2003/590/EC: Commission Decision of 5 March 2003 on the State aid which the United Kingdom is planning to grant to CDC Group plc (Text with EEA relevance) (notified under document number C(2003) 651)
Date: 2003-03-05
Institutions: European Commission
Subjects: State aid, United Kingdom, control of State aid, developing countries, economic development, investment

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COMMISSION

COMMISSION DECISION

of 5 March 2003

on the State aid which the United Kingdom is planning to grant to CDC Group plc

(notified under document number C(2003) 651)

(Only the English text is authentic)

(Text with EEA relevance)

(2003/590/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Com-
munity, and in particular the first subparagraph of Article
88(2) thereof,

Having regard to the Agreement on the European Economic
Area, and in particular Article 62(1)(a) thereof,

Having called on interested parties to submit their comments
pursuant to those provisions (1),

the richer developing countries.

foreign investment in developing countries is focused on
only a few of
is
believed that financial sectors in poorer countries are
underdeveloped and that official and market information
about investment opportunities and potential returns is
inadequate.

It

(6)

The legal basis of this measure is the CDC Act 1999.

Whereas:

(7)

1. PROCEDURE

By letter dated 17 January 2001, the United Kingdom
notified the Commission of the aid to CDC Group plc. It
provided the Commission with further information by a
letter dated 5 June 2001, registered on 8 June 2001, a
registered on 21
letter dated 18 September 2001,
September 2001, and a letter dated 29 May 2002, regis-
tered on 7 June 2002.

By letter dated 2 July 2002, the Commission informed
the United Kingdom that it had decided to initiate the
procedure laid down in Article 88(2) of the Treaty in
respect of the aid.

The Commission decision to initiate the procedure was
published in the Official Journal of the European Commu-
nities (2). The Commission called on interested parties to
submit their comments.

(8)

The Commission received no comments from interested
parties.

(1)

(2)

(3)

(4)

(5)

for

is the United Kingdom
The CDC Group plc (CDC)
Government's main instrument
investing in the
poorer countries. The purpose of CDC is to maximise
the creation and long-term growth of viable businesses
in developing countries, especially poorer countries.
CDC is not a tax planning instrument, nor an instrument
to repatriate passive income. By transforming CDC into
a public private partnership, the United Kingdom autho-
rities seek to encourage private investment flows to the
poorer countries. CDC is expected to remedy the market
failure by demonstrating that commercial returns are
available from such investments. The Government has
therefore imposed an operating framework on CDC,
according to which it is required to make 70 % of new
investments (by aggregate value) in poorer developing
countries (3) over a rolling five-year period and to seek
to make at least half of new investments in sub-Saharan
Africa and South Asia.

The United Kingdom authorities originally intended to
sell the majority of shares in CDC rather soon. However,
by letter dated 12 August 2002,
they informed the
Commission that it would not be possible in the current
market conditions to obtain value for money from such
a sale. The sale still remains an objective for the future
and there will then be open competition and full publi-
cising of the CDC investment opportunity.

2. DETAILED DESCRIPTION OF THE AID

The overall purpose of the scheme is to support the
United Kingdom Government's international develop-
ment policy. According to the United Kingdom, most

(1) OJ C 223, 19.9.2002, p. 6.
(2) See footnote 1.

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

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The aid consists in granting CDC investment company
status, although the company does not meet all the tech-
nical requirements of an investment company as set out
in United Kingdom legislation. The main implication is
that CDC will enjoy an exemption from tax on income
and chargeable gains derived from its investment activ-
ities in the same way that investment companies do.
Investors in CDC will pay tax according to their own
circumstances. The United Kingdom authorities argue
that if CDC is not tax efficient, private investors will not
support the partnership.

Commission had doubts as regards the compatibility
with the common market of an aid scheme with an
unspecified duration, and therefore decided to open the
procedure under Article 88(2) of
the Treaty. The
following doubts were expressed in the decision to open
the procedure:

(a) the Commission does not,

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

The United Kingdom authorities also submitted that
nobody could know how long it would take to obtain
the demonstration effect, but that it was expected to take
more than 10 years. Therefore, they claimed that they
would not be able to attract private investors if the
Commission's initial approval were limited to 10 years.
The measure was therefore notified for an unspecified
period.

(b) 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 ulti-
mate goal should be to obtain a fully functioning
market without State intervention. The Commission
finds that
is appropriate to review State aid
schemes regularly in order to ascertain whether the
aid is still necessary in view of market developments;

it

(9)

(10)

(11)

The United Kingdom authorities expect the effect of the
aid to be limited, since the value of the tax exemption of
probably less than GBP 50 million (about EUR 80
million) is small in relation to the total foreign direct
investment in developing countries, which was around
GBP 100 000 million (about EUR 160 000 million) in
1997. Most of these funds are invested by multilateral
and European development finance institutions, such as
the International Finance Institution and the European
Investment Bank. These are supranational bodies outside
the tax system. The United Kingdom authorities submit
that sub-Saharan Africa and South Asia received less
than 4 % of all private flows to developing countries in
1997. The direct public and private competitors of CDC
at the investor level are likely to be emerging market
investor funds, emerging market private equity funds
and ethical funds. Less directly, competition could be
represented by large multinational companies who might
raise funds to finance acquisitions in the countries where
CDC operates. At the level of investments, alternative
players may include trade players (e.g. companies already
involved in the industry into which CDC is buying),
other venture capital
including development
funds,
finance institutions, or entrepreneurs who have spotted
a good opportunity.

2.1. The decision to open the procedure under

Article 88(2) of the Treaty

(12) On 2 July 2002, the Commission decided that the aid as
such was compatible with the common market, due to
its development objective and because it contained
several of the positive elements set out in the Communi-
cation on State aid and risk capital (4). However, the

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

(c) 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 reasons why the period
of application of the Communication is limited to
five years and why the Commission reserves the
right to adjust its approach during that period. CDC
does not carry out the kinds of risk capital invest-
the
ments foreseen in the Communication, but
Commission cannot exclude that
for
the market
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;

(d) the Commission does not find the arguments put
forward by the United Kingdom 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 prolongation. In
particular, the Commission is not convinced that an
approval initially limited to 10 years in itself would
reduce, significantly, the willingness of private inves-
tors to invest in CDC;

(e) if schemes were open-ended neither the Commission
nor other Member States would know which aid
in operation in a particular
schemes were still
Member State. Therefore, regular renotifications of
aid schemes leading to Commission decisions, which
are published, provide transparency;

(f) the European Council meeting in Barcelona on 15
and 16 March 2002 renewed its call to the Member
States to reduce the overall level of State aid. The
request for a time limit is in line with this policy;

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(g) an indefinite tax exemption would appear to be diffi-
cult to reconcile with the principles of the European
Community and OECD initiatives to curb harmful
tax competition, as set out in the Code of Conduct
(adopted 1 December 1997 as part of
the Tax
Package) in the European Union and in the 1998
Report on Harmful Tax Competition — an Emerging
Global Issue, in the OECD;

(h) several countries in which CDC may invest are
currently candidate countries negotiating accession
to the European Union. The Commission doubts that
CDC will be able to continue investing in these
countries once they have become members of the
European Union.

3. COMMENTS FROM THE UNITED KINGDOM

referred to the fact

(13) Already in their letter of 29 May 2002, the United
Kingdom authorities
the
Commission can choose unilaterally to initiate an appro-
the
priate measures exercise under Article 88(1) of
Treaty at any time, if it believes that the objective of the
scheme has been attained, or if other changes have
occurred that affect CDC's special tax treatment.

that

(14)

In their letter of 12 August 2002, registered on 19
August 2002, the United Kingdom authorities recall the
Joint Commission — Council declaration on EC develop-
ment policy in November 2000 (5), which stressed the
importance of private sector development for developing
countries. The CDC is central to the United Kingdom
authorities approach to this issue. The United Kingdom
authorities also recall that Article 178 of the Treaty
states that the Community is to take account of the
objectives referred to in Article 177 on development
cooperation in the policies that it implements which are
likely to affect developing countries. They believe that it
is not possible to achieve the objectives of CDC within
10 years, which is the time limit usually requested by
the Commission.

(15)

The United Kingdom authorities made the following
comments on the Commission's doubts as set out in
recital 12:

(a) the United Kingdom authorities state that they have
quantified the proposed aid and have emphasised to
they intend to bring the
the Commission that
proposed tax exemption for CDC to an end when
the market failure has been corrected and the aid is
no longer required;

(b) the United Kingdom authorities agree that the aid
should be a temporary measure whose ultimate goal
should be to achieve a fully functioning market for
the provision of capital to poorer developing coun-
tries without the need for State intervention. They
will not provide State aid to CDC which is unneces-
sary in view of market developments;

(5) ‘Bulletin EU’ 11-2000 Development cooperation (1/10) 1.6.43. State-
ment by the Council and the Commission on the Community's
development policy.

(c) the United Kingdom authorities agree that

risk
capital investment is an area of rapid development
in the Community economy. They hope that this
rapid development will also include or
lead to
increased ethical
in the poorer devel-
oping countries. They also agree with the Commis-
sion that CDC does not carry out the kinds of risk
capital investments foreseen in the Communication;

investment

(d) the United Kingdom authorities

reply that an
approval initially limited to 10 years would not be
workable. CDC is increasingly focusing its activities
in a series of Funds,
following standard industry
practice. Each such Fund will normally have a life-
time of 10 years, after which profits are returned to
investors. A Fund launched one year after Commis-
sion approval had been received would therefore not
return profits to investors within the period of the
operation of the aid. The United Kingdom authori-
ties would therefore have to renotify before the
the United
launch of each Fund. More generally,
Kingdom authorities have estimated that a period of
40 to 50 years will be required to correct the market
failure for the provision of capital
to emerging
markets. Developments in capital markets since 11
September 2001 may cause this timetable to become
further extended. In the light of this assessment, the
United Kingdom authorities find that a 10-year
approval would not appear to be appropriate. The
Commission states that it is not convinced that an
approval initially limited to 10 years would reduce,
significantly, the willingness of private investors to
invest in CDC. To this, the United Kingdom authori-
ties respond that this is the advice that has been
given by the investment bank which is retained as
the United Kingdom Government's financial advisers
on CDC. It will not be possible to give private inves-
tors certainty that the approval will be renewed by
the Commission during the initial 10-year period. If
the approval were not renewed, this would signifi-
cantly affect the value of any investment;

(e) the concern about knowing which State aid schemes
are still in operation can be addressed separately;

(f) the United Kingdom authorities recall the meeting in
Barcelona in March 2002 and would like to make
clear that United Kingdom levels of State aid are
falling in line with the Barcelona conclusions. The
United Kingdom authorities also emphasise that the
Barcelona Conclusions do not call for an a priori
time-limitation on State aid measures (though the
there are good
United Kingdom recognises that
reasons, where appropriate,
for time-limiting aid
measures), but urge Member States to target State
aid at market failures, such as the market failure
addressed by CDC;

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‘harmful

constitutes

(g) the United Kingdom authorities do not believe that
the proposed measure
tax
competition’ in the meaning of European Commu-
nity and OECD initiatives. The Harmful Tax Compe-
tition Initiative uses the term ‘harmful tax competi-
tion’ to describe an unfair measure that significantly
influences the location of business activity in the
Community. Such a description could not be applied
to the proposed measure, the objective of which is
not
to concentrate business activity in a single
Member State, but to increase investment in poorer
developing countries;

(h) the United Kingdom authorities agree that CDC
should not invest in countries that have become
members of the European Union. They will address
this issue at the appropriate time.

3.1. New information — Reorganisation of CDC

Group plc

By letter dated 27 September 2002, registered on 7
October 2002, and letter dated 18 November 2002,
registered on 22 November 2002, the United Kingdom
authorities submitted new information and requested
that it be taken into account in the Commission's deci-
sion closing the procedure.

The new information concerned a planned reorganisa-
tion of CDC, which is considered necessary, since under
current management arrangements there is no competi-
tion for
In the
the management of CDC's capital.
medium term, the proposed reorganisation will lead to a
more competitive market for the management of invest-
ments in poorer developing countries.

(16)

(17)

(18)

The effect of the reorganisation will be to separate CDC
into two corporate entities:

— ‘CDC-Investco’ (6)

(the existing CDC, with some
amendments to its Articles), which would continue
to own the cash and investment assets of CDC and
its subsidiaries on the same basis as at present. CDC-
Investco would be the beneficiary of the proposed
tax exemption, which is subject to the current proce-
dure;

— a new investment management company (Manco (7)).
Manco will establish investment Funds with a
geographical or sectoral focus,
initially for Africa,
South Asia, Power and SMEs. Each Fund will be
either a corporate or quasi-corporate or partnership
entity owned by its investors in proportion to their
holdings and having a constitution appropriate to its
purpose. Each Fund will be managed by fund
managers
(Fundcos) with appropriate skills and
experience provided by Manco.

(19) Manco would initially be wholly owned by government
(the Department for International Development, DFID).
But it is envisaged that, at as early a stage as possible, a
proportion of the equity in Manco would be offered for
sale to private investors,
in an open and competitive
way. The United Kingdom authorities have been advised
that the sale of equity in Manco, as a smaller and more
straightforward transaction than a sale of equity in CDC
as a whole, is achievable in current market conditions.
CDC-Investco will remain wholly owned by government
during the restructuring, but the government intends
that private investors should be brought in to CDC-
Investco when the conditions are right. The structure of
the operation is set out in the following diagram (8):

(6) The company names ‘CDC-Investco’ and ‘Manco’ are only preli-

minary names.
(7) See footnote 5.
(8) Source: United Kingdom authorities.

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(20)

The structure of a management company and a family
of Funds is an accepted norm in the international fund
management industry. The advantages of this structure
for CDC are foreseen as follows. Firstly, since each Fund
would have its own expected rate of return, risk profile
and other characteristics, potential private investors
would be able to identify Funds which fitted into their
investment strategy. Secondly, the exaggerated percep-
tion of risk which prejudices private equity investors
against poorer country investment would be more effec-
tively mitigated by demonstrating the success of specia-
lised Funds in specific markets. Thirdly, the Fund struc-
ture would provide the Government with more transpar-
ency and better monitoring of management costs and
performance — and ability to take corrective action in
the event of underperformance.

(22) After five years under the main contract, CDC-Investco
would be free to invest its uncommitted capital in Funds
launched by other companies as well as Manco, and to
procure investment management services on a competi-
tive basis. Sometimes the investment manager chosen by
CDC-Investco might be Manco, sometimes an alternative
would be selected — such that in say 10 years time,
CDC-Investco would be using a range of managers
including Manco. Similarly, the United Kingdom authori-
ties would expect Manco to be managing capital for a
range of investors including CDC-Investco. CDC-Invest-
co's and Manco's development focus on poorer countries
would remain unchanged after the end of the contract
between them.

3.1.1. The proposed contract between CDC-Investco and

Manco

(23)

(21)

It is proposed that CDC-Investco should contract for a
five-year period to commit capital to Funds created and
managed by Manco. This is necessary to ensure that
Manco's initial business plan will be feasible, and that
the new company will be financially viable. The contract
will also contain terms for the management of
the
current CDC portfolio, which ensure the continued
development focus of the existing projects.

There are broadly standard, or
for
contracts for the management of investment funds and
for the most part
is expected that CDC-Investco's
contract with Manco will be on such terms. The atypical
terms that may exist will be only in the following areas:

typical,

terms

it

(a) there will be terms binding Manco to adherence to
the ‘CDC Universe’ of countries, the socially respon-
sible business principles and other policy values
currently applied to CDC;

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(b) there will be a qualified commitment by CDC-
Investco to invest in agreed Manco-managed funds
launched during the first five years of operation;

(c) there may be different management fees associated
with different Funds, depending on whether CDC-
Investco is a sole investor in a Fund or one of a
number of investors. CDC-Investco will remain the
only investor in the most unattractive funds. For
these funds, the fees might be somewhat higher, but
not higher than they are in the present structure.
Where CDC-Investco is investing in a Fund together
with private investors, they will all pay the same
management fees.

3.1.2. Comments from the United Kingdom authorities

(24) Without the reorganisation, CDC management would
have an indefinite right to manage all CDC's capital,
whereas the proposed contract will have a finite dura-
tion. As such, the United Kingdom authorities consider
their proposed course of action to be pro-competitive.

(25)

The statements made in the United Kingdom's notifica-
tion concerning the tax exemption for CDC will remain
valid. In particular, the reorganisation will retain consis-
tency with the Commission's Communication on State
aid and Risk Capital, because Manco will be a new and
innovative enterprise focused on risk capital market
failure in poorer developing countries, making invest-
ment decisions on a commercial basis, and without
receiving operating aid or distorting the common
market. It is hoped that the reorganisation will accelerate
the process by which CDC is able to remedy the market
failure in the provision of risk capital in poorer coun-
tries.

practice to consider that when the State intervenes to
financial
create a new player on the international
markets,
flows
between Member States. In this case, however, the effect
on trade and competition was found to be limited, in
view of the specific investment focus of CDC Group plc.

this has an effect on the investment

In the following, the beneficiary of this aid is referred to
as ‘CDC-Investco’.

4.1.2. The reorganisation

(27) As

the
stated by the United Kingdom authorities,
contract between CDC-Investco and Manco contains
atypical terms in three areas.

(a) Manco will continue to be bound to the ‘CDC-
Universe’ of countries, the socially responsible busi-
ness principles and other policy values currently
applied to CDC Group plc. This measure does not
involve State resources and therefore does not
constitute State aid.

(b) CDC-Investco will commit

to invest

in agreed
Manco-managed Funds launched during first
five
years of operation. For the sums invested to consti-
tute State resources within the meaning of Article
87(1) of the Treaty,
three conditions have to be
fulfilled, according to the case law of the Court of
Justice: (i) there have to be public funds involved, (ii)
the measure must be imputable to the State, and (iii)
the money must be invested in a way in which a
prudent investor in a market economy would not
have invested them (10).

4. ASSESSMENT

In this case, the Commission assesses the fulfilment
of the three conditions as follows:

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

Treaty

4.1.1. The tax exemption

(26) No new information was received during the procedure,
which affects the Commission's initial assessment that
the tax exemption constitutes State aid to CDC Group
plc. The tax exemption will lead to a loss of revenue for
the State and thus involves State resources (9). The
measure is only available to CDC, and is therefore
specific. It is an advantage for CDC to be granted invest-
ment company status, and thus the tax benefit. Without
it, CDC would not be able to attract private capital for
any kind of investment. As regards the effect on trade
between Member States, it is the Commission's constant

(9) The amount of tax revenue foregone depends on the extent to
which investors in CDC are liable to tax in the United Kingdom. See
also the Commission's decision in case N 56/2001 (OJ C 223,
19.9.2002, p. 6).

(i) CDC-Investco will initially continue to be wholly
owned by the State, and the privatisation has
been postponed for an undefined period of time.
At the time the decision to commit funds is
taken,
the public authorities clearly exercise
dominant influence over CDC-Investco, and the
funds of
constitute
public funds;

company therefore

the

(ii) the measure is planned and notified by the

State;

(iii) the United Kingdom authorities

that
contracts dealing with the outsourcing by the
parent company of a core function are unusual
and that the proposed contract therefore lies
outside some market norms.

state

The measure
within the meaning of Article 87(1) of the Treaty.

involves State resources

therefore

(10) See e.g. judgement in Case C-482/99 French Republic v Commission.

[2002] ECR I-4397.

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CDC-Investco will only make a commitment towards
Manco, and thus the measure is specific. A propor-
tion of the equity in Manco is to be privatised as
soon as possible, and a five-year commitment of
funds is an advantage to any private management
company, since it ensures a certain income and
profit from management fees. Fund management at
the level at which Manco will operate is an interna-
tional activity. The measure is intended to ensure the
the company on this market. The
viability of
threatens to distort
measure thereby distorts or
competition and affects
trade between Member
States. The Commission therefore finds that CDC-
Investco's commitment to Manco constitutes State
aid to Manco covered by Article 87(1) of the Treaty.
Such an aid cannot be quantified.

Manco will be privatised in an open and competitive
way. Therefore, the Commission finds that there is
no selectivity at this level, and that the aid is not
passed on to the private investors in Manco.

(c) The management

fees, although varying between
Funds, will be cost-reflective. When CDC-Investco
invests in the same Funds as private investors, the
management fees will be the same for all investors.
The Commission therefore does not see any advan-
tage to Manco nor to the private investors, and the
differentiation of management fees between Funds
does not constitute State aid under Article 87(1) of
the Treaty.

4.2. Compatibility of the aid under Article 87(3)(c)

of the Treaty

(28) Article 87(3)(c) of the Treaty allows the Commission to
grant an exemption for ‘aid to facilitate the development
of certain economic activities, where such aid does not
adversely affect trading conditions to an extent contrary
to the common interest’. In this case, the aid serves to
facilitate the development of risk capital investments by
private EU investors in businesses in the poorer devel-
oping countries. The two aid measures are assessed sepa-
rately below.

4.2.1. The tax exemption

(29)

the Treaty,

the Commission did not doubt

In its decision to open proceedings under Article 88(2)
of
the
compatibility of the aid as such. The aid to CDC-Investco
is granted in line with the Community development
policy as set out
the Treaty. The
in Article 177 of
scheme also contains a number of positive elements as
described in the Commission Communication on State

aid and risk capital. A number of these criteria serve to
ensure that
the funds are invested and managed on
market conditions. The creation and privatisation of a
separate management company will
therefore only
improve the aid's fulfilment of the relevant criteria.

(30)

(31)

(32)

The doubts expressed mainly concerned the duration of
the aid, which was notified for an unspecified period of
time. In principle, the Commission does not approve
fiscal non-quantifiable State aids for an unlimited period
of time. In brief, the Commission considers that such
State aid measures should be temporary, because the
ultimate goal
is to obtain a fully functioning market,
without State intervention. In general, the risk capital
market develops rapidly so that it cannot be excluded
that the notified aid will distort competition and affect
trade between Member States to a significantly greater
extent than it does today.

If, however,
risk capital
the rapid development of
markets also leads to increased ethical investment in the
poorer developing countries, the period during which
the aid is granted will be shortened. This is because once
the United Kingdom authorities consider that the rele-
vant markets have developed, the State will give up its
special share in CDC to which the tax exemption is
linked. If, on the other hand, the relevant market does
not develop,
the distortion of competition remains
limited, and its duration will therefore also be of less
importance.

The Commission also referred to the European Council
meeting in Barcelona 15 and 16 March 2002, which
called for reduced overall
levels of aid, and to the
European Community and OECD initiatives to curb
harmful tax competition. It is true that the European
Council in Barcelona also urged Member States to target
State aid to identified market failures. Moreover,
the
notified measure is not intended to concentrate business
activity in one single Member State, nor can it be
expected to have such an effect. Since investors in CDC
are taxed according to their own circumstances, they
have no reason to relocate because of the tax exemption
of CDC-Investco.

(33)

In its decision to open proceedings, the Commission also
doubted whether the ‘CDC Universe’ could include coun-
tries expected to accede to the European Union in 2004.
The United Kingdom authorities will ensure that CDC-
Investco does not invest in countries that have become
members of the European Union. This doubt has there-
In addition, no EEA countries are
fore been allayed.
included in the ‘CDC Universe’.

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(34)

(35)

(36)

(37)

(38)

In conclusion, the Commission maintains its position
that fiscal aid, in particular, must not be authorised for
an undefined period of time. However, the Commission
finds that exceptionally the aid can be authorised for an
initial period of 20 years, given the specificity and aim
of the aid, the wish of the United Kingdom authorities
to end the measure as soon as it is no longer necessary,
the limited distortion of competition and the absence of
comments from third parties. Whether or not the aid
can be authorised for a longer period, as requested by
the United Kingdom authorities, is better assessed at a
later stage when any market developments can be prop-
erly taken into account. Therefore,
the United
Kingdom authorities
they may notify the
so wish,
Commission of a prolongation of the aid as from the
end of the first 10 years of its application.

if

4.2.2. The five-year commitment of funds to Manco

The Commission notes that the reorganisation of CDC
Group plc is appropriate in the current market condi-
tions and will facilitate the achievement of the objective
of
for
the scheme, namely to attract private capital
investment in businesses in the poorer developing coun-
tries. The structure of a management company and a
family of Funds is an accepted norm in the international
fund management industry.

The Commission also notes that the United Kingdom
authorities find it necessary for CDC-Investco to commit
to invest in agreed Manco-managed funds for the five
first years of operation of the new structure. In this way,
Manco will be guaranteed income through management
fees. The Commission accepts that it is important to
since the
safeguard the initial viability of Manco,
company remains an instrument of United Kingdom
development policy.

The Commission finds that the commitment of funds for
a five-year period can be considered proportionate to
the development objective pursued. The aid to Manco is
therefore considered compatible with the common
market under Article 87(3)(c) of the Treaty. This decision
is also in line with Article 178 of the Treaty, which
states that the Community shall take account of the
objectives referred to in Article 177 on development co-
operation in the policies that it implements which are
likely to affect developing countries.

5. CONCLUSION

The Commission concludes that the aid granted in the
form of a tax exemption to CDC-Investco is compatible
with the common market under Article 87(3)(c) of the
Treaty. However, it can at this stage only be authorised
for an initial period of 20 years from its entry into force.
As from the end of the first 10 years of application of
the aid, the United Kingdom authorities may notify a
prolongation of it beyond the initial 20 years.

(39)

(40)

The aid granted to Manco in the form of a commitment
by CDC-Investco to invest in agreed Funds launched by
Manco is also compatible with the common market
under Article 87(3)(c) of the Treaty and can be approved
for the five-year period for which it was notified.

The Commission attaches great
importance to the
ongoing work against harmful tax practices on both
European Community level
(the Code of Conduct
Group) and OECD level (the OECD Forum on harmful
tax practices). However, since CDC only will make real,
active investments in third countries, the regime would
appear to be in line with the Community approach in
this respect. The Commission will closely monitor this in
the annual
reports to be submitted by the United
Kingdom authorities,

HAS ADOPTED THIS DECISION:

Article 1

The State aid, notified on 17 January 2001, in the form of a
tax exemption, which the United Kingdom is planning to
implement on the basis of the CDC Act 1999 for the invest-
ment company to be created through the reorganisation of
CDC Group plc, provisionally known as ‘CDC-Investco’,
is
compatible with the common market within the meaning of
Article 87(3)(c) of the Treaty.

The tax exemption is authorised for an initial period of 20
years from its entry into force.

in favour of

The State aid in the form of a commitment by the investment
company provisionally known as ‘CDC-Investco’ to invest in
certain agreed Funds, which the United Kingdom is planning to
implement
the management company to be
created through the reorganisation of CDC Group plc, provi-
sionally known as ‘Manco’,
is compatible with the common
market within the meaning of Article 87(3)(c) of the Treaty.
The aid is authorised for a period of five years from the entry
into force of the relevant contract between the two companies.

Implementation of the aid is accordingly authorised for the
specified periods.

Article 2

This Decision is addressed to the United Kingdom of Great
Britain and Northern Ireland.

Done at Brussels, 5 March 2003.

For the Commission

Mario MONTI

Member of the Commission