State aid — United Kingdom — Aid C 46/2002 (ex N 56/2001) — CDC Group plc — Invitation to submit comments pursuant to Article 88(2) of the EC Treaty (Text with EEA relevance)
Date: 2002-09-19
Institutions: European Commission
Subjects: State aid, United Kingdom, aid system, developing countries, development policy, investment company

C 223/6

EN

Official Journal of the European Communities

19.9.2002

STATE AID — UNITED KINGDOM

Aid C 46/2002 (ex N 56/2001) — CDC Group plc

Invitation to submit comments pursuant to Article 88(2) of the EC Treaty

(2002/C 223/03)

(Text with EEA relevance)

By means of the letter dated 2 July 2002, reproduced in the authentic language on the pages following this
summary, the Commission notified United Kingdom of its decision to initiate the procedure laid down in
Article 88(2) of the EC Treaty concerning the abovementioned aid.

Interested parties may submit their comments within one month of the date of publication of this
summary and the following letter, to:

European Commission
Directorate-General for Competition
State Aid Registry
B-1049 Brussels
Fax (32-2) 296 12 42.

These comments will be communicated to United Kingdom. Confidential treatment of the identity of the
interested party submitting the comments may be requested in writing, stating the reasons for the request.

SUMMARY

1. DESCRIPTION

By letter dated 17 January 2001, registered 19 January 2001,
the United Kingdom authorities notified the scheme ‘CDC
Group plc’ to the Commission pursuant to Article 88(3) EC.
The legal basis of
the CDC Act 1999.
the scheme is
Responsible for the scheme and its implementation is the
Department for International Development.

the scheme is to support

the UK
The overall purpose of
Government's international development policy. According to
the UK, most foreign investment in developing countries is
focused on only a few of the richer developing countries. It
is believed that financial sectors in poorer countries are under-
developed and that official and market
information about
investment opportunities and potential returns is inadequate.

The CDC Group plc (CDC)
is the UK Government's main
instrument for investing in the poorer countries. By trans-
forming CDC into a public private partnership, the UK auth-
flows to the
orities seek to encourage private investment
poorer countries. CDC is expected to remedy the market
failure
are
that
from such investments. The Government has
available
therefore
on CDC,
an
imposed
framework
is required to make 70 % of new
according to which it

demonstrating

commercial

operating

returns

by

(by

aggregate

investments
in poorer developing
countries (1) over a rolling five-year period and to seek to
make at least half of new investments in Sub-Saharan Africa
and South Asia.

value)

all

the

technical

Up to 75 % of the shares of CDC will be offered to private
investors. There will be open competition and full publicising
of the CDC investment opportunity. It is proposed to grant
CDC investment company status, although CDC does not
meet
an investment
company as set out in the Companies Act. The main impli-
cation is that CDC will enjoy an exemption from tax on
income and chargeable gains derived from its investment
activities in the same way that
investment companies do.
Investors in CDC will pay tax according to their own circum-
stances. The UK authorities argue that
tax
efficient, private investors will not support the partnership.

requirements of

if CDC is not

Moreover, the UK authorities submit that nobody knows how
long it will take to obtain the demonstration effect, but it is
expected to take more than 10 years. Therefore, they claim that
they would not be able to attract private investors if
the
Commission's initial approval were limited to 10 years. The
measure has therefore been notified for an unspecified period.

(1) ‘Poorer developing countries’ are those classified as ‘low income’ by
the World Bank in 1998, and those classified as ‘lower middle
income’ by the World Bank in 1998 and that are below the
weighted mean of GNP per capita for
lower middle income
countries. The definition also includes 11 countries for which the
World Bank does not currently collect GNP data.

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The tax revenue forgone by the State is estimated at about
GBP 50 million (about EUR 80 million) per year.

— the European Council meeting in Barcelona on 15-16
to the Member States to
level of State aid. The request for a

March 2002 renewed its call
reduce the overall
time limit is in line with this policy,

2. ASSESSMENT AND THE COMMISSION'S DOUBTS

that

fulfils all

the measure

The Commission finds
the
requirements of Article 87(1) of the EC Treaty, and that the
measure therefore constitutes State aid. The tax revenue
forgone by the State constitutes a loss of State resources, the
aid favours a certain undertaking, and the tax treatment which
follows from the investment company status is an advantage
for CDC, because it would not have been able to attract any
is the Commission's
it. Finally,
private capital without
constant position that when the State intervenes to create a
new player on the international financial markets, there is an
effect on the investment flows between Member States.

it

— an indefinite tax exemption would appear to be difficult to
the EU and OECD

reconcile with the principles of
initiatives to curb harmful tax competition,

— several countries in which CDC may invest are currently

candidate countries negotiating accession to the EU.

The Commission has assessed the compatibility of the aid with
the common market. It finds that the objective of the aid is in
line with Article 177 of
the EC Treaty, which states that
Member States should foster the sustainable economic and
the most disadvantaged developing
social development of
countries.

TEXT OF THE LETTER

‘The Commission wishes to inform the United Kingdom that,
having examined the information supplied by your authorities
it has decided to initiate the
on the aid referred to above,
procedure laid down in Article 88(2) of the EC Treaty.

The further assessment was made with reference to the
Commission Communication on State aid and risk capital (2).
The notified aid contains a number of positive elements,
notably that it serves to remedy a market failure, that it is
proportionate, and that CDC will make equity investments
and be profit driven. It is also the intention that the majority
of the capital of CDC should be private.

The Commission has doubts as regards the compatibility with
the common market of an aid scheme with an unspecified
duration for the following reasons:

— the Commission does not,

in principle, approve fiscal
non-quantifiable State aid for an unlimited period of time,

— the Commission finds that it is appropriate to review State
aid schemes regularly in order to ascertain whether the aid
is still necessary in view of market developments. It cannot
be excluded that the market for ethical
investment funds
will develop, so that the aid to CDC distorts competition
and affects trade between Member States to a significantly
greater extent than it does now,

— the Commission does not find the arguments put forward
by the UK authorities convincing enough to deviate from
its practice. In particular, the Commission is not convinced
that an approval initially limited to 10 years in itself would
reduce significantly the willingness of private investors to
invest in CDC,

1. PROCEDURE

By letter dated 17 January 2001, registered 19 January 2001,
the United Kingdom authorities notified the aid ‘CDC Group
plc’ to the Commission pursuant to Article 88(3) EC. By letters
dated 19 March 2001 and 17 May 2001, the UK authorities
stated that they intended to submit further information. The
information was submitted by letter dated 5 June 2001,
registered on 8 June 2001. A meeting between representatives
of the Commission and the UK authorities was held on 11 July
2001. Following this meeting, the UK authorities submitted
further
information by letter dated 18 September 2001,
registered on 21 September 2001. By letters dated 23
November 2001 and 24 January 2002, the UK authorities
wrote that they intended to submit more information. The
latest
information was submitted by letter dated 29 May
2002, registered on 7 June 2002.

2. DETAILED DESCRIPTION OF THE MEASURE

2.1. Aim of the scheme

the scheme is to support

The overall purpose of
the UK
Government's international development policy, which aims
the proportion of people living in
to reduce by one half
the
extreme poverty by 2015. For
economic growth of developing countries must be greater
than population growth.

to be achieved,

this

— regular

renotifications

leading
of
Commission decisions, which are published, give
parties concerned transparency as to aid in force,

schemes

aid

(2) OJ C 235, 21.8.2001, p. 3.

to
all

in developing countries has
Although foreign investment
increased significantly in the last
it,
few years, most of
according to the UK authorities, is focused on only a few of
the richer developing countries. In 1997 over 90 % went to
middle income countries and over 50 % to only five countries.

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Sub-Saharan Africa and South Asia received less than 4 % of all
private flows to developing countries in 1997 (3).

the

risks are

It is believed that financial sectors in poorer countries are
information
underdeveloped and that official and market
about investment opportunities and potential returns is inad-
equate. According to the UK authorities, foreign investors' fears
of
cause under-
exaggerated. These
investment in such countries. In particular, equity investments
seek to
are relatively under-utilised. The UK authorities
encourage private investment flows to the poorer countries
and to demonstrate that commercial
returns are available
from such investments. This should help to correct investors'
perceptions of
return ratio in poorer countries.
Increasing investment will also promote economic growth
and stability and thereby lower the risks for investors.

the net

fears

2.2. CDC Group plc

The CDC Group plc is the UK Government's main instrument
for investing in the poorer countries. The purpose of CDC, as
written in its Memorandum, is to maximise the creation and
long-term growth of viable businesses in developing countries,
especially poorer countries, to achieve attractive returns to its
shareholders and implement social, environmental and ethical
best practice". Since its foundation in 1948, CDC has been
present as an investor in developing countries with a special
focus on poorer countries and territories in the Common-
wealth. It currently has interests in over 50 countries.

In December 1999, CDC was transformed from a statutory
corporation into a public limited company. As a next step,
up to 75 % of the shares will be offered to private investors.
There will be open competition and full publicising of the CDC
investment opportunity, allowing investors from any Member
State to participate in the venture. The Government will
It will also hold a
maintain at
special
rights
special
redeemable preference share of GBP 1 in the capital of CDC,
which allows it to control that CDC makes its investments in
accordance with the UK development policy objectives.

least 25 % of
in CDC,

consisting of one

the shares.

share

in place. Under

When CDC was transformed in 1999, an operating framework
for the company was put
the operating
framework, CDC is required to make 70 % of new investments
(by aggregate value) in poorer developing countries (4) over a
rolling five year period and to seek to make at least half of new
investments in Sub-Saharan Africa and South Asia. Through its
special share in CDC, the UK Government is able to ensure that
CDC complies with this operating framework. However, the
investment
Government does not intervene in the individual
decisions taken by the CDC Board. Once the Government gives
up its special share, CDC will no longer be bound by these
objectives and will lose its investment company status (see also
point 2.7 on the duration of the scheme).

(3) Source: UNCTAD World Investment Report. The numbers refer to
world FDI, which mainly comes from OECD countries. In 2000,
Africa's share of FDI in developing countries was still about 4 %
(0,8 % of all FDI).

(4) ‘Poorer developing countries’ are those classified as ‘low income’ by
the World Bank in 1998, and those classified as ‘lower middle
income’ by the World Bank in 1998 and that are below the
weighted mean of GNP per capita for
lower middle income
countries. The definition also includes 11 countries for which the
World Bank does not currently collect GNP data.

2.3. Capital restructuring

CDC comes from a State sector background. Prior to CDC's
transformation into a plc, there was no mechanism other than
debt from the Government to provide funding to the statutory
corporation. This debt carried no interest and was normally
rolled over on maturity. At present CDC has an interim
capital structure. CDC's new capital structure will have to
accommodate the different parts of its portfolio:

— A lower risk portfolio of

loans, which produces corre-
spondingly low returns. At 31 December 1999 about
20 % of CDC's outstanding loans were loans to the public
sector. They were removed from CDC's balance sheet in
September 2000 by an arrangement which gives
the
Government
flowing from them. Public
sector loans is a discontinued line of business for CDC.

the net benefit

— A higher risk higher return equity portfolio, which will be

the focus of all CDC's new business.

CDC has assets of around GBP 600 million of loans to the
private sector and about GBP 500 million of risk capital
investments (5). This will be funded by a combination of
equity and debt. Existing debt will be converted into equity.
Approximately GBP 200 million of new debt will be structured
so that the UK Government has the option to sell the debt.
CDC also has the option to refinance it in the public debt
market. The rate will be set on the basis of formal advice
from an independent investment bank.

Under this scheme, the UK Government will sell shares in a
smaller CDC. However, the UK authorities consider that the
characteristics of this entity will be such that investors might
pay a better price proportionately. When added to assets
retained in public ownership, better value is likely to be
secured overall.

2.4. Investment company status

For the period that the UK Government holds its special share
and CDC is subject to the operating framework, the UK auth-
orities propose to grant CDC investment company status,
although CDC does not meet all the technical requirements
of an investment company as set out in the Companies Act.

The UK authorities are able to ensure that CDC will carry out
its intended role as an investor in developing countries by
various means. These include the special share arrangements,
a deed of covenant relating to CDC's implementation of the
agreed investment policy and remedies available through the
Companies Act for any non-compliance. The UK authorities
state that
they would not have the same possibilities to
control other fully private operators claiming to have the
same investment policy as CDC, and therefore wanting to
benefit from the same tax benefits without answering to the
definition of an investment company in the Companies Act.
Consequently, the investment company status is only available
to CDC.

(5) Figures submitted at the time of notification.

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Allowing CDC to have the status of an investment company
will have three practical effects.

2.4.1. Tax treatment

The main benefit to CDC of the investment company status is
the tax treatment. CDC will enjoy an exemption from tax on
income and chargeable gains derived from its investment
activities in the same way that
investment companies do.
CDC will remain liable to all applicable local taxes in the
developing countries as at present. Investors in CDC will be
liable to tax on their income and gains from CDC as normal,
according to their own circumstances. Where CDC undertakes
activity in the EU, this will be undertaken through a separate
subsidiary and subject to tax in the normal way.

The proposed tax treatment arises
from the decision to
introduce private capital to CDC. It is generally accepted that
for investment vehicles to serve their purpose, they should not
impose any additional tax burdens on investors over and above
what these investors would have on investments made directly
by themselves. According to the UK authorities, this is illus-
trated by the fact that in all the major economies, investment
funds are treated as tax exempt or tax transparent. In the UK
and most other Member States certain tax reliefs are available
to various types of collective investment vehicles. The UK auth-
orities consider that if CDC is not tax efficient, private investors
will simply not support the partnership.

The UK authorities considered whether CDC could meet the
technical requirements of any of the existing UK tax efficient
schemes. However, because of the nature of its investments and
the countries in which it invests, the UK authorities found that
CDC is not able to do so (6). The tailored tax treatment, which
puts CDC on a par with other investment vehicles, is therefore
considered a necessary part of the partnership.

The UK authorities estimate that the revenue foregone by the
State amounts
to about GBP 50 million (about EUR 80
million) per year.

2.4.2. Accounts

The second effect of the investment company status is that
CDC will be permitted to prepare its accounts in the way
that investment companies do, which is different from other
companies. In particular, investment companies are allowed to
reflect unrealised gains on investments in their accounts.
Potential
investors are likely to see and value CDC as an
investment company, and will expect it to account in this way.

2.4.3. Distribution of profits

The third effect concerns distribution of profits. Companies
than investment companies can, broadly, only pay
other
dividends from accumulated realised profits less accumulated
realised losses, without distinction between revenue and capital.
Thus, for example,
if a company makes revenue profits, but
it may not be able to make a distribution.
capital

losses,

(6) The UK authorities submitted credible explanations of why CDC
cannot fulfil the requirements of the following existing structures:
investment
trusts/open-ended
investment companies, pension fund pooling scheme, partnership
or limited partnership.

trust, venture capital

trust, unit

can

pay

only

dividends

companies

from
Investment
accumulated realised revenue profits minus
accumulated
realised revenue losses, and so may be able to pay dividends
even if they make capital losses. According to the UK auth-
orities, it would not be possible to list CDC as an investment
entity without
the secure prospect of regular dividends to
investors, and it is therefore important that CDC is able to
make distributions in this way. However, CDC is under no
obligation to distribute a minimum share of
its annual
income as dividends.

2.5. Investments made by CDC

All CDC's investments must be for the economic benefit of
developing countries and at least 70 % of these investments
must be for the poorer of those countries (defined as those
with a GDP per capita of less than USD 1 740 in 1996). CDC
is also required to aim at making at least half of its new
investments each year in sub-Saharan Africa and South Asia.

CDC is not allowed to invest
in manufacture of military
equipment, gambling, pornography, illegal drugs and tobacco.
CDC's Articles of Association also require it to operate under
business principles which reflect best practice in a number of
areas — health and safety, corporate governance, environment
and social issues.

CDC's investment decisions are taken on a commercial basis.
This is of central importance for the demonstration effect. CDC
will normally only make investments on the basis of business
plans.

The UK Government's return on investment
dinated to that of the private investors in CDC.

is not subor-

2.6. Competition

The UK authorities believe that CDC does not have any direct
competitors, due to its unique status as a public private part-
nership and its unique investment policy. According to them,
CDC is a pioneering venture, and its main aim is to demon-
strate that ethically sound investments in the poorer countries
of the world can be commercially viable. The transformation of
CDC into a public private partnership reflects the conviction of
the UK Government that the terms of CDC's engagement in the
market should be fully commercial and reflect no subsidy.

in total,

Looked at
the only entities who share CDC's
developing country focus and have broadly similar aims are
the multilateral and European Development Finance Insti-
tutions, such as the International Finance Corporation (7) (IFC)
and the European Investment Bank (EIB). The UK authorities
claim that all of these receive relief or benefits in some form.
For instance, IFC and EIB are supranational bodies outside the
tax system. These institutions tend to focus on loans rather
than, as CDC now does, on equity investment
(in some
cases,
they have limits on the equity they can take in a
company), and they tend not to be driven by commercial
profit
the real difficulty is in finding
sufficient funds to invest in worthwhile projects rather than
competing over particular projects.

targets. Furthermore,

(7) IFC is part of
countries.

the World Bank Group, and has 175 member

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in specific
However, CDC can face different competitors
instances at both the investor level (i.e. the level of obtaining
investment funds from bodies in the EU) and investment level
(i.e. the level of competition for attractive investment oppor-
tunities). Indirectly, competition at these levels could involve
EU bodies. CDC will be competing at these two levels without
subsidy and with tax applied in a way common for investment
institutions in the EU.

2.6.1. Competition at

the investor level (i.e. between investors in

CDC and other investors)

At the investor level, CDC is likely to be of interest to more
sophisticated investors who are able to assess the risks and
rewards involved. These investors probably have an exposure
to emerging markets, and seek portfolio diversification and
exposure to the parts of the world in which CDC operates.
investors may also find CDC's business principles
Ethical
attractive. Competitors to CDC in the market for funds are
therefore likely to be emerging market
funds,
emerging market private equity firms and ethical funds. Less
directly, competition could be represented by large multi-
raise
national companies (quoted in the EU) who might
funds to finance acquisitions in the countries where CDC
operates.

investment

The UK authorities furthermore explain that the great majority
of those who will be competing with CDC for investors' funds
are themselves able to take advantage of beneficial
tax
In three broad categories by being an approved
treatment.
investment
trust, by being a limited partnership (which
suffers no tax at the level of the entity) or by being resident
outside the UK in a competitive tax jurisdiction. This is
emerging market
the
apparently
particularly
investment
though trade
funds and private equity funds,
investors can also benefit from tax relief by using offshore
vehicles.

case

for

2.6.2. Competition at the investment level (i.e. between CDC and

other bodies)

At the level of investment, CDC's aim is to acquire equity
stakes in companies
in developing countries and expand
these investments through further growth (whether organic
or by further acquisition). Alternative players may include
trade players (for example, companies already involved in the
industry into which CDC is buying), other venture capital
funds,
finance institutions, or entre-
preneurs who have spotted a good opportunity.

including development

The UK authorities have considered the investments made by
CDC since March 1999, and found that only with regard to
15 % of the investments realised had CDC had competitors
from within the EU. The UK authorities therefore claim that
the extent
to which CDC is competing with EU-based
companies for investments is limited.

Finally, the UK authorities point out that the value of the tax
exemption of GBP 50 million (about EUR 80 million) is very
small
in
developing
around GBP 100 000
million (about EUR 160 000 million) in 1997.

in relation to the total

countries, which was

foreign direct

investment

2.7. The duration of the scheme

The UK authorities submit that it is not possible to know the
duration of the special fiscal regime in advance. The UK auth-
orities argue that they want to demonstrate that profits can be
made from investments in viable companies in the poorer
developing countries and thereby influence the behaviour of
private investors. To do so, they need to control the investment
policy of CDC and make sure that it invests in the parts of the
world to which they want to direct private investment flows.
However, nobody knows how long it will take to obtain a
demonstration effect. It will not be achieved within five or
10 years, as might be the case for a market failure to be
remedied within the EU, but will take much longer. Therefore,
it cannot be determined in advance when the Government will
give up its special share and CDC will
lose its investment
company status and tax exemption.

As regards the possibility to limit the period covered by the
notification to 10 years, and then renotify the aid should it still
be needed, the UK authorities submit that investors would not
want to invest in CDC, if there was a risk that the Commission
would not approve the aid a second time after 10 years.

However, the UK authorities consider that an over-subscription
to the shares offered for sale would be an indication that the
market
failure is less severe and less long-term than they
currently believe. Thus, if the part sales of the shares in CDC
were to be significantly over-subscribed as a result of
the
proposed State aid,
the UK Government would review the
policy implications of that for the public-private partnership.
The UK would communicate the results of any such review to
the Commission, in addition to the annual report that the CDC,
in compliance with the Companies Act, will provide. Moreover,
the UK commits to keep the Commission informed of any
changes to the notified measure.

3. ASSESSMENT

3.1. Presence of State aid under Article 87(1) of the EC

Treaty

Article 87(1) EC states that any aid granted by a Member State
or through State resources in ‘any form whatsoever which
to distort competition by favouring
distorts or
certain undertakings or the production of certain goods shall,
insofar as it affects trade between Member States, be incom-
patible with the common market’.

threatens

The notification covers two aspects of the transformation of
CDC from a statutory corporation to a public private part-
nership.

3.1.1. Capital restructuring

The measures foreseen in order to prepare CDC for the trans-
formation into a public private partnership can be summarised
as follows:

— those of CDC's loans that were granted to public bodies are
transferred to the State, since this activity is discontinued,

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— CDC's existing debt to the Government is converted into

equity,

albeit to a limited extent in this case in view of the specific
investment focus of CDC.

— new debt is injected on commercial terms.

The Commission finds it conceivable that a private market
economy investor would carry out all of these measures. The
transfer of the loans granted to the public sector is a natural
consequence of the streamlining of CDC's activities. CDC will
now focus exclusively on the private sector. This transfer is
therefore no different from any shifting of activities between
members of a company group. The assessment might have
been different had CDC continued to grant
loans to the
public sector, with the State only taking over the bad loans.
Moreover, since CDC paid no interest to the Government, it
makes more sense for the government to convert its loans to
equity, and so stand a chance of
receiving a return on
investment. Finally, the new debt is injected on commercial
terms, as established by an independent investment bank.

The Commission finds that the capital restructuring of CDC
does not confer any advantage on the company within the
meaning of Article 87(1) EC and therefore it does not
constitute aid.

3.1.2. Investment company status

The UK authorities will grant CDC an exemption from tax on
income and chargeable gains derived from its investment
activities. This exemption is estimated to result in an annual
loss of revenue for the State of GBP 50 million (about EUR 80
million). However, to the extent that the shareholders are UK
companies the tax burden is shifted to them (they would not
have been liable to tax if CDC had not been granted investment
company status). It cannot be assumed that the tax they pay
will fully compensate the State for the loss of tax revenue from
CDC. In any case, it is only the net loss of tax revenue (which
the GBP 50 million (about
cannot be calculated) and not
EUR 80 million) that can be considered as a loss of State
resources within the meaning of Article 87(1) EC.

The UK authorities will only confer investment company status
on CDC. Other potential private investment organisations with
an ethical objective similar to that of CDC will not be allowed
to benefit from a similar treatment. Therefore, the measure
favours a certain undertaking.

Irrespective of its investment focus, it is an advantage for CDC
to be granted investment company status enabling it to enjoy
the tax benefit. Without it, CDC would not be able to attract
private investors for any kind of
It is also an
advantage for CDC that the majority of private investments
focusing on developing countries and originating in the UK
will have to go through CDC. Not many,
if any, proper
investment companies are likely to invest in the third world
for the same reasons why CDC does not fit into any of the
investment companies. This has a
structures foreseen for
positive effect on the flow of capital to CDC.

investment.

As regards the effect on trade between Member States, it is the
Commission's constant position that when the State intervenes
to create a new player on the international financial markets,
this has an effect on the investment flows between Member
States. In any case, the impact on Community trade is not
disputed (see points 2.6.1 and 2.6.2 above). Therefore,
the
measure is considered to affect trade between Member States,

Consequently, the Commission considers at this stage that the
tax treatment resulting from the investment company status
which CDC will enjoy, and which enables it to attract private
capital, is covered by Article 87(1) EC.

3.2. Compatibility of the aid with Article 87(3)(c) of the

EC Treaty

The Commission has assessed the compatibility of the aid with
the common market based on Article 87(3)(c) EC, which allows
for aid to facilitate the development of certain economic
activities or of certain economic areas, where such aid does
not adversely affect trading conditions to an extent contrary to
the common interest.

— According to Article 177 of the EC Treaty, Community
policy in the sphere of development cooperation, which
shall be
complementary to the policies pursued by
Member States, shall foster the sustainable economic and
social development of the developing countries, and more
particularly, the most disadvantaged among them. Thus, as
long as the UK Government maintains its special share and
controls that CDC invests in accordance with its operating
the scheme is entirely in line with the
framework,
Community development policy.

the background of

— In view of the fact that the objective of CDC is to invest in
the
creating and growing long-term viable businesses,
Commission also refers to the communication on State
aid and risk capital (8). As regards the applicability of the
communication, it is important to note that it was designed
the Community objective of
against
thereby
supporting small and medium-sized enterprises,
increasing employment opportunities
in the European
Union. The measure concerned in this case has been
designed with a different Community objective in view,
namely the sustainable economic and social development
of the poorer developing countries. The communication is
therefore only used as guide in the overall assessment of
the scheme. The Commission finds the following positive
elements of the measure to be relevant:

— The

and

high

transaction

factors which the Commission recognises as
failure are imperfect or asymmetric
causing market
information
The
Commission also recognises that there are particular
difficulties in regions qualifying for assistance under
(points VI.3 and VI.4 of the
Article 87(3)(a) and (c)
communication). The Commission appreciates
that
these difficulties are even more acute in developing
countries.

costs.

— The Commission accepts the data provided by the UK
authorities as regards the distribution of private capital
flows to developing countries as proof of a failure of
the market to provide sufficient capital to the majority
of developing countries (point VIII.2 of the communi-
cation).

(8) OJ C 253, 21.8.2001, p. 3.

C 223/12

EN

Official Journal of the European Communities

19.9.2002

— CDC operates as an investment organisation focusing
on the poorer developing countries. The investment
company status enables CDC to offer private investors
to those offered by other
conditions
comparable
investment
the
investment organisations. Without
company status, CDC would not be able to attract
private capital. Therefore, the Commission finds that
to ensure that market
the measure is just sufficient
investors provide
in
investment decisions being taken on a commercial
basis and on terms as close as possible to those
which would prevail in the normal economy.

and that

capital

results

it

Moreover, the rationale of the scheme is that CDC one
day will be able to attract private capital for investments
in developing countries and be viable without
the
special tax treatment. Until that happens, there is a
transitional period, during which the UK Government
controls that CDC complies with the UK development
policy goals. The benefit which CDC has from the
measure compensates
the lower profits it will
make as a result of having to take a public policy
objective into account, and not being able to take
investment decisions exclusively on the basis of profit
considerations. For example, without
the particular
focus on poorer developing countries, CDC could
have invested more in middle income developing
countries and potentially made better returns.

for

failure it

the measure can be considered to be
Consequently,
proportionate to the presumed market
is
devised to meet, and to ensure that any distortion is
minimised (point VI.6 of the communication). There
will also be open competition and full publicising of
the CDC investment opportunity, allowing investors
from any EU Member State to participate in the
distortion of
venture. This
therefore a
competition between investors and is
positive element.

also minimises

the

— The Commission specifically identified fiscal incentives
investment as a
to investors to undertake risk capital
form of aid capable of meeting the criteria set out in
section VIII of the communication (point VII.1(e) of the
communication).

— It

is a positive element

that CDC will make equity

investments (point VIII.3 of the communication).

it

that

is a positive element

— The whole objective of CDC is to be profit driven. In
the UK
this context,
Government intends to sell up to 75 % of the shares
in CDC to private investors. Within the limits of the
operating framework,
is invested on a
commercial basis directly in the equity of the target
enterprises. The investment decisions are taken by the
in the
CDC Board. The State does not
that
decisions
investment
limits of
investments
the
are made within the
the communi-
operating framework (point VIII.3 of
cation).

take part
controlling

this capital

beyond

— CDC has no sectoral focus, and only excludes certain
sectors for ethical reasons. This is a positive element
(point VIII.3 of the communication).

— Normally,

investments will be made on the basis of

business plans (point VIII.3 of the communication).

since it

— It is unlikely that CDC will be eligible for any other
is not an SME, will not
State aid, e.g.
undertake
in environmental protection
and is not located in an assisted area. Therefore, there
is no real risk of cumulation with other aid measures.
This is a positive element.

investments

The UK authorities will submit detailed annual reports to
the Commission, and in addition they will also submit the
results of any review of the scheme which the UK auth-
orities will carry out in case a significant over-subscription
to the shares of CDC indicates that the market conditions
have changed and therefore also the necessity of
the
scheme as notified. This is important, as risk capital is an
area of rapid development (point IX of the communication).

Any further benefit foreseen for CDC once the Government
no longer holds its special share are to be notified to the
Commission before implementation.

3.3. The Commission's doubts concerning the duration of

the scheme

The Commission, nevertheless, has doubts as regards the
compatibility with the common market of this aid for the
following reasons:

— the Commission does not,

in principle, approve fiscal
non-quantifiable State aids for an unlimited period of time,

— the granting of State aid should not be seen as a permanent
solution, but as a temporary measure, which aims to
address specific problems. The ultimate goal should be to
obtain a fully functioning market without State inter-
vention. The Commission finds that it is appropriate to
review State aid schemes regularly in order to ascertain
whether the aid is still necessary in view of market devel-
opments,

— it is stated in point IX of the communication on State aid
and risk capital that risk capital investment is an area of
rapid development in the Community economy. This is one
of
the
the reasons why the period of application of
limited to five years and why the
communication is
Commission reserves
its approach
to adjust
during that period. CDC does not carry out the kinds of
risk capital investments foreseen in the communication, but
the Commission cannot exclude that the market for ethical
investment funds will develop so that the aid to CDC will
distort competition and affect trade between Member States
to a significantly greater extent than it does now,

the right

— the Commission does not find the arguments put forward
by the UK authorities to be convincing enough to deviate
from its practice to require all State aid cases to be limited
in time with a possibility of renotification and prolon-
the Commission is not convinced
gation.
initially limited to 10 years in itself
that an approval
would reduce,
the willingness of private
investors to invest in CDC,

In particular,

significantly,

19.9.2002

EN

Official Journal of the European Communities

C 223/13

— if schemes were open-ended neither the Commission nor
other Member States would know which aid schemes were
still in operation in a particular Member State. Therefore,
regular
to
Commission decisions, which are published, provide trans-
parency,

renotifications

schemes

leading

aid

of

— the European Council meeting in Barcelona on 15-16
to the Member States to
level of State aid. The request for a

March 2002 renewed its call
reduce the overall
time limit is in line with this policy,

— an indefinite tax exemption would appear to be difficult to
the EU and OECD

reconcile with the principles of
initiatives to curb harmful tax competition,

— several countries in which CDC may invest are currently
candidate countries negotiating accession to the EU. The

Commission doubts that CDC will be able to continue
investing in these countries once they have become
members of the European Union.

requests

In the light of the foregoing considerations, the Commission,
acting under the procedure laid down in Article 88(2) of the
EC Treaty,
its
comments and to provide all such information as may help
to assess the aid, within one month of the date of receipt of
this letter. It requests your authorities to forward a copy of this
letter to the potential recipient of the aid immediately.

the United Kingdom to submit

The Commission wishes to remind the United Kingdom that
Article 88(3) of the EC Treaty has suspensory effect, and would
draw your attention to Article 14 of Council Regulation (EC)
No 659/1999, which provides that all unlawful aid may be
recovered from the recipient.’

Non-opposition to a notified concentration

(Case COMP/M.2883 — Bertelsmann/Zomba)

(2002/C 223/04)

(Text with EEA relevance)

On 2 September 2002 the Commission decided not to oppose the above notified concentration and to
declare it compatible with the common market. This decision is based on Article 6(1)(b) of Council
Regulation (EEC) No 4064/89. The full text of the decision is only available in English and will be
made public after it is cleared of any business secrets it may contain. It will be available:

— as a paper version through the sales offices of the Office for Official Publications of the European

Communities (see list on the last page),

— in electronic form in the ‘CEN’ version of the CELEX database, under document No 302M2883. CELEX

is the computerised documentation system of European Community law.

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