State aid — United Kingdom — State aid No C 7/07 (ex NN 82/06 and NN 83/06) — Alleged aid in favour of Royal Mail and POL — Invitation to submit comments pursuant to Article 88(2) of the EC Treaty (Text with EEA relevance )
Date: 2007-04-26
Institutions: European Commission
Subjects: State aid, United Kingdom, control of State aid, exchange of information, loan, postal service

C 91/34

EN

Official Journal of the European Union

26.4.2007

V

(Announcements)

PROCEDURES RELATING TO THE IMPLEMENTATION OF THE COMPETITION
POLICY

COMMISSION

STATE AID — UNITED KINGDOM

State aid No C 7/07 (ex NN 82/06 and NN 83/06) — Alleged aid in favour of Royal Mail and POL

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

(Text with EEA relevance)

(2007/C 91/10)

By means of the letter dated 21 February 2007 reproduced in the authentic language on the pages following
this summary, the Commission notified the United Kingdom of its decision to initiate the procedure laid
down in Article 88(2) of the EC Treaty concerning certain measures.

The Commission decided not to raise any objections to certain other measures, as described in the letter
following this summary.

Interested parties may submit their comments on the measures in respect of which the Commission is initi-
ating the procedure within one month of the date of publication of this summary and the following letter,
to:

European Commission
Directorate-General for Competition
State Aid Greffe
SPA 3 6/5
B-1049 Brussels
Fax No: (32-2) 296 12 42

These comments will be communicated to the 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.

TEXT OF SUMMARY

THE MEASURES IN RESPECT OF WHICH THE COMMISSION IS
INITIATING THE PROCEDURE

PROCEDURE

Beneficiary

The measures on which the Commission has opened the proce-
dure laid down in Article 88(2) were brought to the Commis-
sion's attention either by means of complaints, or in cor-
respondence with the United Kingdom authorities following
such complaints. None of these measures have been notified to
the Commission.

The beneficiary of the alleged State aid is Royal Mail Group plc
(RM) which (through a holding company, Royal Mail Holdings
plc) is a 100 % State-owned company. RM is the UK's main
postal operator and had a legal monopoly over most basic letter
services until the end of 2005. The post office network is oper-
ated by POL, which is a subsidiary of RM. RM has a separate
parcels business division, Parcelforce. Parcelforce accumulated

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C 91/35

losses since 1991 and apart from a small trading profit in
1995/1996 and despite numerous restructuring efforts, made
losses until it became profitable again in 2005.

that consequences have already followed from it, and therefore
considers that it has been put into effect.

The 2001 loan

In February 2001, the UK authorities made a loan of GBP 500
million to RM to finance overseas acquisitions for the mails and
parcels business. The loan is repayable between 2021 and 2025
and carries an average interest rate of around 5,8 %. The UK
authorities have stated in correspondence with the Commission
that this loan was on commercial terms, and that they followed
advice from consultants designed to ensure that this was so. In
addition, they have stated that the loan was not for any Parcel-
linked to such
force restructuring,
restructuring, and that it was made solely to finance overseas
acquisitions.

its terms were not

that

The loan facilities

In 2003 the UK authorities made available to RM various loan
facilities to finance its ‘renewal plan’. These facilities consisted of
a loan facility of GBP 544 million from the National Loans
Fund (NLF) secured on RM's accumulated cash balances and the
acquisition by the authorities of two bonds issued by RM (one
of GBP 300 million and one of GBP 200 million). Again, the
UK authorities have stated in correspondence with the Commis-
sion that these loan facilities were on commercial terms, and
that they followed advice from consultants designed to ensure
that this was so. As of October 2006 these loan facilities had
not been drawn down, and the GBP 200 million facility had by
then expired. Commitment fees had nonetheless been paid by
RM. In May 2006 the UK authorities announced their intention
to extend the remaining loan facilities and to increase their level
from GBP 844 million to GBP 900 million.

The pensions escrow account

In 2006 the UK authorities decided to set up an ‘escrow
account’ with cash balances in RM's reserves over which the UK
authorities have specific control under section 72 of the Postal
Services Act 2000. The account could be drawn on by the
Royal Mail Pension Plan (RMPP) in certain circumstances if RM
were to fail. The background was that the various RM pension
schemes, of which the RMPP is by far the largest, showed a total
deficit of GBP 5,6 billion in its 2005/6 accounts. The account
allows RM to agree with the trustees of the RMPP a longer
period for addressing the deficit thereby reducing its pension
contributions in the next years. The UK authorities have stated
that they believe the use of the reserves for this purpose is in
RM's best commercial
interests, and that by enabling RM to
complete its strategic plan they will bring about an increase in
the value of the UK authorities' shareholding. The Commission
understands that this measure has been fully committed to, and

The GBP 300 million shareholder loan

On 8 February 2007 the UK authorities made an announcement
concerning the pensions measure, the GBP 900 million loan
facility and also a new loan of GBP 300 million to Royal Mail.

ASSESSMENT OF THE MEASURES

Existence of aid

The 2001 loan is repayable between 2021 and 2025 and
carries an average interest rate significantly below the reference
rate applicable to the UK at the time the UK informed the
Commission that the loan was granted, which was 7,06 %. The
UK authorities have provided certain evidence that at that time
the interest rates for such a long term loan could be below the
reference rate (which is based on five year rates) without contra-
vening the market economy investor principle. However, this
evidence also appears to indicate that part of the loan was
granted in 1999 and 2000. Not only does this contradict earlier
information, but it involves a period when the reference rate
was even higher (7,64 % in 2000).

The loan facilities granted in 2003 were not drawn down.
However, it cannot be concluded from this point alone that the
loan facilities provided no advantage, since the availability of the
loan facilities has an ‘option value’ to the company. It could not
have been known in 2003 that they would not be drawn down.
The 2003 loan facilities still existing in October 2006 are to be
extended, on revised terms. The UK authorities informed the
Commission on 31 October that the terms were still being
negotiated. On the basis of the information available to the
Commission it cannot be ruled out that an aid element
is
involved.

One effect of the pensions escrow account, which is clearly
selective towards RM, is to reduce the pensions contributions
that RM has to make to the RMPP to address its current deficit.
This is an indication that the measure may provide an advantage
to RM and therefore be State aid. The UK authorities have
argued that the measure can be justified as the intervention of a
market economy investor, because it allows RM to modernise its
the
business
Commission has doubts about this argument, which has not
been backed up by projections or by financial analysis, and is
not in a position to allay its doubts that aid may be involved.

strategic plan. However,

through its current

The terms of the GBP 300m loan have not been communicated
to the Commission. Given the fact that the loan is part of
package of measures where the Commission has not allayed its
doubts that State aid may be involved, the terms of the loan
could not in any case be assessed independently.

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Compatibility of aid

In the case of these measures, the legal basis of Article 86(2)
does not seem to be available. The 2001 loan and loan facilities
have been explicitly linked by the UK authorities to other
projects than services of general economic interest, namely the
overseas acquisitions of RM and the renewal plan adopted in
2003. The pensions escrow account and GBP 300 million share-
holder loan have similarly not been linked to any service of
general economic interest performed by RM.

The only basis for compatibility for these measures,
if they
contain State aid, would at this stage appear to be Article 87(3)
(c) of
the Treaty. However, the measures do not appear to
conform with any of the rules concerning the application of
that sub-paragraph that the Commission has promulgated to
date. If therefore State aid is involved, the Commission doubts
whether
these measures are compatible with the common
market.

In accordance with Article 14 of Council Regulation (EC) No
659/1999, all unlawful aid can be subject to recovery from the
recipient.

TEXT OF LETTER

‘The Commission wishes to inform the United Kingdom that,
having examined the information supplied by your authorities
on the aid/measure referred to above, it has decided to initiate
the procedure laid down in Article 88(2) of the EC Treaty. The
Commission decided not to raise any objections to certain other
measures, as described in this letter.

1. PROCEDURAL ASPECTS

(1) On 3 December 2002, Deutsche Post

lodged a
complaint against alleged cross-subsidies granted to the
parcel activities of Royal Mail Group (RM).

(DP)

(2) In response to Commission requests for information, the
UK authorities provided information relevant
to the
matters raised in the complaint by letters of 25 February
2003 and 13 February 2004, and by email dated
17 December 2003. This information included certain
other Government measures in relation to Royal Mail.

(3) On 27 May 2003, the Commission approved a series of
measures in favour of Post Office Limited (“POL”) which is
a subsidiary of RM (case N 784/02) (1). Under
these

(1) — an annual compensation of GBP 150 million granted to POL for
the net public service cost of rural counter coverage (“rural
network support”),

— an aid devoted to back POL's debt to Royal Mail Group plc
which had financed POL's balance-sheet deficits up to 31 March
2002 (“debt payment funding”),

— a rolling working capital loan to POL for over-the-counter cash

payments meant to fund the basic postal account.

the Commission
These measures complement earlier measures
approved in 2002. On 12 March 2002 the Commission approved the
funding of a basic postal account to credit social benefits and from
which cash can be withdrawn at post office counters for those benefits
holders who do not want to open an account with a bank. On
18 September 2002 the Commission approved minimum funding
necessary for POL to close 3 000 urban counters no longer required
under the 2000 UK Postal Services Act (2000).

financed
measures, compensation was granted to POL,
through a reserve constituted from surplus cash generated
by RM. On 22 February 2006 the Commission raised no
objection to continuation of one of these measures (rural
network support) for a further period (case N 166/05).

(4) On 8 October 2003, DP lodged an action for annulment
(T-343/03) against the N 784/02 Commission Decision,
arguing that this decision had implicitly rejected its CP
206/02 complaint. On 16 November 2005, the Court of
First Instance rejected the action of DP saying that the
N 784/02 Decision did not imply the rejection of the
complaint and that
the Commission was carrying on
investigations (as demonstrated by the correspondence
presented before the Court).

(5) On 10 August 2006, DP sent a letter which invited the
Commission to take a position on its complaint of 2002
within the period of two months, on the basis of Article
232 of the Treaty. The same letter contained information
concerning a series of alleged new State aid measures.
These measures are distinct from those which were the
subject of
the complaint of 2002 and the complaint
against them was therefore treated as a separate complaint
which was attributed the reference CP 221/06, subse-
quently NN 83/06. The alleged measures were as follows:

— a transfer of GBP 850 million to a special account

dedicated to finance RM's pensions,

— decision of Department of Trade and Industry to
increase the amount of a loan granted to RM from
GBP 844 million to GBP 900 million,

— violation of DG Comp's N 166/05 Decision
concerning support
for POL's rural network, since
GBP 150 million was transferred to POL directly from
the State budget and not, as approved by the Decision,
from a special, ring-fenced reserve.

(6) In response to Commission requests for information, the
to the
UK authorities provided information relevant
raised in the two complaints by letters of
matters
6 October and 31 October 2006. By letter of 5 December
2006 they supplemented this information with respect to
one of the other measures mentioned at paragraph (3)
above.

(7) By letter of 27 October 2006,

the Mail Competition
Forum (MCF), a body representing entrants to the postal
market in the UK, submitted a complaint about the special
account dedicated to finance RM's pensions also covered
by DP's second complaint. The complaint of MCF was
attributed the reference CP 164/06, subsequently NN
82/06. A non-confidential version of the complaint was
sent to the UK authorities on 20 November 2006. The
UK authorities supplied some comments on the complaint
by letter of 19 December 2006.

(8) By letter of 7 December 2006 the Commission informed
DP that it did not see sufficient grounds for continuing
the investigation concerning complaint CP 206/02, and
that if it did not hear from DP within 20 working days,
the complaint would be
considered withdrawn. No
response was received within the deadline. That complaint
is therefore considered withdrawn and the specific allega-
tions made in it are not treated in this decision.

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(9) On 7 December 2006 the United Kingdom notified the
proposed extension of another of the measures in favour
of POL (debt payment funding) covered by N 784/02
which was otherwise due to expire in 2007. The Commis-
sion is treating this notification (N 822/06) in a separate
decision.

(10) On 8 February 2007 the UK authorities communicated to
the Commission the
an announcement
concerning the pensions measure, the GBP 900 million
loan facility and also a new loan of GBP 300 million to
Royal Mail.

terms of

2. DESCRIPTION OF THE MEASURES

2.1. The beneficiary of the alleged State aid

(11) The beneficiary of

the alleged State aid is Royal Mail
Group plc (RM) which (through a holding company, Royal
Mail Holdings plc) is a 100 % State-owned company. RM
is the UK's main postal operator and had a legal mono-
poly over most basic letter services until the end of 2005.
The post office network is operated by POL, which is a
subsidiary of RM.

(12) Before 2001, the postal activities in the UK were carried
out by The Post Office Corporation, a statutory body
created by the Post Office Act 1969. The assets and liabil-
ities of The Post Office Corporation were transferred to
Consignia Holdings (now renamed Royal Mail Holdings
plc) and to its subsidiary, Consignia plc (now RM) on 26
March 2001, under the terms of the Postal Services Act
2000.

(13) RM has a separate parcels business division, Parcelforce,
which was cited as the particular beneficiary in DP's
complaint of 2002. Parcelforce has its own separate hub
and spoke infrastructure. In 2003 a part of parcels activity
(including the provision of a universal service for parcels
handed in at post offices) was transferred from Parcelforce
to RM and is now operated through RM's infrastructure.
Today Parcelforce is focused only on time critical parcels.

2.2. Financial regime of the beneficiary and relation-

ship with the State

(14) Under the regime in existence before the incorporation
and transfers of 2001, there was no requirement for The
Post Office Corporation to pay any dividends to the UK
authorities and it did not do so. It was however obliged to
invest a proportion of the profits it generated each year in
Government securities or National Loan Fund deposits.
These investments, classed as current assets and often
referred to as the “gilts”, remained with RM following the
2001 transfers and amounted to GBP 1,8 billion at
31 March 2002. Following directions of the UK authori-
ties under section 72 of the Post Office Act 2000 dated
30 January 2003, RM placed these assets in a special
reserve (“the mails reserve”) to be used to finance specific
measures as directed.

(16) Beginning in 2001, the UK authorities have made certain
loans or loan facilities available to RM. These are described
in section 2.4 below.

(17) Through directions dated 30 January 2003, 25 May 2006
and 11 July 2006, the UK authorities directed RM to use
the mails reserve to fund measures in favour of POL. The
Commission had raised no objection to these measures by
decisions of 27 May 2003 (2)
(case N 784/02) and
22 February 2006 (N 166/05). By means of an agreement
dated 9 August 2006 and through directions dated the
same day and 28 September 2006, the UK authorities
made arrangements to end the use of the mails reserve to
fund these measures and to fund them instead directly
from the State budget. The UK authorities informed the
Commission of this change by means of a letter dated
6 October 2006.

(18) Parcelforce had accumulated losses since 1991. Before
1996 Parcelforce underwent a restructuring with the
effect of containing its losses and Parcelforce made a small
in 1995/1996. Since that date, despite
trading profit
numerous restructuring efforts,
including the closure of
five sort-centres, the elimination of some 5 000 jobs and
the closure of 50 out of 102 depots in 2002, Parcelforce
generated further losses until the implementation of a far-
reaching restructuring plan starting in 2003. After a
successful implementation of this plan, Parcelforce became
profitable again in 2005.

2.3. State financing measures in favour of RM

2.3.1. The 2001 loan

(19) In February 2001, the UK authorities made a loan of
GBP 500 million to RM to finance overseas acquisitions
for the mails and parcels business. The loan is repayable
between 2021 and 2025 and carries an average interest
rate of around 5,8 %. The UK authorities have stated in
correspondence with the Commission that this loan was
on commercial terms, and that they followed advice from
consultants designed to ensure that this was so. In addi-
tion, they have stated that the loan was not for any Parcel-
force restructuring, that its terms were not linked to such
restructuring, and that it was made solely to finance over-
seas acquisitions. The loan was secured on RM's share-
holding in General Logistics Systems International Hold-
ings BV and certain other RM assets. The loan was not
notified to the Commission.

2.3.2. The measures in favour of POL

(20) By letter dated 3 December 2002 the UK authorities noti-
fied the measures in favour of POL referred to at para-
graph (4) above. These measures were approved by the
Commission in May 2003. The decision noted the
funding mechanism from the mails reserve.

(15) Following the incorporation and transfers of 2001, the
possibility exists for RM Holdings plc to pay a dividend to
its shareholder the UK Government. It has not however
done so having made losses for most of the subsequent
years.

(2) It should be noted that this decision stated the measures not to be State
aid given the jurisprudence existent at the time, but in the alternative to
be compatible with the common market if they were considered to be
aid. When one measure (rural network support funding) was reassessed
in case N 166/05 in the light of the subsequent jurisprudence, it was
considered to be State aid.

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(21) By letter of 18 March 2005 the UK authorities notified
the extension of one of these measures, Rural Network
Support, which had been authorised for three years up to
31 March 2006. This extension was approved by the
Commission on 22 February 2006. By letter of 6 October
2006 the UK authorities informed the Commission that
they were now funding the two continuing measures,
namely Rural Network Support
Funding
Mechanism, directly from the State budget and indeed had
begun to make payments on that basis. In that letter the
UK authorities noted that the mails reserve represented
State resources and that therefore the UK believed the
change in funding arrangements had any bearing on the
previous clearance decisions. In the case of one payment,
the State made a capital injection to RM for an amount
(GBP 145 million) that RM had loaned to POL.

and Debt

2.3.3. The loan facilities

(22) In 2003 the UK authorities made available to RM various
loan facilities to finance its “renewal plan” (including the
restructuring of Parcelforce described at paragraph (19)
above). These facilities, described by the UK authorities as
“a commercial package” were negotiated between RM and
the Government and consisted of a loan facility of
GBP 544 million from the National Loans Fund (NLF)
secured on RM's accumulated cash balances (in particular
the funds allocated to the mails reserve) and the acquisi-
tion by the authorities of two bonds issued by RM (one of
GBP 300 million and one of GBP 200 million). Again, the
UK authorities have stated in correspondence with the
Commission that these loan facilities were on commercial
terms, and that they followed advice from consultants
designed to ensure that this was so. They also informed
the Commission that as of October 2006 these loan facil-
ities had not been drawn down, apart from a GBP 50
million testing of
the draw down process which was
repaid in 7 days, and that the GBP 200 million facility
had by then expired. Commitment
fees of some GBP
[…] (*) had nonetheless been paid by RM. These loan
facilities were not notified to the Commission.

(23) In May 2006 the UK authorities announced their inten-
tion to extend the remaining loan facilities and to increase
their level from GBP 844 million to GBP 900 million. The
UK authorities indicated on 31 October 2006 that the
precise terms of this extension were still being finalised
but the intention was that it would be on commercial
terms and that the lending would not constitute State aid.
They did not therefore intend to notify the extended loan
facilities to the Commission. On 8 February 2007 the UK
authorities announced that the terms of the extended facil-
ities had been agreed.

showed a total deficit (excess of projected liabilities over
assets, on certain prudential assumptions) of GBP 5,6
billion in its 2005/6 accounts, where for the first time this
deficit was included in RM's balance sheet. The RMPP, like
other UK occupational pension schemes,
is a funded
scheme which is required to hold assets in respect of its
liabilities. According to the UK authorities, RM would not
be able to pay off this deficit quickly and modernise the
business at the same time, given projected cash flows. The
account therefore allows RM to agree with the trustees of
the RMPP a longer period for addressing the deficit
thereby reducing its pension contributions in the next
years. The UK authorities have stated that they believe the
use of the mails reserve for this purpose is in RM's best
interests, and that by enabling RM to
commercial
complete its strategic plan they will bring about an
increase in the value of the UK authorities' shareholding.
Without the escrow account and the extended loan facil-
ities, the UK authorities claim there is a possibility that
shareholder value would be destroyed not enhanced, and
therefore that they are acting in a commercial manner and
notification is not necessary.

to Parliament. They have

(25) The Commission understands that the UK authorities have
fully committed themselves to this measure including in
statements
informed the
Commission that the measures in favour of POL are being
financed from the State budget because the mails reserve
has been allocated for this other purpose. The intention to
implement the escrow account is referred to both in the
accounts of the Department of Trade and Industry and in
the recital to a legal act directing RM under s.72 of the
Postal Services Act which ends the use of
the mails
reserve to fund the POL measures. The Commission there-
fore considers that this measure has been put into effect.
It has therefore placed this measure on the register of
non-notified aid, under the reference NN 82/06 (in rela-
tion to the complaint by the MCF) and NN 83/06 (in rela-
tion to the complaint by DP).

2.3.5. The new GBP 300 million shareholder loan

(26) On 8 February 2007 the UK authorities announced their
agreement to provide RM with a GBP 300 million share-
holder loan. This loan has not been notified to the
Commission, nor have the UK authorities indicated their
the
It is clear from the terms of
intention to do so.
announcement
this loan is part of a package of
that
measures with the pensions escrow account and loan
facility.

3. ANALYSIS

2.3.4. The pensions escrow account

(24) In 2006 the UK authorities decided to release GBP 850
million of
the cash balances remaining in the mails
reserve within RM to set up an “escrow account”, which
could be drawn on by the Royal Mail Pension Plan (RMPP)
in certain circumstances if RM were to fail as a business.
The background to this measure was that the various RM
pension schemes, of which the RMPP is by far the largest,

(*) Business secret.

3.1. Qualification of the measures as State aid

(27) Article 87(1) of the EC Treaty states:

Save as otherwise provided in this Treaty, any aid granted by a
Member State or through State resources in any form whatsoever
which distorts or threatens to distort competition by favouring
certain undertakings or the production of certain goods shall, in
so far as it affects trade between Member States, be incompatible
with the common market.

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In order for aid in the sense of Article 87(1) to be present,
there needs to be an aid measure imputable to the State
which is granted by State resources, affects trade between
Member States and distort competition in the common
markets, and confers a selective advantage to undertak-
ings.

(28) The business of letters and parcels delivery is an interna-
tional one, and the Commission believes that a selective
advantage in favour of RM or Parcelforce would distort
competition and affect trade between Member States.

3.1.1. The 2001 loan

(29) The 2001 loan was granted from State funds, and was

selective in that it was granted only to RM.

(30) In order to determine whether the loan provided an
advantage to RM, it is necessary to examine its terms so
as to assess whether a private lender, acting in a market
economy, would have been prepared to lend on the same
terms. For these purposes the Commission has equipped
itself with reference interest rates (3) by which the terms of
loans may be assessed. These reference rates are based on
the five-year interbank swap rate, plus a premium of 0,75
percentage points. As it has made clear in its 1993
Communication on the Application of Articles 92 and 93
of the EEC Treaty and of Article 5 of Commission Direc-
tive 80/723/EEC to public undertakings in the manufac-
turing sector, “where the public authority controls an indi-
vidual public undertaking … the Commission will take
account of the nature of the public authorities' holding in
comparing their behaviour with the benchmark of the
equivalent market economy investor” (4), both for calls for
funds to financially restructure a company and to finance
specific projects. In the case of a company which “has
underperformed”, the owner called upon to provide the
extra finance to such undertaking will normally examine
“more sceptically” a call for finance. Where the call for
finance “is necessary to protect the value of the whole
investment the public authority like a private investor can
be expected to take account of this wider context when
examining whether the commitment of new funds is
commercially justified” and where a decision is made “to
abandon a line of activity because of its lack of medium/
like a
long term commercial viability, a public group,
private group, can be expected to decide the timing and
scale of its run down in the light of the impact on the
overall credibility and structure of the group”.

(31) As noted above, the 2001 loan is repayable between 2021
and 2025 and carries an average interest rate of around
5,8 %. This is significantly below the reference rate applic-
able to the UK at the time the UK previously informed the
the loan was granted, which was
Commission that
7,06 %. The UK authorities have provided certain evidence
that at that time the yield curve in the UK was downward
sloping and that therefore the interest rates for such a
long term loan could be below the reference rate (which is
based on five year rates) without contravening the market
economy investor principle. However, this evidence also
the loan was granted
appears to indicate that part of

in 1999 and 2000. Not only does this contradict earlier
information, but it involves a period when the reference
rate was even higher (7,64 % in 2000). The Commission
has also noted that, at least in 2001, the decline in Royal
Mail's financial performance was beginning. This would
normally be reflected in the terms of any loan. For this
reason, when assessing a loan to a company in financial
difficulties,
the Commission may use as a point of
comparison a rate higher than the reference rate.

(32) The Commission also notes that the purpose of the loan
was not linked to restructuring, and that it was made
solely to finance overseas acquisitions. The UK authorities
have not argued that the loan was necessary to protect the
value of the whole investment in RM.

(33) The Commission therefore has doubts concerning the aid
character of this loan and cannot exclude a priori that aid
is involved. The Commission wishes to examine, within
the context of the Article 88(2) procedure, whether the
2001 loan provided an advantage to RM.

3.1.2. The measures in favour of POL

(34) The Commission has already assessed the aid character of
the measures in favour of POL in cases reference N 784/
02 and N 166/05. In the case of N 784/02 it should be
noted that the Commission considered that the measures
did not constitute State aid in the sense of Article 87(1),
given the absence of overcompensation for the provision
of a service of general economic interest, in accordance
with the Community jurisprudence at the time. In the
alternative, were they to be considered State aid, they were
compatible under Article 86(2) of the Treaty.

(35) As it has already stated in case N 166/05 in respect of
one measure, the Commission believes that in the light of
subsequent jurisprudence (5) these measures do constitute
State aid because they do not meet the four criteria under
which compensation for provision of services of general
economic interest falls outside the definition in Article 87
(1) of the Treaty. These conditions are that, first, the reci-
pient undertaking must actually have public service obli-
gations to discharge, and the obligations must be clearly
defined. Second, the parameters on the basis of which the
compensation is calculated must be established in advance
in an objective and transparent manner. Third,
the
compensation cannot exceed what is necessary to cover
all or part of the costs incurred in the discharge of the
public service obligations, taking into account the relevant
receipts and a reasonable profit. Finally, where the under-
taking which is to discharge public service obligations, in
a specific case, is not chosen pursuant to a public procure-
ment procedure which would allow for the selection of
the tenderer capable of providing those services at the
least cost to the community, the level of compensation
needed must be determined on the basis of an analysis of
the costs which a typical undertaking, well run and
adequately provided with means of transport, would have
incurred. The Commission considers
the fourth
condition is not met by the measures in favour of POL.

that

(3) Commission notice on the method for setting the reference and

discount rates (OJ C 273, 9.9.1997, p. 3).
(4) OJ C 307, 13.11.1993, p. 3, paragraph 30.

(5) Judgment of the Court of 24 July 2003, Altmark Trans GmbH and
Regierungspräsidium Magdeburg v Nahverkehrsgesellschaft Altmark
GmbH, Case C-280-00, [2003] ECR I-7747.

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EN

Official Journal of the European Union

26.4.2007

(36) The qualification of these measures as State aid is not at
all changed by the information provided by the UK in its
letter of 6 October, that the two continuing measures,
namely Rural Network Support
Funding
Mechanism, would now be funded directly from the State
budget.

and Debt

(37) These measures therefore constitute State aid. In so far as
they respect the terms on which they have already been
authorised by the Commission, they constitute existing aid
in the sense of Article 1(b)(ii) of Council Regulation (EC)
No 659/1999.

3.1.3. The loan facilities

(38) The UK authorities have informed the Commission that as
at October 2006 the loan facilities granted in 2003 had
not been drawn down. However, it cannot be concluded
from this point alone that the loan facilities provided no
advantage, since the availability of the loan facilities has
an “option value” to the company. It could not have been
known in 2003 that they would not be drawn down. The
terms of the loan facilities therefore need to be assessed in
the same way as the 2001 loan. The 1993 Commission
communication mentioned and quoted at paragraph (31)
above is also relevant to this assessment. It can be noted
that these loan facilities were linked to RM's “renewal
plan”.

(39) The GBP 544 million NLF loan was granted at “[…] basis
points above Libor or relevant gilt”. It should be noted
that the reference rate is set at 75 points above an inter-
bank swap rate. The UK authorities have justified the low
margin by reference to the security provided, namely the
cash reserves of RM. However, the Commission notes that
these reserves constitute State resources over which the
UK authorities had control through specific legislation.
The Commission therefore questions whether their use as
security could necessarily dispel its doubts as to the aid
character of the measure. It notes that if the loan had
been drawn down a saving of […] basis points would
outweigh the value of the commitment fees which have
been paid by RM.

(40) The bonds of GBP 300 million and of GBP 200 million
were issued at rates of […] and […] basis points above
the “relevant gilt”. The larger bond was secured by a
floating charge over all assets of RM while the smaller one
had lower security. The margin of […] basis points above
a rate based on Government securities (which are typically
below interbank rates) implies the GBP 300 million loan
may have been at a rate below the Commission's reference
rate.

(41) In order to assess whether the terms of these loan facilities
contained an aid element, one test to be applied would be
whether the commitment fees paid by RM covered the
value of
the loan facilities themselves
contain an aid element (ie if the available loan was below
a market economy investor rate) then it would be neces-
sary to assess what account should be taken of this in
assessing the value of the option.

the option.

If

(42) The UK authorities have informed the Commission,

in
response to questions, that the 2003 loan facilities still
existing in October 2006 (namely the GBP 544 million
National Loan Fund loan and the GBP 300 million bond)
are to be extended, on revised terms. The UK authorities
informed the Commission on 31 October that the terms
were still being negotiated but
they were taking
advice from consultants to ensure that the terms were
commercial.

that

(43) On the basis of the information available to the Commis-
is

that an aid element

sion it cannot be ruled out
involved.

(44) In the light of all the above information the Commission
is unable to allay its doubts that the loan facilities made
available to RM may contain State aid. It therefore invites
the UK to provide full details to the Commission within
the context of the Article 88(2) procedure so that it can
be assessed whether the past and proposed extended facil-
ities provide any aid element.

3.1.4. The pensions escrow account

(45) It is established case law that measures of State interven-
tion need to be assessed under Article 87(1) not by refer-
ence to their causes or their aims but in relation to their
effects (6). The UK authorities have made clear that one
clear effect of the escrow account, which is clearly selec-
tive towards RM, is to reduce the pensions contributions
that RM has to make to the RMPP to address its current
deficit. This is an indication that the measure may provide
an advantage to RM and therefore be State aid.

(46) As already noted the UK authorities have argued that the
measure can be justified as the intervention of a market
economy investor, which would imply that it does not
provide any advantage and is therefore not State aid,
because it allows RM to modernise its business through its
current strategic plan. However,
the Commission has
doubts about this argument, which has not been backed
up by projections or by financial analysis, and is not in a
position to allay its doubts that aid may be involved. It
therefore wishes to open the Article 88(2) procedure on
this point.

the creation of

(47) In examining this question the Commission will be
considering three aspects, given the particular nature of
the funds being allocated to the escrow account. Given
that the reserve funds within the reserve are already held
within Royal Mail and on its balance sheet, one issue is
the escrow account can be
whether
regarded as a commercial decision by RM in spite of the
involvement of the UK authorities, which arises through
the particular legal regime applicable. A second issue,
given the particular powers taken by the UK authorities
over
is whether a shareholder acting
commercially would agree to this use of shareholders'
equity. A third issue, given that the use of the reserves for
the pensions measure requires the authorities to fund the
POL measures from the State budget, is whether a share-
holder would agree to bring new equity to fund an escrow
account of this type.

these reserves,

(6) Judgment of the Court of 2 July 1974, Italian Republic v Commission
of the European Communities — Family allowances in the textile
industry, Case 173-73, [1974] ECR 709.

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Official Journal of the European Union

C 91/41

3.1.5. The new GBP 300 million shareholder loan

(48) The terms of the loan have not been communicated to
the Commission. The Commission has therefore been
unable to assess whether its terms include aid. Given the
fact that the loan is part of package of measures where
the Commission has not allayed its doubts that State aid
may be involved, the terms of the loan could not in any
case be assessed independently. The Commission therefore
wishes to assess the terms of this loan within the 88(2)
procedure it is opening.

3.2. Assessment of compatibility of the measures if

State aid is present

(49) RM carries out certain services of general economic
interest. Aid destined to meet the extra costs of providing
such services could, under appropriate conditions, be
authorised on the basis of Article 86(2) of the EC Treaty.
Indeed, the measures in favour of POL referred to in
section 3.1.3 above were authorised on this basis. The
Commission believes that this authorisation is not put
into question by the change of
funding arrangements
under which the measures are financed direct from the
State budget and therefore raises no objection to this
change.

(50) However,

in the case of the other measures referred to
above for which the Commission has not been able to
allay its doubts that State aid may be involved, namely the
2001 loan, the loan facilities and the pensions escrow
account, the legal basis of Article 86(2) does not seem to
be available. The 2001 loan and loan facilities have been
explicitly linked by the UK authorities to other projects,
namely the overseas acquisitions of RM and the renewal
plan adopted in 2003. The pensions escrow account and
GBP 300 million shareholder loan have similarly not been
linked to any service of general economic interest
performed by RM.

the Treaty. However,

(51) The only basis for compatibility for these measures, if they
contain State aid, would at this stage appear to be Article
87(3)(c) of
the measures do not
appear to conform with any of the rules concerning the
application of that sub-paragraph that the Commission
has promulgated to date. If therefore State aid is involved,
the Commission doubts whether
these measures are
compatible with the common market.

4. DECISION

(52) In the light of the foregoing considerations, the Commis-
down in

the procedure

acting

under

sion,

laid

the EC Treaty,

the United
Article 88(2) of
Kingdom to submit its comments and to provide all such
information as may help to assess the 2001 loan, the loan
facilities and the pensions escrow account within one
month of the date of receipt of this letter.

requests

(53) In particular, the Commission requests the UK to provide:

— clarification of the details and timing of the 2001 loan
and any further considerations concerning its confor-
mity to the market economy investor principle,

— clarification of the details of the loan facilities issued
in 2003, any further considerations concerning their
conformity to the market economy investor principle
including concerning the market conformity of the
commitment fees paid, and full details of the extended
loan facility negotiated with Royal Mail,

— full details of the pensions escrow account, including
the terms on which it may be called upon by the
RMPP, the legal instruments establishing it, the effect
of its creation on the pensions contributions to be
paid
considerations
any
concerning its assessment under Article 87(1) of the
Treaty,

by RM,

further

and

— full details of the GBP 300 million shareholder loan

announced on 8 February 2007.

(54) The Commission raises no objection to the change of
funding arrangements for the measures in favour of POL
of which the United Kingdom informed the Commission
on 6 October 2006.

(55) The Commission requests your authorities to forward a
copy of this letter to the potential recipient of the aid
immediately.

(56) 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 Regu-
lation (EC) No 659/1999, which provides that all unlawful
aid may be recovered from the recipient.

Journal of

(57) The Commission warns the United Kingdom that it will
inform interested parties by publishing this letter and a
the
meaningful summary of it in the Official
European Union. It will also inform interested parties in the
EFTA countries which are signatories to the EEA Agree-
ment, by publication of a notice in the EEA Supplement
to the Official Journal of the European Union and will inform
the EFTA Surveillance Authority by sending a copy of this
letter. All such interested parties will be invited to submit
their comments within one month of the date of such
publication.’