatory measures must be taken. Otherwise, the aid will be regarded as‘ contrary to the common interest’ and therefore incompatible with the common market.’

(126)

It is further specified (point 39) that ‘These measures may comprise divestment of assets, reductions in capacity or market presence and reduction of entry barriers on the markets concerned. When assessing whether the compensatory measures are appropriate the Commission will take account of the market structure and the conditions of competition to ensure that any such measure does not lead to a deterioration in the structure of the market’…

(127)

The Commission must therefore examine the restructuring and determine if sufficient measures have been taken in relation to Cyprus Airways and the Cyprus Airways group so as to minimise the distortive effect of the aid.

(128)

At the end of 2004 the company initiated what was called an ‘action plan’and began by reducing its fleet by two aircraft one of which was subsequently wet-leased to Eurocypria and gave up a number of routes previously served by it being Warsaw, Budapest and Colombo.

(129)

In this framework, the fleet of the airline was reduced by one aircraft at the end of 2004; at the time of the implementation of the restructuring plan Cyprus Airways operated 10 aircraft (2 A319, 6 A320-200 and 2 A330-200) and wet-leased out a further A320-200 to Eurocypria, this wet lease arrangement was brought to an end at the end of the 2006 summer season. In addition, the Commission notes that air traffic growth prospects range from 3,5 to 4,3 % per annum on average over the years 2005-2010, while Cyprus airways projections foresee a growth of 2,4 % per annum, which will lead to a market share decrease from 26,6 % to at most 23,2 % over the period. The Commission can accept that any further reduction in the size of the fleet or market share would risk jeopardising the possibilities of the airline to recover without providing any meaningful market opportunities for competitors.

(130)

In the opening of procedure the Commission specifically invited observations of interested third parties in this regard; no comments on this issue were received.

(131)

In addition, the Commission underlines that the R & R Guidelines (point 55) provide that as ‘Economic and social cohesion (are) a priority objective of the Community…the Commission must take the needs of regional development into account when assessing restructuring aid in assisted areas’. It is further provided (point 56) that in ‘assisted areas … the conditions for authorising aid may be less stringent as regards the implementation of compensatory measures and the size of the beneficiary's contribution’.

(132)

In this context it should be recalled that for the period between 1 May 2004 and 31 December 2006 (14) the whole of Cyprus was eligible under the derogation of Article 87(3)(c) of the EC Treaty. For the period 2007-2013 two regions covering together 50 % of the Cypriot population should be eligible to receive regional investment aid under the derogation of Article 87(3)(c) of the EC Treaty at an aid intensity of 15 %. Furthermore, Cyprus exhibits a number of territorial, and, therefore permanent, characteristics which impact on its socio-economic development. Cyprus's southern peripherality results in direct problems with respect to accessibility to the rest of the European Union and as a result the country is extensively dependent on air and sea transport, but particularly on air transport. This is important as in the case of Cyprus, air travel is the only viable means of business passenger transport. Eurostat statistics for 2003 which calculate the so called ‘air dependency’ of an economy demonstrate that Cyprus is the most highly dependent Member State on air travel (15).

(133)

In this regard and having regard to the particularities of the air transport market in Cyprus and on the basis that Cyprus Airways has already reduced its fleet and that the former subsidiary Eurocypria will now operate as a legally and financially independent business outside of the ownership and control of Cyprus Airways the Commission can conclude that sufficient compensatory measures have been proposed by the Cypriot authorities to address the market distortions that will be occasioned by the restructuring.

(134)

The R & R guidelines (Point 43) of the guidelines provide that the ‘amount and intensity of the aid must be limited to the strict minimum of the restructuring costs necessary to enable restructuring to be undertaken in the light of the existing financial resources of the company, its shareholders or the business group to which it belongs. Such assessment will take account of any rescue aid granted beforehand’. The Commission considers that this condition is fulfilled.

(135)

Indeed, on the one hand, as recalled above, the restructuring costs amount to CYP 71,1 million. On the other hand, the revenues used to finance this restructuring include the CYP 55 million loan (partially guaranteed by the State), CYP 13,425 million of sales proceed of Eurocypria, plus around CYP 8,5 million of other resources, coming in particular from the divestment of various assets. The proceeds of the planned capital increase should not be added to these measures, as it will be used in full to reimburse part of the CYP 55 million loan, and will therefore not increase the total amount of the resources utilised for the restructuring, but only substitute for an equivalent part thereof. The resources therefore amount in total to around CYP 76,9 million. The Commission finds this amount acceptable, and concludes that there is no excess of permanent resources in comparison to the corresponding costs, since the major part of the restructuring resources is made up of a loan which will have to be reimbursed by the company out of its own results and therefore does not constitute permanent funding whereas the company has to face definitive restructuring costs.

(136)

Additionally, the Commission notes that the commitment of the Cypriot authorities to reduce the part of the CYP 55 million loan that will be covered by the government guarantee amounts to a further limitation to the State aid element in comparison to what was initially foreseen.

(137)

In relation to the level of own contribution the guidelines (point. 43) provide that ‘Aid beneficiaries will be expected to make a significant contribution to the restructuring plan from their own resources, including the sale of assets that are not essential to the firm's survival, or from external financing at market conditions. Such contribution is a sign that the markets believe in the feasibility of the return to viability. Such contribution must be real, i.e., actual, excluding all future expected profits such as cash flow, and must be as high as possible.’ The guidelines then indicate what level of own contribution would normally be considered as appropriate; for a company the size of Cyprus Airways this rate would be 50 %.

(138)

The Commission has established that the restructuring costs will be approximately CYP 71,1 million.

(139)

The amounts which should be considered as own contribution will consist of: at least CYP 4,2 million corresponding to the part of the CYP 14 million capital increase that will be underwritten by the private investors; at least CYP 10 million of the CYP 55 million commercial loan that will be borrowed by the airline on the markets without guarantee or other State intervention; as well as the CYP 8,5 million (as set out in paragraph 53 above) of sales proceeds of various assets.

(140)

The Cyprus authorities also argue that the sale proceeds from the sale of Eurocypria should also be considered as own contribution. The practice of the Commission in this regard (16) is that if such a sale takes place at the real value of the assets (independently of the nature of the buyer) it does not constitute State aid to the enterprise selling the assets. The sales proceeds of these assets may then be used to finance the restructuring and should be regarded as making up an own contribution. This means that the sales proceeds from the sale of Eurocypria of CYP 13,425 million must also be considered as own contribution. This conclusion is further reinforced in the present case by the commitment from the Cypriot authorities and the condition imposed by the Commission that Eurocypria will be effectively run as a separate entity from and a real competing airline with Cyprus Airways.

(141)

This results in a total own contribution of at least CYP 36,2 million. This amounts to 51 % of the restructuring costs. The Commission can therefore conclude that the requirement to contribute a sufficient amount to the restructuring costs has been met in the present case.

(142)

The Commission further stresses that the restructuring costs are in majority covered by a loan of CYP 55 million, which, even if its has been partly guaranteed by the State, will have to be reimbursed by the company out of its own results, and not by a CYP 55 million State grant (17). The effort that the company will have to produce in order to cover, over time, the costs of its own restructuring has the same effect as own financing of its restructuring, the only difference being that this effort can be spread over several years thanks to the commercial loan guaranteed by the State

a)

the loan guarantee granted by Cyprus to Cyprus Airways Public Ltd is brought to an end; or

b)

Cyprus no longer has direct or indirect majority participation and/or control in the capital of both companies.

a)

the capital increase will not take place until a formal unconditional commitment to underwrite the successful outcome of the operation has been signed by the appointed underwriting commercial bank with the exception of the usual conditions concerning cases of force majeure, acts of war, terrorism and other similar cases;

b)

the State can only subscribe in the capital increase up to a maximum of 70 % thereof,

c)

the State subscribes the new shares issued on the basis of the same rights and under the same conditions, at the same price as the private investors, without prejudice to the proposed timetable for the underwriting by the bank of the successful completion;

d)

the operation must not be accompanied by any collateral agreement or implicit agreement whereby the State would exonerate the bank from its obligation if the recapitalisation offer was insufficiently subscribed or grant the bank any special discount on the issue price.