Communication from the Commission — Community guidelines on State aid for railway undertakings
Date: 2008-07-22
Institutions: European Commission
Subjects: State aid, aid for restructuring, aid system, aid to undertakings, control of State aid, rail transport

22.7.2008

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Communication from the Commission

Community guidelines on State aid for railway undertakings

(2008/C 184/07)

1. INTRODUCTION

1.1. General context: the railway sector

1.

2.

3.

4.

5.

6.

The railways have unique advantages: they are a safe and clean mode of transport. Rail transport
therefore has great potential for contributing to the development of sustainable transport in Europe.

The White Paper ‘European transport policy for 2010: time to decide’ (1) and its mid-term review (2)
underline to what extent a dynamic railway industry is necessary for establishing an efficient, clean
and safe goods and passenger transport system that will contribute to the creation of a single
European market enjoying lasting prosperity. The road congestion plaguing the towns and certain
areas of the European Community, the need to face up to the challenges of climate change, and the
increase in fuel prices show how necessary it is to stimulate the development of rail transport. In this
respect it should be pointed out that the common transport policy also has to pursue the environ-
mental objectives set by the Treaty (3).

However, rail transport in Europe has an image problem, having declined steadily from the 1960s to
the end of the 20th century. Both goods and passenger traffic volumes have fallen in relative terms
compared with the other transport modes. Rail freight has even shown a decline in absolute terms:
loads transported by rail were higher in 1970 than in 2000. The traditional railway undertakings
were unable to offer the reliability and good timekeeping their customers expected of them, which
led to a shift of traffic from rail to the other modes of transport, chiefly road (4). Although passenger
transport by rail might have continued to grow in absolute terms, this increase seems very limited
compared with that of road and air transport (5).

This trend seems to have reversed recently (6), but there is still a long way to go for rail transport to
become sound and competitive. Particularly in the rail freight transport sector there continue to be
major difficulties which call for public-sector action (7).

The relative decline in Europe's railway industry is largely due to the way transport supply has been
organised historically, essentially on national and monopolistic lines.

First of all, in the absence of competition on the national networks, railway undertakings had no
incentive to reduce their operating costs and develop new services. Their activities did not bring in
sufficient revenue to cover all the costs and investments necessary. These essential investments were
not always made and sometimes the Member States forced the national railway undertakings into

(1) COM(2001) 370 of 12 September 2001, p. 18.
(2) Communication from the Commission ‘Keep Europe moving — Sustainable mobility for our continent — Mid-term

review of the Transport White Paper’ (COM(2006) 314, 22 June 2006, p. 21).

(3) Article 2 of the Treaty stipulates as one of the main objectives of the Community that of promoting ‘sustainable and
non-inflationary growth’ respecting the environment. These provisions are supplemented by specific objectives set out in
Article 174, which provides that Community environment policy shall contribute in particular to preserving, protecting
and improving the quality of the environment. Article 6 of the Treaty provides that ‘Environmental protection require-
ments must be integrated into the definition and implementation of the Community policies and activities referred to in
Article 3, in particular with a view to promoting sustainable development’.

(4) From 1995 to 2005 rail freight (expressed in tonne-km) increased by 0,9 % per year on average, as against + 3,3 % average

annual growth for road during the same period (source: Eurostat).

(5) From 1995 to 2004 passenger rail transport (expressed in passenger-km) increased by 0,9 % per year on average, as against

+ 1,8 % average annual growth for private vehicles during the same period (source: Eurostat).

(6) Since 2002, particularly in those countries which have opened up their markets to competition. In 2006 there was a 3,7 %
growth on the year in rail freight performance and 3 % in the performance of passenger transport. This improvement is
likely to continue in 2007.

(7) Communication from the Commission ‘Towards a rail network giving priority to freight’

(SEC(2007) 1322,

SEC(2007) 1324 and SEC(2007) 1325, 18 October 2007).

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making them when they were not in a position to finance them adequately from their own resources.
The result was heavy indebtedness for these undertakings, which itself had a negative impact on their
development.

7.

Secondly, the development of rail transport in Europe was hamstrung by the lack of standardisation
and interoperability on the networks, while road hauliers and air carriers had been able to develop a
international services. The Community has inherited a mosaic of national rail
whole range of
networks characterised by different track gauges and incompatible signalling and safety systems,
which do not allow the railway undertakings to benefit from the economies of scale which would
result from designing infrastructure and rolling stock for a large single market rather than for 25 (1)
national markets.

8.

The Community is conducting a three-pronged policy to revitalise the rail industry by:

(a) gradually introducing conditions fostering competition on the rail transport services markets;

(b) encouraging standardisation and technical harmonisation on the European rail networks, aiming

at full interoperability at the European level;

(c) granting financial support at Community level (in the TEN-T programme and the Structural

Funds framework).

9.

The Community has thus gradually opened up the rail transport markets to competition. An initial
liberalisation package was adopted in 2001 including Directive 2001/12/EC of
the European
Parliament and of the Council of 26 February 2001 amending Council Directive 91/440/EEC on the
development of the Community's railways (2), Directive 2001/13/EC of the European Parliament and
of the Council of 26 February 2001 amending Council Directive 95/18/EC on the licensing of
railway undertakings (3), Directive 2001/14/EC of the European Parliament and of the Council of
26 February 2001 on the allocation of railway infrastructure capacity and the levying of charges for
the use of railway infrastructure and safety certification (4). That package was followed by a second
package in 2004 the main instruments of which were Regulation (EC) No 881/2004 of
the
European Parliament and of
the Council of 29 April 2004 establishing a European Railway
Agency (5), Directive 2004/49/EC of the European Parliament and of the Council of 29 April 2004
on safety on the Community's railways and amending Council Directive 95/18/EC on the licensing of
railway undertakings and Directive 2001/14/EC on the allocation of railway infrastructure capacity
and the levying of charges for the use of railway infrastructure and safety certification (6), Directive
2004/50/EC of the European Parliament and of the Council of 29 April 2004 amending Council
Directive 96/48/EC on the interoperability of the trans-European high-speed rail system and Directive
2001/16/EC of
the
trans-European conventional rail system (7) and Directive 2004/51/EC of the European Parliament
and of the Council of 29 April 2004 amending Council Directive 91/440/EEC on the development of
the Community's railways (8). A third package was adopted in 2007 comprising Regulation (EC)
No 1370/2007 of the European Parliament and of the Council of 23 October 2007 on public
passenger transport services by rail and by road and repealing Council Regulations (EEC) No 1191/69
and (EEC) No 1107/70 (9), Regulation (EC) No 1371/2007 of the European Parliament and of the
Council of 23 October 2007 on rail passengers' rights and obligations (10), Directive 2007/58/EC of
the European Parliament and of the Council of 23 October 2007 amending Council Directive
91/440/EEC on the development of the Community's railways, and Directive 2001/14/EC on the allo-
cation of railway infrastructure capacity and the levying of charges for the use of railway infrastruc-
ture (11) and Directive 2007/59/EC of the European Parliament and of the Council of 23 October
2007 on the certification of train drivers operating locomotives and trains on the railway system in
the Community (12). As a result, the rail freight market was opened to competition on 15 March
2003 on the trans-European rail freight network, then on 1 January 2006 for international freight

the Council on the interoperability of

the European Parliament and of

(1) Malta and Cyprus do not have rail transport networks.
(2) OJ L 75, 15.3.2001, p. 1.
(3) OJ L 75, 15.3.2001, p. 26.
(4) OJ L 75, 15.3.2001, p. 29. Directive as last amended by Directive 2007/58/EC (OJ L 315, 3.12.2007, p. 44).
(5) OJ L 164, 30.4.2004, p. 1.
(6) OJ L 164, 30.4.2004, p. 44.
(7) OJ L 164, 30.4.2004, p. 114.
(8) OJ L 164, 30.4.2004, p. 164.
(9) OJ L 315, 3.12.2007, p. 1.
(10) OJ L 315, 3.12.2007, p. 14.
(11) OJ L 315, 3.12.2007, p. 44.
(12) OJ L 315, 3.12.2007, p. 51.

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and finally from 1 January 2007 for rail cabotage. The third railway package sets 1 January 2010 as
the date for opening up international passenger transport to competition. Some of the Member
States, such as the United Kingdom, Germany, the Netherlands and Italy, have already (partially)
opened up their domestic passenger transport markets.

10.

The relevant provisions of Council Directive 91/440/EEC of 29 July 1991 on the development of the
Community's railways (1), put in place a new institutional and organisational framework for the
players in the railway industry, involving:

(a) separating railway undertakings (2) from infrastructure managers (3) as regards accounts and orga-

nisation;

(b) management independence of railway undertakings;

(c) management of railway undertakings according to the principles which apply to commercial

companies;

11.

12.

13.

14.

(d) financial equilibrium of railway undertakings according to a sound business plan;

(e) compatibility of Member States' financial measures with the State aid rules (4).

Alongside this liberalisation process, the Commission has undertaken, on a second level, to promote
the interoperability of European rail networks. This approach has been accompanied by Community
initiatives to improve the safety standard of rail transport (5).

The third level of public intervention in favour of the railway industry lies in the area of financial
support. The Commission considers this support to be justified in certain circumstances in view of
the substantial adaptation costs necessary in that industry.

The Commission notes, furthermore, that there has always been considerable injection of public
funds in the rail transport sector. Since 2004 the States of the European Union when it comprised
25 Member States (EU-25) have overall contributed funds totalling some EUR 17 billion to the
construction and maintenance of railway infrastructure (6). The Member States pay railway undertak-
ings EUR 15 billion annually in compensation for the provision of unprofitable passenger transport
services (6).

The granting of State aid to the railway industry can be authorised only where it contributes to the
completion of an integrated European market, open to competition and interoperable and to Com-
munity objectives of sustainable mobility. The Commission will accordingly make sure that public-
sector financial support does not cause distortions of competition contrary to the common interest.
Here the Commission will in certain cases be able to ask Member States for commitments on the
Community objectives in return for the granting of aid.

1.2. Objective and scope of these guidelines

15.

The objective of these guidelines is to provide guidance on the compatibility with the Treaty of State
aid to railway undertakings as it is defined in Directive 91/440/EEC and in the context described
above. In addition, Chapter 3 also applies to urban, suburban and regional passenger transport under-
takings. The guidelines are based in particular on the principles established by the Community legis-
lator in the three successive railway packages. Their aim is to improve the transparency of public

(1) OJ L 237, 24.8.1991, p. 25. Directive as last amended by Directive 2007/58/EC.
(2) Article 3 of Directive 91/440/EEC defines a railway undertaking as ‘any public or private undertaking licensed according to
applicable Community legislation, the principal business of which is to provide services for the transport of goods and/or
passengers by rail with a requirement that the undertaking must ensure traction; this also includes undertakings which
provide traction only’.

(3) Article 3 of Directive 91/440/EEC defines an infrastructure manager as ‘any body or undertaking responsible in particular
for establishing and maintaining railway infrastructure. This may also include the management of infrastructure control
and safety systems. The functions of the infrastructure manager on a network or part of a network may be allocated to
different bodies or undertakings’.

(4) Article 9(3) of Directive 91/440/EEC states: ‘Aid accorded by Member States to cancel the debts referred to in this Article

shall be granted in accordance with Articles 73, 87 and 88 of the Treaty’.

(5) In particular, Directive 2004/49/EC.
(6) Source: European Commission, on the basis of the data communicated annually by the Member States. The figures may be
even higher in that not all financial support has been notified, in particular co-financing through the Structural and Cohe-
sion Funds.

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16.

17.

18.

19.

20.

financing and legal certainty with regard to the Treaty rules in the context of the opening-up of the
markets. These guidelines do not concern public financing intended for infrastructure managers.

Article 87(1) of the Treaty provides that in principle any aid granted by a Member State which threa-
tens to distort competition by favouring certain undertakings or the production of certain goods is,
in so far as it affects trade between Member States, incompatible with the common market. Neverthe-
less, such State aid may in certain situations be justified in the light of the common interest of the
Community. Some of these situations are mentioned in Article 87(3) of the Treaty, and apply to the
transport sector as they do to other sectors of the economy.

Also, Article 73 of the Treaty provides that aids are compatible with the common market ‘if they
meet the needs of coordination of transport or if they represent reimbursement for the discharge of
certain obligations inherent in the concept of a public service’. This Article constitutes a lex specialis in
the general scheme of the Treaty. On the basis of this Article the Community legislator has adopted
two instruments specific to the transport sector: Council Regulation (EEC) No 1191/69 of 26 June
1969 on action by Member States concerning the obligations inherent in the concept of a public
service in transport by rail, road and inland waterway (1) and Council Regulation (EEC) No 1107/70
of 4 June 1970 on the granting of aids for transport by rail, road and inland waterway (2). Council
Regulation (EEC) No 1192/69 of 26 June 1969 on common rules for the normalisation of the
accounts of railway undertakings (3) likewise provides that certain compensation may be granted by
Member States to railway undertakings.

Article 3 of Regulation (EEC) No 1107/70 provides that Member States are neither to take coordina-
tion measures nor to impose obligations inherent in the concept of a public service which involve the
granting of aids pursuant to Article 73 of the Treaty except in the cases or circumstances provided
for by the Regulation in question, without prejudice, however, to Regulations (EEC) No 1191/69 and
(EEC) No 1192/69. According to the judgment of the Court of Justice of the European Communities
in Altmark (4), it follows that State aid which cannot be authorised on the basis of Regulations (EEC)
No 1107/70, (EEC) No 1191/69 or (EEC) No 1192/69 cannot be declared compatible on the basis of
Article 73 of the Treaty (5). In addition, it should be recalled that public service compensation which
does not respect provisions stemming from Article 73 of the Treaty cannot be declared compatible
with the common market on the basis of Article 86(2) or any other provision of the Treaty (6).

Regulation (EC) No 1370/2007 (‘the PSO Regulation’), which will
into force on
3 December 2009 and which repeals Regulations (EEC) No 1191/69 and (EEC) No 1107/70, will put
in place a new legal framework. The aspects relating to public service compensation are therefore not
covered by these guidelines.

enter

After the entry into force of Regulation (EC) No 1370/2007, Article 73 of the Treaty will be directly
applicable as a legal basis for establishing the compatibility of aid not covered by the PSO Regulation,
and in particular aid for the coordination of freight transport. A general
interpretation therefore
needs to be developed for considering the compatibility of aid for coordination purposes with
Article 73 of the Treaty. The aim of these guidelines is in particular to establish criteria for this exam-
ination and intensity thresholds. In view of the wording of Article 73, the Commission must never-
theless make it possible for Member States to show, where appropriate, the need for and proportion-
ality of any measures which exceed the thresholds established.

21.

These guidelines concern the application of Articles 73 and 87 of the Treaty and their implementa-
tion with regard to public funding for railway undertakings within the meaning of Directive
91/440/EEC. They deal with the following aspects: public financing of railway undertakings by means
of infrastructure funding (Chapter 2), aid for the purchase and renewal of rolling stock (Chapter 3),

(1) OJ L 156, 28.6.1969, p. 1. Regulation as last amended by Regulation (EEC) No 1893/91 (OJ L 169, 29.6.1991, p. 1).
(2) OJ L 130, 15.6.1970, p. 1.
(3) OJ L 156, 28.6.1969, p. 8. Regulation as last amended by Regulation (EC) No 1791/2006 (OJ L 363, 20.12.2006, p. 1).
(4) Judgment of the Court of Justice of 24 July 2003, Case C-280/00, Altmark Trans GmbH and Regierungspräsidium Magdeburg

v Nahverkehrsgesellschaft Altmark GmbH (‘Altmark’) [2003] ECR I-7747.

(5) Judgement in Altmark, paragraph 107.
(6) See, in that regard, recital 17 of Commission Decision of 28 November 2005 on the application of Article 86(2) of the
EC Treaty to State aid in the form of public service compensation granted to certain undertakings entrusted with the opera-
tion of services of general economic interest (OJ L 312, 29.11.2005, p. 67, point 17).

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debt cancellation by States with a view to the financial rejuvenation of railway undertakings
(Chapter 4), aid for restructuring railway undertakings (Chapter 5), aid for the needs of transport
coordination (Chapter 6), and State guarantees for railway undertakings (Chapter 7). However, these
guidelines do not deal with the rules for the application of the PSO Regulation, for which the
Commission has not yet developed any decision-making practice (1).

2. PUBLIC FINANCING OF RAILWAY UNDERTAKINGS BY MEANS OF RAILWAY INFRASTRUCTURE

FUNDING

22.

23.

Railway infrastructure is of major importance for the development of the railway sector in Europe.
Whether for interoperability, safety or the development of high-speed rail, considerable investments
will have to be made in this infrastructure (2).

These guidelines apply only to railway undertakings. Their aim is therefore not to define, in the light
of State aid rules, the legal framework which applies to the public financing of infrastructure. This
Chapter only examines the effects of public financing of infrastructure on railway undertakings.

24. Moreover, public financing of infrastructure development can grant an advantage to railway undertak-
ings indirectly and thereby constitute aid. According to the case-law of the Court of Justice, it should
be evaluated whether the infrastructure measure has the economic effect of lightening the burden of
charges normally encumbering railway undertakings' budgets (3). For that to be the case, a selective
advantage would have to be granted to the undertakings concerned, that advantage originating in the
financing of the infrastructure in question (4).

25. Where infrastructure use is open to all potential users in a fair and non-discriminatory manner, and
access to that infrastructure is charged for at a rate in accordance with Community legislation
(Directive 2001/14/EC), the Commission normally considers that public financing of the infrastruc-
ture does not constitute State aid to railway undertakings (5).

26.

The Commission also points out that, where public financing of railway infrastructure constitutes aid
to one or more railway undertakings, it may be authorised, for example on the basis of Article 73 of
the Treaty, if the infrastructure in question meets the needs of transport coordination. In this regard,
Chapter 6 of these guidelines is a pertinent reference point for assessing compatibility.

3. AID FOR THE PURCHASE AND RENEWAL OF ROLLING STOCK

3.1. Objective

27.

The fleet of locomotives and carriages used for passenger transport is ageing and in some cases worn
out, especially in the new Member States. In 2005, 70 % of the locomotives (diesel and electric) and
65 % of the wagons of the EU-25 were more than 20 years old (6). Taking only the Member States

(1) Nor do they concern the application of Regulation (EEC) No 1192/69.
(2) Communication from the Commission ‘Keep Europe moving — Sustainable mobility for our continent — Mid-term

review of the Transport White Paper’.

(3) Judgment of the Court of Justice of 13 June 2002, Case C-382/99, Netherlands v Commission [2002] ECR I-5163.
(4) Judgment of the Court of Justice of 19 September 2000, Case C-156/98, Germany v Commission [2000] ECR I-6857.
(5) Commission Decision of 7 June 2006, N 478/04, Ireland — State guarantee for capital borrowings by Córas Iompair
Éireann (CIÉ) for infrastructure investment (OJ C 209, 31.8.2006, p. 8); Decision of 8 March 2006, N 284/05, Ireland —
Regional Broadband Programme (OJ C 207, 30.8.2006, p. 3), point 34; and the following Decisions: Decision
2003/227/EC of 2 August 2002 on various measures and the State aid invested by Spain in ‘Terra Mítica SA’, a theme park
near Benidorm (Alicante) (OJ L 91, 8.4.2003, p. 23), point 64; Decision of 20 April 2005, N 355/04 PPP, Belgium —
Public-Private-Partnership for tunnelling the Krijgsbaan at Deurne; the development of industrial estates and the operation
of Antwerp Airport (OJ C 176, 16.7.2005, p. 11), point 34; Decision of 11 December 2001, N 550/01, Belgium —
Public-Private Partnership for loading and unloading facilities (OJ C 24, 26.1.2002, p. 2), point 24; Decision of
20 December 2001, N 649/01, United Kingdom — Freight Facilities Grant (OJ C 45, 19.2.2002, p. 2), point 45; Decision
of 17 July 2002, N 356/02, United Kingdom — Network Rail (OJ C 232, 28.9.2002, p. 2), point 70; N 511/95, Jaguar
Cars Ltd. See also, the Commission Guidelines on the application of Articles 92 and 93 of the EC Treaty and Article 61 of
the EEA Agreement to State aids in the aviation sector (OJ C 350, 10.12.1994, p. 5), point 12; White Paper: Fair Payment
for Infrastructure use (COM(1998) 466 final), point 43; Communication from the Commission to the European Parliament
and the Council: ‘Reinforcing Quality Service in Sea Ports: A Key for European Transport’ (COM(2001) 35 final, p. 11).

(6) Source: UIC Rolling stock fleet in EU-25 + Norway (2005).

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which joined the European Union in 2004, 82 % of locomotives and 62 % of wagons were more
than 20 years old in 2005 (1). According to the information at its disposal, the Commission estimates
that the annual rate of renewal of the fleet is around 1 %.

28.

This trend of course reflects the difficulties of the railway industry in general, which reduce the incen-
tives for railway undertakings and their capacity to invest in an effort to modernise and/or renew
their rolling stock. Such investment is indispensable to keeping rail transport competitive with other
modes of transport which cause more pollution or entail higher external costs. It is also necessary to
limit the impact of rail transport on the environment, particularly by reducing the noise pollution it
causes, and to improve its safety. Finally, improving interoperability between the national networks
means it is necessary to adapt the existing rolling stock in order to be able to maintain a coherent
system.

29.

In the light of the above it seems that under certain circumstances aid for the purchase and renewal
of rolling stock can contribute to several types of objectives of common interest and therefore be
considered compatible with the common market.

30.

This Chapter seeks to define the conditions in which the Commission is to carry out such a compat-
ibility assessment.

3.2. Compatibility

31.

32.

33.

The compatibility assessment has to be made according to the common-interest objective to which
the aid is contributing.

The Commission considers that in principle the need to modernise rolling stock can be sufficiently
taken into account either in implementing the general State aid rules or by applying Article 73 of the
Treaty where such aid is intended for transport coordination (see Chapter 6).

In assessing the compatibility of aid for rolling stock the Commission therefore generally applies the
criteria defined for each of the following aid categories in these guidelines or in any other relevant
document:

(a) aid for coordination of transport (2);

(b) aid for restructuring railway undertakings (3);

(c) aid for small and medium-sized enterprises (4);

(d) aid for environmental protection (5);

(e) aid to offset costs relating to public service obligations and in the framework of public service

contracts (6);

(f) regional aid (7).

34.

In the case of regional aid for initial investment, the Guidelines on national regional aid, ‘the regional
aid guidelines’, provide that ‘in the transport sector, expenditure on the purchase of transport equip-
ment (movable assets) is not eligible for aid for initial
(point 50, footnote 48). The
Commission considers that a derogation should be made from this rule with regard to rail passenger
transport. This is due to the specific characteristics of this mode of transport, and in particular to the

investment’

(1) Source: CER (2005).
(2) See Chapter 6.
(3) Community guidelines on State aid for rescuing and restructuring firms in difficulty (OJ C 244, 1.10.2004, p. 2), and

Chapter 5.

(4) Commission Regulation (EC) No 70/2001 of 12 January 2001 on the application of Articles 87 and 88 of the EC Treaty to
State aid to small and medium-sized enterprises (OJ L 10, 13.1.2001, p. 33). Regulation as last amended by Regulation
(EC) No 1976/2006 (OJ L 368, 23.12.2006, p. 85).

(5) Community guidelines on State aid for environmental protection (OJ C 82, 1.4.2008, p. 1).
(6) Regulation (EEC) No 1191/69 cited above; PSO Regulation of the European Parliament and of the Council, cited above, in
which attention should be drawn in particular to Article 3(1): ‘Where a competent authority decides to grant the operator
of its choice an exclusive right and/or compensation, of whatever nature, in return for the discharge of public service obli-
gations, it shall do so within the framework of a public service contract’.

(7) Guidelines on national regional aid for 2007-2013 (OJ C 54, 4.3.2006, p. 13), point 8.

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fact that it is possible that the rolling stock in this sector may be permanently assigned to specific
lines or services. Subject to certain conditions, defined below, the costs of acquisition of rolling stock
in the rail passenger transport sector (or for other modes such as light rail, underground or tram) are
deemed to be admissible expenditure within the meaning of the guidelines in question (1). However,
the costs of acquisition of rolling stock for exclusive use in freight transport are not admissible.

35.

In view of the situation described in points 28 and 29, this derogation applies to any kind of invest-
ment in rolling stock, whether initial or for replacement purposes, so long as it is assigned to lines
regularly serving a region eligible for aid under Article 87(3)(a) of the Treaty, an outermost region or
a region of low population density within the meaning of points 80 and 81 of the regional aid guide-
lines (2). In the other regions, the derogation applies only to aid for initial investment. For aid for
investment for replacement purposes, the derogation applies only when all the rolling stock that the
aid is used to modernise is more than 15 years old.

36.

In order to avoid distortions of competition which would be contrary to the common interest, the
Commission does, however, consider that such a derogation has to be made subject to four condi-
tions, which have to be met cumulatively:

(a) the rolling stock concerned must be exclusively assigned to urban, suburban or regional passenger
transport services in a specific region or for a specific line serving several different regions; For
the purposes of these guidelines ‘urban and suburban transport services’ is to be understood as
transport services serving an urban centre or conurbation as well as those services between that
centre or conurbation and its suburbs. ‘Regional transport services’ is to be understood as trans-
port services intended to meet the transport needs of one or more regions. Transport services
serving several different regions, in one or more Member States, may therefore be covered by the
scope of this point if it can be shown that there is an impact on the regional development of the
regions served, in particular by the regular nature of the service. In this case, the Commission
verifies that the aid does not compromise the effective opening of the international passenger
transport market and cabotage following the entry into force of the third railway package;

(b) the rolling stock must remain exclusively assigned to the specific region or the specific line

passing through several different regions for which it has received aid for at least ten years;

(c) the replacement rolling stock must meet the latest interoperability, safety and environmental stan-

dards (3) applicable to the network concerned;

(d) the Member State must prove that the project contributes to a coherent regional development

strategy.

37.

The Commission will take care to avoid undue distortions of competition, notably by taking account
of the additional revenue that the replaced rolling stock on the line in question could procure for the
enterprise aided, for example, through sales to a third party or use on other markets. To this end, the
granting of the aid may be made subject to the obligation on the recipient undertaking to sell under
normal market conditions all or part of the rolling stock it is no longer using, so as to allow its
further use by other operators; in this case the proceeds from the sale of the old rolling stock will be
deducted from the eligible costs.

(1) The Commission notes that, depending on the specific circumstances of the case in point, this reasoning may be applied
mutatis mutandis to vehicles used for the public transport of passengers by road, where such vehicles meet the latest Com-
munity standards applicable to new vehicles. Where that is the case, in the interests of equal treatment the Commission
will, in such situations, apply the approach described here for railway rolling stock. The Commission encourages the
Member State to support the least polluting technologies when awarding this type of aid and will study the extent to which
specific financial aid leading to higher aid intensities for such technologies is appropriate.

(2) The least populated regions represent or belong to regions at NUTS-II level with a population density of no more than
8 inhabitants per km2 and extend to adjacent and contiguous smaller areas meeting the same population density criterion.
(3) Aid for the acquisition of new transport vehicles which go beyond Community standards or which increase the level of
environmental protection in the absence of Community standards is possible within the Guidelines on State aid for envir-
onmental protection.

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38. More generally, the Commission will ensure that no improper use is made of the aid. The other
conditions provided for in the regional aid guidelines, notably as regards the intensity ceilings and the
regional aid maps and the rules on the cumulation of aid, apply. The Commission notes that the
specific lines concerned may in certain cases pass through regions where there are different intensity
ceilings in accordance with the regional aid maps. In this case the Commission will apply the highest
rate of intensity of the regions regularly served by the line concerned in proportion to the regularity
of such service (1).

39. With regard to investment projects with eligible expenditure in excess of EUR 50 million, the
Commission considers it appropriate, due to the specificities of the rail passenger transport sector, to
derogate from points 60 to 70 of the regional aid guidelines. However, points 64 and 67 of those
guidelines remain applicable when the investment project concerns rolling stock assigned to a specific
line serving several regions.

40.

If the recipient undertaking is entrusted with providing services of general economic interest that
necessitate buying and/or renewing rolling stock and it already receives compensation for this, that
compensation should be taken into account in the amount of regional aid that may be awarded to
this undertaking, in order to avoid overcompensation.

4. DEBT CANCELLATION

4.1. Objective

41.

42.

As mentioned in Section 1.1, railway undertakings have in the past experienced a state of imbalance
between their revenues and their costs, especially their investment costs. This has led to major indebt-
edness, the financial servicing of which represents a very heavy burden on railway undertakings and
limits their capacity to make the necessary investments in both infrastructure and renewal of rolling
stock.

Directive 91/440/EEC explicitly took this situation into account. It is stated in the seventh recital
thereto that Member States ‘should ensure in particular that existing publicly owned or controlled
railway transport undertakings are given a sound financial structure’ and envisages that a ‘financial
rearrangement’ might be necessary for this purpose. Article 9 of the Directive provides: ‘In conjunc-
tion with the existing publicly owned or controlled railway undertakings, Member States shall set up
appropriate mechanisms to help reduce the indebtedness of such undertakings to a level which does
not impede sound financial management and to improve their financial situation’. Article 9(3) envi-
sages the granting of State aid ‘to cancel the debts referred to in this Article’, and provides that such
aid must be granted in accordance with Articles 73, 87 and 88 of the Treaty.

43.

At the beginning of the 1990s, following the entry into force of Directive 91/440/EEC, the Member
States considerably reduced the debts of railway undertakings. The debt restructuring took different
forms:

(a) transfer of all or part of the debt to the body responsible for managing the infrastructure, thus
enabling the railway undertaking to operate on a sounder financial footing. It was possible to
make this transfer when transport service activities were separated from infrastructure manage-
ment;

(b) the creation of separate entities for the financing of infrastructure projects (for example, high-
speed lines), making it possible to relieve railway undertakings of the future financial burden
which the financing of this new infrastructure would have meant;

(c) financial restructuring of railway undertakings, notably by the cancellation of all or part of their

debts.

(1) Where the line or specific service systematically (that is to say, on every journey) serves the region to which the highest rate
applies, this rate is applied to all admissible expenditure. Where the region to which the highest rate applies is only occa-
sionally served, this rate is applied only to the part of the admissible expenditure allocated to serving that region.

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44.

45.

46.

47.

48.

49.

50.

These three types of action have helped to improve the financial situation of railway undertakings in
the short term. Their indebtedness has been reduced compared with total liabilities, as has the share
of interest repayments in the operating costs. In general the debt reduction has allowed railway under-
takings to improve their financial situation through a reduction in their capital and interest repay-
ments. Such reductions have also helped to lower the rates of interest, which has a substantial impact
on the financial servicing of the debt.

the level of

the Commission notes that

indebtedness of many railway undertakings
However,
continues to give cause for concern. Several of these undertakings have a level of indebtedness higher
than is acceptable for a commercial company, are still not capable of self-financing, and/or cannot
finance their investment needs from the revenue from present and future transport operations. Also,
in the Member States which joined the Community after 1 May 2004 the level of indebtedness of the
companies in the sector is considerably higher than in the rest of the Community.

This fact is reflected in the Community legislator's choice not to amend the provisions of Directive
91/440/EEC when Directives 2001/12/EC and 2004/51/EC were adopted. These provisions therefore
fall within the general framework formed by the successive railway packages.

This Chapter seeks to define how,
in the light of this requirement of secondary legislation, the
Commission intends to apply the Treaty rules on State aid to the mechanisms for reducing the indebt-
edness of railway undertakings.

4.2. Presence of State aid

The Commission notes first of all that the principle of incompatibility laid down in Article 87(1) of
the Treaty applies only to aid ‘which distorts or threatens to distort competition by favouring certain
undertakings or the production of certain goods’ and only ‘insofar as it affects trade between Member
States’. Under established case-law, when State financial aid strengthens the position of an undertaking
compared with other undertakings competing in intra-community trade, these undertakings must be
regarded as affected by that aid (1).

Any measure attributable to the State which leads to the complete or partial cancellation of debts
specifically in favour of one or more railway undertakings and through State resources therefore falls
within the scope of Article 87(1) of the Treaty, if the railway undertaking in question is active in
markets open to competition and if this debt cancellation strengthens its position in at least one of
those markets.

The Commission notes that Directive 2001/12/EC opened up the international rail freight services
market to competition over the whole trans-European rail freight network from 15 March 2003. It
therefore considers that, generally, the market was opened up to competition at the latest on
15 March 2003.

4.3. Compatibility

51. When the cancellation of a railway undertaking's debt constitutes State aid covered by Article 87(1)
of the Treaty it must be notified to the Commission in accordance with Article 88 of the Treaty.

52.

53.

Aid of this kind must generally be examined on the basis of the Community guidelines on State aid
for rescuing and restructuring firms in difficulty of 2004 (‘the 2004 guidelines on State aid for
restructuring’), subject to Chapter 5 of these Guidelines.

In specific cases where the debts cancelled exclusively concern transport coordination, compensation
of public service obligations or the setting of accounting standards, the compatibility of this aid will
be examined on the basis of Article 73 of the Treaty, the regulations adopted for the implementation
thereof and the rules for the normalisation of the accounts (2).

(1) Judgment of the Court of Justice of 17 September 1980, Case 730/79, Phillip Morris Holland v Commission [1980]

ECR 2671, paragraph 11.
(2) Regulation (EEC) No 1192/69.

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54.

55.

56.

57.

58.

59.

60.

In the light of Article 9 of Directive 91/440/EEC, the Commission also considers that, under certain
circumstances, it should be possible to authorise this aid without financial restructuring if the cancel-
lation concerns old debts incurred prior to the entry into force of Directive 2001/12/EC, which lays
down the conditions for opening up the sector to competition.

The Commission takes the view that this type of aid may be compatible in so far as it seeks to ease
the transition to an open rail market, as provided for by Article 9 of Directive 91/440/EEC (1). Thus it
considers that such aid may be regarded as compatible with Article 87(3)(c) of the Treaty (2), provided
that the following conditions are met.

Firstly, the aid must serve to offset clearly determined and individualised debts incurred prior to
15 March 2001, the date on which Directive 2001/12/EC entered into force. Under no circumstances
may the aid exceed the amount of these debts. In cases where the Member States joined the Com-
munity after 15 March 2001, the relevant date is that of accession to the Community. The logic of
Article 9 of Directive 91/440/EEC, repeated in subsequent Directives, was to address a level of debt
accumulated at a time when a decision to open the market at Community level had yet to be taken.

Secondly, the debts concerned must be directly linked to the activity of rail transport or the activities
of management, construction or use of railway infrastructure. Debts incurred for the purpose of
investment not directly linked to transport and/or rail infrastructure are not eligible.

Thirdly, the cancellation of debts must be in favour of undertakings facing an excessive level of
indebtedness which is hindering their sound financial management. The aid must be necessary to
remedy this situation, insofar as the likely development of competition on the market would not
allow them to rectify their financial situation within a foreseeable future. Assessment of this criterion
has to take into account any productivity improvements which the undertaking can reasonably be
expected to achieve.

Fourthly, the aid must not go beyond what is necessary for the purpose. In this regard, account must
also be taken of future developments in competition. It should not, at any rate, place the undertaking
in a situation more favourable than that of an average well-managed undertaking with the same
activity profile.

Fifthly, cancellation of its debts must not give an undertaking a competitive advantage such that it
prevents the development of effective competition on the market, for example by deterring outside
undertakings or new players from entering certain national or regional markets. In particular, aid
intended for cancelling debts cannot be financed from levies imposed on other rail operators (3).

61. Where these conditions are met, the debt cancellation measures are contributing to the objective set
in Article 9 of Directive 91/440/EEC, without unduly distorting competition and trade between
Member States. They can thus be considered compatible with the common market.

5. AID FOR RESTRUCTURING RAILWAY UNDERTAKINGS — RESTRUCTURING A ‘FREIGHT’

DIVISION

5.1. Objective

62.

Save where specifically provided otherwise, the Commission assesses the compatibility of State aid for
restructuring firms in difficulty in the railway industry on the basis of the 2004 guidelines on State
aid for restructuring. Those guidelines do not provide for any derogation for railway undertakings.

(1) The Commission applies, by analogy, certain conditions laid down by the Commission communication relating to the

methodology for analysing State aid linked to stranded costs of 26 July 2001, SEC(2001) 1238.

(2) Without prejudice to the application of Regulations (EEC) No 1191/69, (EEC) No 1192/69 and (EEC) No 1107/70.
(3) Without prejudice to the application of Directive 2001/14/EC.

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63.

64.

65.

66.

67.

68.

69.

70.

71.

72.

Generally speaking, a division of an undertaking, namely an economic entity without legal person-
ality, is not eligible for restructuring aid. The 2004 guidelines on State aid for restructuring apply
only to ‘firms in difficulty’. They also state, at point 13, that a firm ‘belonging to or being taken over
by a larger business group is not normally eligible for restructuring aid, except where it can be
demonstrated that the firm's difficulties are intrinsic and are not the result of an arbitrary allocation
of costs within the group, and that the difficulties are too serious to be dealt with by the group itself’.
It should be avoided, a fortiori, that artificial subdivision allows a loss-making activity within a given
company to receive public funds.

However, the Commission considers that the European rail freight sector currently finds itself in a
very specific situation making it necessary, in the common interest, to envisage that aid granted to a
railway undertaking allowing it to overcome difficulties in the freight operations of that undertaking
might, under certain circumstances, be considered compatible with the common market.

In today's railway industry, the competitive situation of freight transport operations is quite different
from that which applies to passenger transport. The national freight markets are open to competition
whereas the rail passenger transport markets are not going to be opened up before 1 January 2010.

This situation has a financial impact in so far as freight is in principle governed solely by the business
relations between shippers and carriers. The financial equilibrium of passenger transport, on the
other hand, may also depend on the public authorities taking action by way of public service
compensation.

However, several European railway undertakings have not legally separated their passenger and freight
transport activities, or have only just done so. Moreover, current Community legislation does not
provide for the obligation to make this legal separation.

Furthermore, one of the central priorities of European transport policy has, for many years, been to
breathe new life into the railway freight industry. The reasons for this are set out in Chapter 1 of
these guidelines.

This specific characteristic of rail freight activities necessitates an adapted approach, as has been recog-
nised in the Commission's decision-making practice (1) on the basis of the Community Guidelines on
State aid for rescuing and restructuring firms in difficulty of 1999 (2).

This Chapter is intended to show, in the light of the Commission's decision-making practice and
taking account of the amendments made by the 2004 guidelines on State aid for restructuring to the
corresponding 1999 guidelines,
the way in which the Commission intends to implement this
approach in future.

In view of the risks highlighted above, this approach is justified and will be maintained only for the
freight divisions of railway undertakings, and for a transitional period, namely for restructurings noti-
fied before 1 January 2010, the date on which the rail passenger transport market will be opened up
to competition.

in a growing number of
Furthermore, the Commission wishes to take account of the fact that,
Member States, railway undertakings have adapted their organisation to specific developments in rail
freight and passenger transport activities by taking steps to legally separate their freight transport
activities. The Commission will therefore require, as part of the restructuring efforts and before
awarding any aid, the legal separation of the freight division in question by transforming it into a
law. The Commission is of the view that this
commercial company under common commercial
separation will, with other appropriate measures, help considerably to achieve two goals, namely to
exclude all cross-subsidisation between the restructured division and the rest of the undertaking and
to ensure that all financial relations between these two activities are carried out in a sustainable
manner and on a commercial basis.

(1) See Commission Decision of 2 March 2005, N 386/04, Aid for restructuring SNCF Freight — France (OJ C 172,

12.7.2005, p. 3).

(2) OJ C 288, 9.10.1999, p. 2.

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73.

In order to avoid any doubt, the 2004 guidelines on State aid for restructuring will continue to apply
in their entirety when examining the aid dealt with in this Chapter, except with regard to the express
derogations set out below.

5.2. Eligibility

74.

The eligibility criteria must be adapted to include the situation in which a freight division of a railway
undertaking constitutes a coherent and permanent economic unit, which will be legally separated
from the rest of the undertaking through the restructuring process before aid is granted, and faces
difficulties such that, if it had been separated from the railway undertaking, it would be a ‘firm in
difficulty’ within the meaning of the 2004 restructuring guidelines.

75.

This means, in particular, that that division of the undertaking would be facing serious difficulties of
its own, which are not the result of an arbitrary allocation of costs within the railway undertaking.

76.

In order for the division to be restructured to constitute a coherent and permanent economic unit it
must comprise all the freight transport activities of the railway undertaking, whether industrial,
commercial, accounting or financial. It must be possible to attribute to it a level of losses, as well as a
level of own funds or capital, which sufficiently reflects the economic reality of the situation which
the division faces in order to evaluate in a coherent manner the criteria fixed in point 10 of the 2004
guidelines on State aid for restructuring (1).

77. When assessing whether a division is in difficulty as described above, the Commission will also take
into account the ability of the rest of the railway undertaking to ensure the recovery of the division
to be restructured.

78.

The Commission is of the view that, although the situation described is not directly covered by the
2004 guidelines on State aid for restructuring, point 12 of which excludes newly created firms from
the scope of the guidelines, restructuring aid may be granted in this context to enable the firm
created by this legal separation to operate in viable market conditions. This is intended to apply only
in situations where the firm to be created as a result of legal separation includes the entire freight
division, as described by the separate accounting established in accordance with Article 9 of Direc-
tive 91/440/EEC, and includes all the division's assets, liabilities, capital, off-balance sheet commit-
ments and workforce.

79.

The Commission considers that, for the same reasons, when a railway undertaking has recently
legally separated its freight division, where this division fulfilled the above criteria, the firm in ques-
tion must not be considered a newly created firm within the meaning of point 12 of the 2004 guide-
lines on State aid for restructuring, and is therefore not excluded from the scope of these guidelines.

5.3. Return to long-term viability

80.

The Commission will make sure not only that the criteria for a return to long-term viability as set out
in the 2004 guidelines on State aid for restructuring are fulfilled (2), but also that restructuring will
ensure the freight activity is transformed from a protected activity enjoying exclusive rights into one
which is competitive on the open market. This restructuring should therefore concern all aspects of

(1) Point 10 of the guidelines on State aid for restructuring states: ‘In particular, a firm is, in principle and irrespective of

its size, regarded as being in difficulty for the purposes of these guidelines in the following circumstances:
— in the case of a limited liability company, where more than half of its registered capital has disappeared and more

than one quarter of that capital has been lost over the preceding 12 months, or

— in the case of a company where at least some members have unlimited liability for the debt of the company, where
more than half of its capital as shown in the company accounts has disappeared and more than one quarter of
that capital has been lost over the preceding 12 months, or

— whatever the type of company concerned, where it fulfils the criteria under its domestic law for being the subject

of collective insolvency proceedings’.

(2) See in particular points 34 to 37 of the guidelines on State aid for restructuring.

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the freight activity, whether industrial, commercial, or financial. The restructuring plan required by
the restructuring guidelines (1) must make it possible to ensure a standard of quality, reliability and
service which meets customers' requirements.

5.4. Prevention of any excessive distortion of competition

81.

In analysing the prevention of any excessive distortion of competition, as provided for by the guide-
lines on State aid for restructuring, the Commission will also base itself on:

(a) the difference between the economic models for rail and the other modes of transport;

(b) the Community objective of shifting the balance between modes of transport;

(c) the competitive situation on the market at the time of restructuring (degree of integration, growth

potential, presence of competitors, likely trends).

82.

83.

84.

85.

86.

87.

5.5. Aid limited to a minimum

The provisions of the 2004 guidelines on State aid for restructuring apply when verifying this
criterion. To this end the firm's own contribution will include that of the freight division which will
be legally separated from the railway undertaking. However,
in the Commission's view, the very
specific situation of the European rail freight industry, which is described above, may constitute an
exceptional circumstance within the meaning of paragraph 44 of those guidelines. It may therefore
accept lower own contributions than those provided for in the 2004 guidelines on State aid for
restructuring provided that the freight division's own contribution is as high as possible without
jeopardising the viability of the operation.

5.6.

‘One time, last time’ principle

The ‘one time, last time’ principle applies to the legally separated firm, by taking account of the
restructuring aid notified as initial restructuring aid received by the undertaking. However, restruc-
turing aid authorised under the conditions set out in this Chapter does not affect application of the
‘one time, last time’ principle with regard to the rest of the railway undertaking.

To avoid any doubt, if the railway undertaking as a whole has already received restructuring aid, the
‘one time, last time’ principle means that aid as provided for in this Chapter may not be granted to
restructure the freight division of the undertaking.

6. AID FOR COORDINATION OF TRANSPORT

6.1. Objective

As already stated, Article 73 of the Treaty was implemented by Regulations (EEC) No 1191/69 and
(EEC) No 1107/70, which will be repealed by the PSO Regulation. The PSO Regulation will, however,
apply only to land passenger transport. It will not cover rail freight transport, for which aid for coor-
dination of transport will continue to be subject only to Article 73 of the Treaty.

In addition to this, Article 9 of the PSO Regulation concerning aid for coordination of transport and
aid for research and development applies explicitly without prejudice to Article 73 of the Treaty, so it
will be possible to use Article 73 directly for justifying the compatibility of aid for coordination of
rail passenger transport.

The objective of this Chapter is therefore to establish criteria which will allow the Commission to
assess the compatibility, on the basis of Article 73 of the Treaty, of aid for the coordination of trans-
port, both generally (Section 6.2) and as regards certain specific forms of aid (Section 6.3). The
Commission notes that, although the general implementing principles of Article 73 of the Treaty are
relevant when assessing State aid under the PSO Regulation, these guidelines do not cover the detailed
rules for the implementation of the Regulation in question.

(1) See in particular Section 3.2 of the restructuring guidelines.

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88.

89.

90.

91.

6.2. General considerations

Article 73 of the Treaty provides for compatibility of aid which meets the needs of coordination of
transport. The Court of Justice has ruled that this Article ‘acknowledges that aid to transport is
compatible with the Treaty only in well-defined cases which do not jeopardise the general interests of
the Community’ (1).

The concept of ‘coordination of transport’ used in Article 73 of the Treaty has a significance which
goes beyond the simple fact of facilitating the development of an economic activity. It implies an
intervention by public authorities which is aimed at guiding the development of the transport sector
in the common interest.

The progress made with liberalising the land transport sector has in some respects considerably
reduced the need for coordination. In an efficient liberalised sector, coordination can in principle
result from the action of market forces. As indicated above, however, the fact remains that investment
in infrastructure development continues to be carried out by the public authorities. Moreover, even
after the liberalisation of the sector, there may still be various market failures. These in particular are
the failures which justify the intervention of the public authorities in this field.

the transport

sector entails major negative externalities,

Firstly,
for example between users
(congestion), or in respect of society as a whole (pollution). These externalities are difficult to take
into account, notably due to the inherent limits to the possibility of including external costs, or even
simply direct usage costs, in the pricing systems for access to transport infrastructure. As a result
there may be disparities between the different modes of transport, which ought to be corrected by
public authority support for those modes of transport which give rise to the lowest external costs.

92.

Secondly, the transport sector may experience ‘coordination’ difficulties in the economic sense of the
term, for example in the adoption of a common interoperability standard for rail, or in the connec-
tions between different transport networks.

93.

Thirdly, the railway undertakings may not be able to reap the full rewards of their research, develop-
ment and innovation efforts (positive externalities), which also amounts to a failure of the market.

94.

The presence of a specific provision in the Treaty making it possible to authorise aid which meets the
needs of transport coordination shows how important these risks of market failures are and the nega-
tive impact they have on the development of the Community.

95.

In principle, aid which meets the needs of transport coordination has to be considered compatible
with the Treaty.

96.

97.

Nevertheless, for a given aid measure to be considered to ‘meet the needs’ of transport coordination,
it has to be necessary and proportionate to the intended objective. Furthermore, the distortion of
competition which is inherent in aid must not jeopardise the general interests of the Community. By
way of illustration, aid likely to shift traffic flows from short sea shipping to rail would fail to meet
these criteria.

Finally, in view of the rapid development of the transport sector, and hence the need for coordinating
it, any aid notified to the Commission for the purpose of obtaining a decision, on the basis of
Article 73 of the Treaty, that the aid is compatible with the Treaty has to be limited (2) to a maximum
of 5 years, in order to allow the Commission to re-examine it in the light of the results obtained and,
where necessary, to authorise its renewal (3).

(2) Ibidem.
(3) This period is increased to 10 years for measures which fall within the scope of Article 15(1)(e) of Council Directive
2003/96/EC of 27 October 2003 restructuring the Community framework for the taxation of energy products and electri-
city (OJ L 283, 31.10.2003, p. 51); Directive as last amended by Directive 2004/75/EC (OJ L 157, 30.4.2004, p. 100). See
in particular Commission Decision of 2 April 2008, NN 46/B/06, Slovakia — Excise duty exemptions and reductions
provided for by Council Directive 2003/96/EC (transport sector), not yet published.

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98.

As regards the railway industry more specifically, aid for the needs of transport coordination can take
several forms:

(a) aid for infrastructure use, that is to say, aid granted to railway undertakings which have to pay
charges for the infrastructure they use, while other undertakings providing transport services
based on other modes of transport do not have to pay such charges;

(b) aid for reducing external costs, designed to encourage a modal shift to rail because it generates

lower external costs than other modes such as road transport;

(c) aid for promoting interoperability, and, to the extent to which it meets the needs of transport
coordination, aid for promoting greater safety, the removal of technical barriers and the reduction
of noise pollution in the rail transport sector, hereinafter referred to as ‘interoperability aid’;

(d) aid for research and development in response to the needs of transport coordination.

99.

In the following Sections the Commission will specify the conditions which, from the point of view
of its decision-making practice, make it possible to ensure, for these different types of aid for coordi-
nation of transport, that the aid concerned meets the conditions of compatibility mentioned in
Article 73 of the Treaty. In view of the specific nature of research and development aid, the criteria
applicable to this type of measure are dealt with separately.

6.3. Criteria for aid for rail infrastructure use, reducing external costs and interoperability

100. The assessment of the compatibility of aid for infrastructure use, reducing external costs and intero-
perability with respect to Article 73 of the Treaty is in keeping with the Commission's decision-
making practice pursuant to Article 3(1)(b) of Regulation (EEC) No 1107/70. In the light of this prac-
tice the conditions which follow appear sufficient for determining whether the aid is compatible.

6.3.1. Eligible costs

101. The eligible costs are determined on the basis of the following.

102. As regards aid for rail infrastructure use, the eligible costs are the additional costs for infrastructure

use paid by rail transport but not by a more polluting competing transport mode.

103. As regards aid for reducing external costs, the eligible costs are the part of the external costs which

rail transport makes it possible to avoid compared with competing transport modes.

104.

In that regard, it should be recalled that Article 10 of Directive 2001/14/EC explicitly allows Member
States to put in place a compensation scheme for the demonstrably unpaid environmental, accident-
related and infrastructure costs of competing transport modes in so far as these costs exceed the
equivalent costs of rail. If there is not yet any Community legislation which harmonises methods for
calculating infrastructure access charges within or across land transport modes, the Commission will
take account of the development of the rules governing the allocation of infrastructure costs and
external costs when applying these guidelines (1).

(1) In this connection the third paragraph of Article 11 of Directive 1999/62/EC of the European Parliament and of the
Council of 17 June 1999 on the charging of heavy goods vehicles for the use of certain infrastructures (OJ L 187,
20.7.1999, p. 42), as amended by Directive 2006/103/EC (OJ L 363, 20.12.2006, p. 344), provides that ‘No later than
10 June 2008, the Commission shall present, after examining all options including environment, noise, congestion and
health-related costs, a generally applicable, transparent and comprehensible model for the assessment of all external costs
to serve as the basis for future calculations of infrastructure charges. This model shall be accompanied by an impact analysis
of the internalisation of external costs for all modes of transport and a strategy for a stepwise implementation of the model
for all modes of transport’. During the preparation of a communication on the internalisation of external costs to comply
with this objective, on 16 January 2008 the Commission published a handbook on the studies carried out so far on
external costs in the transport sector (http://ec.europa.eu/transport/costs/handbook/index_en.htm). This handbook, which
was compiled jointly by several transport research institutes, can be used, amongst other factors, to determine eligible
costs. Furthermore, the Commission has published a White Paper COM(1998) 466, Fair payment for infrastructure use —
A phased approach to a common transport infrastructure charging framework in the European Union (Bulletin of the EU
— Supplement No 3/98).

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105. Both for aid for rail infrastructure use and for aid for reducing external costs, the Member State has
to provide a transparent, reasoned and quantified comparative cost analysis between rail transport
and the alternative options based on other modes of transport (1). The methodology used and calcula-
tions performed must be made publicly available (2).

106. As regards interoperability aid, the eligible costs cover, to the extent to which they contribute to the
objective of coordinating transport, all investments relating to the installation of safety systems and
interoperability (3), or noise reduction both in rail infrastructure and in rolling stock. In particular
they cover investment associated with the deployment of ERTMS (European Rail Traffic Management
System) and any like measure which can help to remove the technical barriers in the European rail
services market (4).

6.3.2. Necessity and proportionality of the aid

107. The Commission considers that there is a presumption of necessity and proportionality of the aid

when the intensity of the aid stays below the following values:

(a) for aid for rail infrastructure use, 30 % of the total cost of rail transport, up to 100 % of the

eligible costs (5);

(b) for aid for reducing external costs, 30 % (6) of the total cost of rail transport, up to 50 % of the

eligible costs (7);

(c) for interoperability aid, 50 % of the eligible costs.

108. For aid above these thresholds, Member States must demonstrate the need and proportionality of the

measures in question (8).

109. For both aid for rail infrastructure use and aid for reducing external costs, the aid has to be strictly
limited to compensation for opportunity costs connected with the use of rail transport rather than
with the use of a more polluting mode of transport. Where there are several competing options
which cause higher levels of pollution than rail transport, the limit chosen corresponds to the highest
cost differential among the various options. Where the intensity thresholds referred to in point 108
are adhered to, it may be presumed that the ‘no overcompensation’ criterion is met.

(1) Member States can find indications of the different methods for evaluating extra costs in Annex 2 to Commission Green
Paper Towards fair and efficient pricing in transport — Policy options for internalising the external costs of transport in the
European Union (Bulletin of the EU — Supplement No 2/96; COM(1995) 691 final) and in the study which the Commis-
sion published on 16 January 2008 (See Article 11 of Directive 1999/62/EC).

(2) Article 10 of Directive 2001/14/EC.
(3) See, in particular, Council Directive 96/48/EC of 23 July 1996 on the interoperability of the trans-European high-speed rail
system (OJ L 235, 17.9.1996, p. 6). Directive as last amended by Directive 2007/32/EC (OJ L 141, 25.6.2007, p. 63) and
Directive 2001/16/EC of the European Parliament and of the Council of 19 March 2001 on the interoperability of the
trans-European conventional rail system (OJ L 110, 20.4.2001, p. 1). Directive as last amended by Directive 2007/32/EC.
(4) Calculation of the eligible costs will take account of any changes made to charges for infrastructure use based on rolling

stock performance (especially sound performance).

(5) See, by way of illustration, Commission Decision of 22 December 2006, N 574/05, prolongation of existing aid scheme
N 335/03, Italy — Friuli Venezia Giulia — Aid for the setting up of rolling-motorway services (OJ C 133, 15.6.2007, p. 6);
Commission Decision of 12 October 2006, N 427/06, United Kingdom — Rail Environmental Benefit Procurement
Scheme (REPS) (OJ C 283, 21.11.2006, p. 10).

(6) Annex I to Regulation (EC) No 1692/2006 of the European Parliament and of the Council of 24 October 2006 establishing
the second Marco Polo programme for the granting of Community financial assistance to improve the environmental
performance of the freight transport system (Marco Polo II) and repealing Regulation (EC) No 1382/2003 (OJ L 328,
24.11.2006, p. 1) provides that Community financial assistance for modal shift actions is limited to a maximum of 35 % of
the total expenditure necessary to achieve the objectives of the action and incurred as a result of the action. In these guide-
lines, as regards State aid for transport coordination the criterion is 30 % of the total cost of rail transport.

(7) See, by way of illustration, Commission Decision of 22 December 2006, N 552/06, Denmark — Prolongation of environ-
mental aid scheme for the transport of goods by rail (OJ C 133, 15.6.2007, p. 5) and Commission Decision of 12 October
2006, N 427/06, United Kingdom — Rail Environmental Benefit Procurement Scheme (REPS), op. cit.

(8) This could be the case with interoperability measures on the trans-European transport network as last defined by Decision
No 884/2004/EC of the European Parliament and of the Council of 29 April 2004 amending Decision No 1692/96/EC on
Community guidelines for the development of the trans-European transport network (OJ L 167, 30.4.2004, p. 1).

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110. At any rate, where the aid recipient is a railway undertaking it must be proved that the aid really does
have the effect of encouraging the modal shift to rail. In principle this will mean that the aid has to
be reflected in the price demanded from the passenger or from the shipper, since it is they who make
the choice between rail and the more polluting transport modes such as road (1).

111. Finally, specifically as regards aid for rail infrastructure use and aid for reducing external costs, there
must be realistic prospects of keeping the traffic transferred to rail so that the aid leads to a sustain-
able transfer of traffic.

6.3.3. Conclusion

112. Aid for rail infrastructure use, for reducing external costs or for interoperability that is necessary and
proportionate and so does not distort competition contrary to the common interest must be consid-
ered compatible under Article 73 of the Treaty.

6.4. Compatibility of aid for research and development

113.

In the area of land transport, Article 3(1)(c) of Regulation (EEC) No 1107/70, adopted on the basis of
Article 73 of the Treaty, provides for the possibility of granting aid to research and development. The
Commission has recently developed a body of practice in the application of this provision (2).

114. Article 9(2)(b) of

the PSO Regulation adopts the text of Article 3(1)(c) of Regulation (EEC)
No 1107/70. Under that provision, aid which has the purpose of promoting research into or develop-
ment of rail passenger transport systems and technologies which are more economic for the com-
munity in general, which is restricted to the research and development stage and which does not
cover the commercial exploitation of such transport systems and technologies, has to be regarded as
meeting the needs of transport coordination.

115. Article 9(2)(b) of the PSO Regulation applies without prejudice to Article 87 of the Treaty. Thus, aid
for research, development and innovation in the field of passenger transport,
if not covered by
Article 9 of the PSO Regulation, and aid which only concerns freight, may be considered compatible
on the basis of Article 87(3)(c) of the Treaty.

116.

(hereinafter

In this regard the Commission has defined, in the Community framework for State aid for research
and development and innovation (3)
the conditions
under which it will declare aid of that type compatible with the common market on the basis of
Article 87(3)(c) of the Treaty. That framework applies ‘to aid to support research and development
and innovation in all sectors governed by the Treaty. It also applies to those sectors which are subject
to specific Community rules on State aid, unless such rules provide otherwise’ (4). The framework
therefore applies to aid for research, development and innovation in the railway transport sector
which does not fall within the scope of Article 3(1)(c) of Regulation (EEC) No 1107/70 or Article 9
of the PSO Regulation (following the entry into force of that Regulation).

the ‘Community framework’),

117.

It is not excluded that the compatibility of aid for research and development may be analysed directly
on the basis of Article 73 of the Treaty, if it is aimed at meeting the needs of transport coordination.
In this case the abovementioned conditions should be checked, in particular the fact that the aid must

(1) With regard to measures falling under Article 15(1)(e) of Directive 2003/96/EC, an impact on the price of transport may
be taken for granted, unless there is proof to the contrary. See in particular the Commission Decision of 2 April 2008,
NN 46/B/06, Slovakia — Excise duty exemptions and reductions provided for by Council Directive 2003/96/EC (transport
sector), not yet published.

(2) Commission Decision of 30 May 2007, N 780/06, The Netherlands — Onderzoek en ontwikkeling composiet scheepsconstructie
en multi-purpose laadruim; het ‘CompoCaNord’-project (OJ C 227, 27.9.2007, p. 5); Commission Decision of 19 July 2006,
N 556/05, The Netherlands — Environmental protection and innovation in public transport in the province of Gelderland
(OJ C 207, 30.8.2006); Commission Decision of 20 July 2005, N 63/05, Czech Republic — Programme for energy
economics and use of alternative fuels in the transport sector (OJ C 83, 6.4.2006).

(3) OJ C 323, 30.12.2006, p. 1.
(4) Ibidem, point 2.1.

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be necessary and proportionate to the intended objective, and must not jeopardise the general inter-
ests of the Community. The Commission considers that the general principles set out in the Com-
munity framework are relevant in analysing these various criteria.

7. STATE GUARANTEES FOR RAILWAY UNDERTAKINGS

118. The Commission Notice on the application of Articles 87 and 88 of the EC Treaty to State aid in the
form of guarantees (1) sets out the legal requirements applicable to State guarantees, including in the
rail transport field.

119. This notice states, in point 2.1.3, that the Commission ‘regards as aid in the form of a guarantee, the
more favourable funding terms obtained by enterprises whose legal form rules out bankruptcy or
other insolvency procedures or provides an explicit State guarantee or coverage of losses by the
State’.

120. The Commission's consistent practice has been to consider unlimited guarantees in a sector open to
competition to be incompatible with the Treaty. In accordance with the proportionality principle they
cannot in particular be justified by tasks of general interest. With an unlimited guarantee it is impos-
sible to check whether the amount of aid exceeds the net costs of providing the public service (2).

121. When the State guarantees are granted to undertakings with a presence on both competitive and
non-competitive markets, the Commission's practice is to require the complete removal of the unlim-
ited guarantee granted to the undertaking as a whole (3).

122. Several railway undertakings are enjoying unlimited guarantees. These guarantees are generally a
legacy of special cases of historic monopolies set up for railway undertakings before the Treaty
entered into force or before the rail transport services market was opened up to competition.

123. According to the information available to the Commission, these guarantees do, to a large extent,
constitute existing aid. The Member States concerned are invited to inform the Commission of the
conditions for implementing the schemes for existing aid as well as of the measures envisaged for
removing them, in accordance with the procedure defined in Section 8.3.

8. FINAL PROVISIONS

8.1. Rules on the cumulation of aid

124. The aid ceilings stipulated in these guidelines are applicable irrespective of whether the aid in question
is financed wholly or in part from State resources or from Community resources. Aid authorised
under these guidelines may not be combined with other forms of State aid within the meaning of
Article 87(1) of the Treaty or with other forms of Community financing if such combination
produces a level of aid higher than that laid down in these guidelines.

125.

In the case of aid serving different purposes and involving the same eligible costs, the most favourable
aid ceiling will apply.

8.2. Date of application

126. The Commission will apply these guidelines from the date of their publication in the Official Journal

of the European Union.

The Commission will apply these guidelines to all aid, whether or not notified, in respect of which it
is called upon to take a decision after the date of their publication.

(1) OJ C 71, 11.3.2000, p. 14.
(2) Commission Decision 2005/145/EC of 16 December 2003 on the State aid granted by France to EDF and the electricity
and gas industries (OJ L 49, 22.2.2005, p. 9); Commission Decision of 24 April 2007, E-12/05, Poland — Unlimited guar-
antee for the Polish post office (Poczta Polska) (OJ C 284, 27.11.2007, p. 2); Commission Decision of 27 March 2002,
E-10/00, Germany — State guarantees for public credit institutions in Germany (OJ C 150, 22.6.2002, p. 7).

(3) Ibidem.

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8.3. Appropriate measures

127.

In accordance with Article 88(1) of the Treaty, the Commission proposes that the Member States
amend their existing aid schemes relating to State aid covered by these guidelines so as to comply
with them at the latest two years after their publication in the Official Journal of the European Union,
subject to the specific provisions in the Chapter on State guarantees. The Member States are invited to
confirm that they accept these proposals for appropriate measures in writing at the latest one year
after the date of publication in the Official Journal of the European Union.

128. Should a Member State fail to confirm its acceptance in writing by that date, the Commission will
apply Article 19(2) of Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed
rules for the application of Article 93 of the EC Treaty (1) and, if necessary, initiate the proceedings
referred to in that provision.

129. The Commission reserves the right to amend these guidelines. It will present a report on their appli-

cation before any amendment and at the latest five years after the date of their publication.

8.4. Period of validity and reporting

(1) OJ L 83, 27.3.1999, p. 1. Regulation as last amended by Regulation (EC) No 1791/2006.