SA 43127 Restructuring aid to PR opening decision en...

Jego Ekscelencja Pan Jacek CZAPUTOWICZ Minister Spraw Zagranicznych Al. J. Ch. Szucha 23 00-580 Warszawa

POLSKA Commission européenne/Europese Commissie, 1049 Bruxelles/Brussel, BELGIQUE/BELGIË - Tel. +32 22991111

EUROPEAN COMMISSION

Brussels, 23.1.2018 C(2018) 205 final

In the published version of this decision, some information has been omitted, pursuant to articles 30 and 31 of Council Regulation (EU) 2015/1589 of 13 July 2015 laying down detailed rules for the application of Article 108 of the Treaty on the Functioning of the European Union, concerning non-disclosure of information covered by professional secrecy. The omissions are shown thus […]

PUBLIC VERSION

This document is made available for information purposes only.

Subject: State aid SA.43127 (2015/NN) (ex 2015/N) – Poland - Restructuring of the Polish Regional Railways

Sir,

The Commission wishes to inform Poland that, having examined the information supplied by your authorities on the measure referred to above, it has decided to initiate the procedure laid down in Article 108(2) of the Treaty on the Functioning of the European Union.

1. PROCEDURE

(1) On 21 September 2015, Poland notified a restructuring aid for Przewozy Regionalne Sp. z o.o. ("PR") in the amount of PLN 770.3 million (c. EUR 181 million)1. The aid was granted on 30 September 2015 in the form of equity investment by the 100% State-owned Industrial Development Agency ("IDA"). Since the aid was granted without prior authorisation by the Commission, it breached the standstill clause laid down in Article 108(3) of the Treaty on the Functioning of the European Union ("TFEU") and Article 3 of Council

1 EUR 1 = PLN 4.25.

2

Regulation (EU) 2015/1589.2 Therefore, the notified measure has been registered as unlawful aid (2015/NN) and the procedural rules applicable are those laid down in Chapter III of that regulation.

(2) The Commission requested additional information on (i) 27 November 2015, (ii) 23 November 2016 and (iii) 30 June 2017, to which Poland replied on (i) 16 February 2016, 4 March 2016 and 3 June 2016, (ii) 9 January 2017 and (iii) 28 July 2017. In addition, Poland submitted information on 11 January 2017, 1 February 2017 and 20 June 2017. The Commission held meetings with Poland on 8 April 2016, 26 April 2016, 21 September 2016, 11 January 2017 and 4 July 2017.

2. DESCRIPTION

2.1. Beneficiary

(3) PR is the largest passenger regional rail operator in Poland, with approximately a 27% share in the Polish market in terms of the number of passengers carried and 50% in terms of traffic volume in train/km. Based in Warsaw, PR operates in 15 out of Polish 16 regions (voivodships) and is the sole provider of public passenger regional rail transport in seven voivodships, mostly the least economically developed.

(4) PR was previously owned by 16 voivodship self-governments. As a result of granting the restructuring aid, it is currently owned by IDA, which has 50% +1 shares in PR, and by 16 voivodship self-governments. It employs approximately 9,000 people and is classified as a large enterprise. All regions in which PR operates are eligible for regional aid under Article 107(3)(a) TFEU.

(5) PR's core activity is the provision of public passenger transport services at the regional level under public service contracts concluded with voivodship self-governments and financed in the form of public service compensation. In addition, on a much smaller scale, PR provides international and "trans-border" transport services and rents and repairs rolling stock. In the past PR also provided commercial inter-regional transport services but ceased operating them in September 2015.

2.2. Competition and legal context

(6) PR's competitors include eight "internal" (so called "in-house") operators3, operating essentially within a single voivodship and owned by that voivodship's authorities (self-governments), as well as one "external" operator, Arriva RP, a subsidiary of Deutsche Bahn. The competitors of PR operate on selected routes, usually concentrated around larger cities. As a result, even in the regions where there is more than one operator, PR often has a significant share in the market.

2 Council Regulation (EU) 2015/1589 of 13 July 2015 laying down detailed rules for the application of

Article 108 of the Treaty on the Functioning of the European Union, OJ L 248 of 24.9.2015.

3 Koleje Mazowieckie, Warszawska Kolej Dojazdowa, PKP Szybka Kolej Miejska, Koleje Śląskie, Koleje Wielkopolskie, Koleje Dolnośląskie, Łódzka Kolej Aglomeracyjna, Koleje Małopolskie.

3

(7) Under Polish law public rail transport at regional level is organised by voivodships and is provided on the basis of a public service contract concluded between the organiser of such transport (voivodship self-government) and the operator. The organiser can procure transport services either by way of direct award or through a competitive tender. In practice the former has been most frequently used. In the 2016/2017 timetable, c. […]*% of traffic volume is carried out under directly awarded contracts.

(8) According to Poland, where a competitive tender was organised in the past, PR was often the only bidder. This is because the other operators considered the routes under tender as not economically attractive or, in case of the "in-house" operators, were not interested in bidding outside "their" voivodships. Apart from Arriva, no other external operator, domestic or foreign, has ever expressed interest in entering the Polish regional rail market.

(9) While some rail transport sectors (e.g. freight, international passenger) have already been liberalised at the EU level, the domestic passenger market can still be closed to competition. Under the fourth railway package4 public service contracts for public passenger transport services by rail can be directly awarded until December 2023, for a maximum duration of 10 years, i.e. until December 2033. Some Member States have already opened (part of) their markets for competition on the basis of their national law. In Poland the contracts awarded by way of a competitive tender account for c. […]% of total traffic volume scheduled in the 2016/2017 timetable.

2.3. Origins of PR's financial difficulties

(10) PR began operations in October 2001 as a result of the structural reform of the railway sector. The reform was implemented mainly on the basis of the Law of 8 September 2000 on commercialisation, restructuring and privatization of the State Enterprise Polish State Railways5 ("PKP Law"). The PKP Law transformed the former State Enterprise Polish State Railways into a joint stock company, wholly-owned by the State Treasury through PKP S.A. PKP S.A., a parent company of the newly-created PKP Group, subsequently established operating subsidiaries, including the infrastructure manager (PKP PLK) and operators

* Business secret.

4 The fourth railway package is a set of six legislative text adopted in 2016 designed to complete the single market for rail services, comprising Regulation (EU) 2016/796 of the European Parliament and of the Council of 11 May 2016 on the European Union Agency for Railways and repealing Regulation (EC) No 881/2004 (OJ L 138, 26.5.2016), Directive (EU) 2016/797 of the European Parliament and of the Council of 11 May 2016 on the interoperability of the rail system within the European Union (OJ L 138, 26.5.2016), Directive (EU) 2016/798 of the European Parliament and of the Council of 11 May 2016 on railway safety (OJ L 138, 26.5.2016), Regulation (EU) 2016/2338 of the European Parliament and of the Council of 14 December 2016 amending Regulation (EC) No 1370/2007 concerning the opening of the market for domestic passenger transport services by rail (OJ L 354, 23.12.2016), Directive (EU) 2016/2370 of the European Parliament and of the Council of 14 December 2016 amending Directive 2012/34/EU as regards the opening of the market for domestic passenger transport services by rail and the governance of the railway infrastructure (OJ L 352, 23.12.2016), Regulation (EU) 2016/2337 of the European Parliament and of the Council of 14 December 2016 repealing Regulation (EEC) No 1192/69 of the Council on common rules for the normalisation of the accounts of railway undertakings (OJ L 354, 23.12.2016).

5 Official Journal of Laws of 2000, number 84, position 984 with amendments.

4

responsible for the provision of freight and passenger transport services. Among the latter was PKP PR, a subsidiary dedicated to the provision of public regional and inter-regional rail transport services. In 2008, PKP PR was acquired by the voivodships, whereupon it changed its name to PR (further references to PR mean also its legal predecessor, PKP PR).

(11) Article 79(1) of the PKP Law provided that the financial resources should be included in the State budget for the provision of regional and inter-regional passenger rail services in the total amount of PLN 2,400 million for the years 2001-2004. At least 10% of this amount should be earmarked for the acquisition of rail vehicles necessary to provide these services. Due to the lack of sufficient budget resources this amount was subsequently reduced to PLN 900 million, of which PR actually received only PLN 532 million.

(12) In addition, on the basis of the Law of 20 June 1992 on entitlements to reduced tariffs for carriage by public transport means6, PR was entitled to receive compensation from the State budget for the loss of revenue caused by the application of the statutory reduced tariffs.7 PR actually received only part of this compensation due for years 2002 and 20038, i.e. PLN 375.5 million instead of PLN 618.4 million, leading to the outstanding balance of PLN 242.9 million.

(13) According to Poland this underfinancing led to the accumulation of financial deficit by PR, which the State reimbursed in the following years. In 2006 and 2007, it granted PR PLN 242.9 million of outstanding compensation for the loss of revenue caused by the application of statutory reduced tariffs in 2002 and 2003 and in 2008, PLN 2,160 million for the provision of transport services between 1 October 2001 and 30 April 2004. The latter amount was determined on the basis of operating losses of PR incurred in the period concerned, as explained in detail in recital (44).

(14) In addition to the financial resources described above, Article 17(1) of the PKP Law obliged PKP S.A. to contribute to its newly-established subsidiaries the assets of the former State Enterprise Polish State Railways, necessary to perform their activities. In the case of PR these assets included real estate and locomotives with a total value of PLN 318 million. Due to unresolved legal status of the assets concerned and disputes with trade unions, the transfer of assets was delayed and took place only in 2008 and 2010.

(15) In order to address the problems encountered during the implementation of the structural reform (insufficient financing, delayed transfer of assets), leading to

6 Official Journal of Laws of 1992, number 54, position 254.

7 The Law provided that certain categories of passengers were entitled to reduced tariffs and rail operators (including PR) were to receive compensation for the loss of revenue caused by the application of these tariffs. This provision was repeated and specified in (i) the Law of 27 June 1997 on the rail transport (Official Journal of Laws of 1997, number 96, position 591, later repealed) – valid until 31 May 2003 and (ii) the Law of 28 March 2003 on the rail transport (Official Journal of Laws of 2003, number 86, position 789) – valid from 31 May 2003 onwards.

8 In particular, in 2002 the State reimbursed PR 52% of lost revenue for the period February - July and 65.29% for the period August - November 2002 (PR received full compensation for January and December). In 2003, the State reimbursed 68% of lost revenue for January and February and 75% from March onwards.

5

deteriorating cash flows of PR, in March 2003 Poland amended the PKP Law9 to give the PKP Group companies (including PR) the possibility to reduce their debt burden by concluding debt restructuring agreement with creditors. Such agreements could have been concluded if approved by creditors accounting for more than 50% of total debt. On the basis of this law, on 29 March 2004, PR concluded a debt restructuring agreement with PKP PLK, which alone held more than half of PR's debt. The agreement provided for restructuring of PR's liabilities towards PKP PLK and other PKP Group companies (PKP S.A., PKP Cargo, PKP Energetyka and PKP Intercity) in the total amount of PLN 1,902 million.

(16) To complement the above-described measures taken under the structural reform of the railway sector, in December 2003, the government adopted the Programme of further restructuring and privatisation of the companies of the PKP Group until the year 2006 ("Programme until 2006"). The Programme until 2006 envisaged i.a. that in 2004 the State would provide a subsidy for the acquisition of rolling stock for regional railways operators in the amount of PLN 100 million. Again, due to budgetary constraints, PR received this subsidy with delay, on the basis of the agreement concluded with the Minister of State Treasury on 27 December 2006.

(17) Poland notified to the Commission as existing aid in force on 1 May 2004 (accession date) the measure Commercialisation, restructuring and privatisation of "Polish State Railways" (PKP) State Enterprise ("Programme PL 7/2004/TREN"). The notified measure was qualified by Poland as aid for co-ordination of transport in the meaning of Article 3(1)(d) of Regulation (EEC) No 1107/70 and consisted of the following instruments: (i) organisational restructuring; (ii) increase of capital in PKP PLK; (iii) write-off or arrangement into instalments of certain public and legal debts of PKP; (iv) State guarantee to redeem bonds issued by PKP in 2001-2004 and repay bank loans taken by PKP; (v) restructuring of certain private and legal debts of PKP Group companies and (vi) restructuring of assets.

(18) Under the interim procedure of the Accession Treaty10, aid granted by Poland to the transport sector before the EU accession on 1 May 2004 and still applicable until 30 April 2007 shall be regarded as existing aid, provided that it was communicated to the Commission within four months after the accession.11 The

9 Law of 28 March 2003 amending the PKP Law (Official Journal of Laws of 2003, number 80, position

720).

10 Treaty between the Kingdom of Belgium, the Kingdom of Denmark, the Federal Republic of Germany, the Hellenic Republic, the Kingdom of Spain, the French Republic, Ireland, the Italian Republic, the Grand Duchy of Luxembourg, the Kingdom of the Netherlands, the Republic of Austria, the Portuguese Republic, the Republic of Finland, the Kingdom of Sweden, the United Kingdom of Great Britain and Northern Ireland (Member States of the European Union) and the Czech Republic, the Republic of Estonia, the Republic of Cyprus, the Republic of Latvia, the Republic of Lithuania, the Republic of Hungary, the Republic of Malta, the Republic of Poland, the Republic of Slovenia, the Slovak Republic, concerning the accession of the Czech Republic, the Republic of Estonia, the Republic of Cyprus, the Republic of Latvia, the Republic of Lithuania, the Republic of Hungary, the Republic of Malta, the Republic of Poland, the Republic of Slovenia and the Slovak Republic to the European Union, OJ L 236, 23.9.2003.

11 Annex IV.3(4) of the Accession Treaty provides that "As regards aid to the transport sector, aid schemes and individual aid put into effect in a new Member State before the date of accession, and still applicable after that date, shall be regarded as existing aid within the meaning of Article 88(1) of the

6

measure referred to in the previous recital was notified within the framework of that procedure. As explained further (see recitals (52), (93), (99), (108)), only the transfer of assets (see recital (14)) and the acquisition of rolling stock (see recital (16)) appear to fulfil these conditions.

2.4. Current financial situation of PR

(19) Despite the measures taken under the structural reform of the railway sector and own restructuring initiatives of PR, including reduction of employment and costs and rationalisation of rolling stock, PR continued to be in a difficult financial condition. Before the notification of the restructuring aid, it had reported net losses each year since 2008 and negative equity each year since at least 2004. Sales revenue had steadily decreased and liabilities increased. PR had generated negative cash flows. Selected financial data of PR in the pre-notification period are presented in Table 1 below.

Tab. 1 Selected financial data of PR in 2011 – 2014, PLN million

2011 2012 2013 2014

Revenue 826.1 795 704.9 644.9

Net result -52.7 -44.3 -54.0 -5.5

Equity -292.4 -336.7 -390.7 -396.2

Liabilities 784.7 834.6 898 884.2

Cash flows -0.6 -3.9 -7.8 -1.3

Source: Financial statements of PR for years 2011-2014

(20) Due to the deteriorating financial situation, in particular liquidity problems, PR was not able to settle its liabilities on time. Between 2009 and 2014, it concluded 25 agreements with creditors deferring repayment of overdue liabilities in the total amount of PLN [950 – 1 250] million (the terms of these agreements are summarised in Annex 1). Despite that the total liabilities in the balance sheet kept increasing, falling only slightly in 2014. The balance of overdue liabilities alone (with interest) was forecast to reach PLN […] million as of 30 September 2015. The two biggest creditors of PR, PKP PLK and PKP Energetyka, called upon PR to repay all its liabilities towards them by 7 October 2015. The latter threatened to stop supplying energy if debt was not settled. PR was not able to repay this debt from its own resources, nor was it capable of obtaining the necessary financing on the market.

(21) It is in this context that Poland granted the notified restructuring aid to PR. On 30 September 2015, IDA acquired 50% plus one share in PR for a consideration of PLN 770.3 million. The purpose of this equity investment was to finance the

EC Treaty until the end of the third year after the date of accession, provided they are communicated to the Commission within four months of the date of accession. This provision shall be without prejudice to the procedures concerning existing aid provided for in Article 88 of the EC Treaty."

7

restructuring process, mostly the repayment of the above debt, with the ultimate goal of restoring long-term viability of PR.

2.5. Interested parties

(22) The Commission received letters from interested third parties who allege that before the notified restructuring aid PR had already received State aid, notably in the form of PLN 2,160 million ex-post compensation for services provided prior to Poland's accession to the EU. Therefore, according to the interested parties, the notified aid breaches the "one time, last time" principle of the Rescue and Restructuring Guidelines12 (the "Guidelines"), which provides that restructuring aid can be granted only once over a period of 10 years. In addition, the interested parties allege that the restructuring aid for PR is not accompanied by sufficient measures to limit distortions of competition. They also expressed concern that the planned direct award by local authorities of the five-year public service contracts to PR would foreclose the market.

(23) In line with Article 24(2) of Council Regulation (EU) 2015/1589, the Commission registered the letters from interested parties as general market information. The Commission has carefully examined their allegations and has taken them into account in the preliminary assessment below.

3. THE MEASURES UNDER ASSESSMENT

(24) Measure 1 (the notified restructuring aid): On 30 September 2015, the State-controlled IDA acquired 50% + 1 shares in PR for the consideration of PLN 770.3 million (c. EUR 181 million).

(25) Apart from the notified restructuring aid, on the basis of information submitted by Poland and by the interested parties, the Commission has identified additional potential State aid measures granted to PR in the past ("pre-restructuring measures"), as described below.

(26) Measure 2: Poland granted to PR (i) in 2008, PLN 2,160 million (c. EUR 508 million) of compensation for public transport services performed between 1 October 2001 and 30 April 2004 ("compensation for carriage") and (ii) in 2006 and 2007, PLN 242.9 million (c. EUR 57 million) of compensation for the loss of revenue caused by the application of statutory reduced tariffs in 2002 and 2003 ("compensation for reduced tariffs")13, for which, according to Poland, PR had not been sufficiently compensated in the past (together (i) and (ii) are further referred to as the "ex-post compensation").

12 Guidelines on State aid for rescuing and restructuring non-financial undertakings in difficulty, OJ C

249, 31.7.2014. All references to "the Guidelines" made in this decision mean the 2014 Guidelines, unless indicated otherwise.

13 The compensation for carriage was granted on the basis of Article 33m(1) of the Law of 25 April 2008 amending the PKP Law (Official Journal of Laws of 2008, number 97, position 624) and the agreement between PR and minister responsible for transport concluded on 23 June 2008. It was paid as follows: (i) PLN 500 million in 2 tranches – PLN 350 million until 30 June 2008 and PLN 150 million until 31 July 2008; (ii) PLN 883 million – in 4 equal monthly tranches, PLN 220.75 million each, paid from 1 August to 30 November 2008; (iii) PLN 770 million – in 6 tranches paid between 15 April and 31 October 2009. The compensation for reduced tariffs was granted on the basis of the Law of 16 December 2005 on the Railway Fund (see footnote 19) and regulations of the Minister of Finance (see footnote 21) and was paid as follows: (i) PLN 110.8 million in 2006 and (ii) PLN 132.1 million in 2007.

8

(27) Measure 3: On 29 March 2004, PR concluded a debt restructuring agreement with PKP PLK providing for the restructuring of PR's liabilities in the amount of PLN 1,902 million (c. EUR 448 million), towards the State-owned PKP Group companies (PKP PLK, PKP S.A., PKP Cargo, PKP Energetyka and PKP Intercity).14 The agreement envisaged a 40% write-off of debt and postponement of repayment of the outstanding debt balance until 31 December 2007. The agreement was modified between 2005 and 2008 with the effect that the repayment period was extended until 29 November 2009.

(28) Measure 4: Between 2009 and 2014, PR concluded 25 agreements with the State-owned creditors (PKP S.A., PKP Energetyka, PKP Intercity, PKP PLK and the Social Security Institution, or "ZUS") providing for deferral of its overdue liabilities towards these creditors in the total amount of PLN [950 – 1 250] million (c. EUR [224 - 294] million). The terms of these deferrals are summarised in Annex 1.

(29) Measure 5: PKP S.A. transferred to PR assets with a total value of PLN 318 million (c. EUR 75 million) by way of in-kind contribution in two tranches: (i) on 30 April 2008, two office buildings and 134 locomotives with related equipment with a value of PLN 48 million and (ii) on 20 July 2010, 26 real estate items (land and buildings) with a value of PLN 270 million.15

(30) Measure 6: In 2006, Poland granted PR PLN 100 million (c. EUR 24 million) of State subsidies for improving the quality of rolling stock.16

(31) Measure 7: Poland granted PR: (i) between 2006 and 2010, training aid of PLN 0.97 million (c. EUR 0.23 million); (ii) in 2012 and 2013, recruitment aid of PLN 39,000 (c. EUR 0.01 million) and (iii) between 2010 and 2015, de minimis aid of PLN 0.7 million (c. EUR 0.17 million).

4. PRELIMINARY ASSESSMENT

4.1. Existence of State aid

(32) Article 107(1) TFEU provides that 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 internal market.

(33) It follows that, for a measure to be qualified as State aid within the meaning of Article 107(1) TFEU, the following cumulative criteria must be met: (i) it must be granted by the State or through State resources and must be imputable to the State; (ii) it must confer an advantage upon an undertaking; (iii) it must be selective, i.e. favour certain undertakings or the production of certain goods; and (iv) it must distort or threaten to distort competition and it must affect trade between Member States.

14 In line with amended PKP Law, it was enough for PR to conclude the agreement only with PKP PLK

because the latter held more than 50% of PR's debt (see recital (15)).

15 The contributions were made on the basis of the PKP Law (see recital (14)).

16 On the basis of the Programme until 2006 and the agreement concluded by PR with the Minister of State Treasury on 27 December 2006 (see recital (16)).

9

4.1.1. Measure 1- Equity investment by IDA (the notified restructuring aid)

(34) Poland does not dispute the classification of the measure as State aid, having itself notified it as restructuring aid.

State resources and imputability

(35) IDA is a 100% State-owned government agency. The funds for the acquisition of shares in PR were transferred to IDA by the Ministry of Infrastructure and Development from the State budget on the basis of a subsidy agreement. The measure thus clearly stems from State resources and is imputable to the State.

Selectivity

(36) The measure was granted to PR only, therefore it is selective.

Advantage

(37) It conferred an undue economic advantage on PR, since PR would not have been able to obtain such financing under normal market conditions, given its difficult financial situation.

Distortion of competition and effect on trade between Member States

(38) Although domestic passenger rail transport has not been liberalised under EU law yet, the Commission held in previous decisions concerning passenger railway companies17 that aid granted to them had an effect on competition and trade based on the fact that international passenger transport has been liberalised and that some Member States have unilaterally opened their rail passenger transport markets. In this respect it is worth noting that PR provides also international and trans-border transport services. In addition, there is inter-modal competition between regional rail and other means of transport in Poland. Furthermore, in several voivodships there is more than one regional rail operator, including a subsidiary of the company from another Member State. Therefore, the measure clearly threatens to distort competition and affects trade between Member States.

Conclusion

(39) On the basis of the above, the Commission at this stage considers that Measure 1 constitutes State aid within the meaning of Article 107(1) TFEU.

4.1.2. Measure 2 – Ex-post compensation


(40) The ex-post compensation was granted from the State budget on the basis of the Law of 25 April 2008 amending the PKP Law18 and the agreement between PR

17 Commission decision C(2017) 4047 final of 16 June 2017 on the State aid SA.32544 (2011/C)

implemented by Greece in favour of the Greek Railway Group TRAINOSE S.A., not yet published; Commission decision C(2017) 4051 final of 16 June 2017 on the State aid SA.31250 (2011/C) planned to be implemented by Bulgaria in favour of BDZ Holding EAD SA, BDZ Passenger EOOD and BDZ Cargo EOOD and other, not yet published.

18 See footnote 13.

10

and the minister responsible for transport concluded on 23 June 2008 (compensation for carriage) and on the basis of the Law of 16 December 2005 on the Railway Fund19 and regulations of the Minister of Finance (see recital (45)). Thus the measure clearly involves State resources and is imputable to the State.

Advantage

(41) As regards economic advantage, it follows from the Altmark judgment that compensation granted by the State or through State resources to undertakings as consideration for PSO imposed on them does not confer such an advantage on the undertakings concerned and hence does not constitute State aid within the meaning of Article 107(1) TFEU, provided that four cumulative conditions are satisfied20:

First, the recipient undertaking is actually required to discharge a PSO and those obligations have been clearly defined;

Second, the parameters on the basis of which the compensation is calculated have been established beforehand in an objective and transparent manner;

Third, the compensation does not exceed what is necessary to cover all or part of the costs incurred in discharging the PSO, taking into account the relevant receipts and a reasonable profit for discharging those obligations;

Fourth, where the undertaking which is to discharge a PSO is not chosen in a public procurement procedure, the level of compensation needed has been determined on the basis of an analysis of the costs which a typical undertaking, well run and adequately provided with means of transport so as to be able to meet the necessary public service requirements, would have incurred in discharging those obligations, taking into account the relevant receipts and a reasonable profit for discharging the obligation(s).

(42) As regards the first Altmark condition, Member States have a wide margin of discretion in defining a given service as a PSO. The Commission's assessment of the exercise of that discretion is limited to checking whether the Member State has made a manifest error when defining a particular service as a PSO. In this respect, the Commission observes that PR provided regional passenger rail transport services which are often unprofitable (especially in remote areas and on less frequented routes) and which are commonly not provided on a purely commercial basis but are rather co-financed by the State. In view of that it can be at least considered that Poland has not made a manifest error by classifying the services provided by PR as PSO.

(43) According to Poland this PSO was imposed on PR by the fact of its establishment on the basis of the PKP Law. It appears however that the PKP Law merely provided that PKP S.A. should establish subsidiaries that will provide passenger rail carriage and thus did not clearly define PR's PSO. In 2001-2004, PR did not conclude any contracts with the minister responsible for transport concerning the provision of the inter-regional services. It did conclude some agreements with

19 Official Journal of Laws of 2005, number 12, position 61.

20 Case C-280/00 Altmark Trans and Regierungspräsidium Magdeburg, [2003] EU:C:2003:415, paragraphs 87 and 88.

11

local authorities concerning the provision of regional services but these agreements had only an implementing character in relation to the source of the PSO imposed on PR, i.e. the PKP Law, and were de facto subsidy agreements (as mentioned in recital (11) regional services were financed in the form of a lump sum State subsidy whose amount was defined annually in the budget law and then was transferred to local authorities). Therefore, on the basis of information currently at the Commission's disposal, the first condition appears not to be satisfied.

(44) As regards the second Altmark condition, the Commission notes that the compensation for carriage was calculated on the basis of a difference between PR's revenue from the provision of regional and inter-regional services generated between 1 October 2001 and 30 April 2004, the associated costs and the financing actually paid in the past. The outcome of this calculation (PLN 2,718 million) was then decreased by the outstanding compensation for reduced tariffs paid in 2006 and 2007 (see recital (13)) and part of the debt written off under the debt restructuring agreement (Measure 3) in the amount of PLN 315 million. This algorithm was not established in advance and was not based on any objective and transparent parameters (such as e.g. volume of work and fee in PLN per train/km). Rather, it was determined ex-post and based on the operating losses of PR. Therefore, the second condition appears not to be met as far as the compensation for carriage is concerned.

(45) When it comes to compensation for reduced tariffs, it was calculated as a difference between the compensation due and the compensation actually paid (see recital (12)). The former was established based on the parameters fixed ex-ante in the regulations issued by the Minister of Finance21, such as the number of passengers carried at different reduction rates and the amount of lost revenue adjusted by the discounted and returned tickets and value added tax. Although the compensation itself was paid ex-post, the parameters on the basis of which it was calculated were established beforehand and the amount ultimately paid was justified on the basis of these parameters. Therefore, in this case the second condition appears to be met.

(46) As regards the fourth Altmark condition, PR was not selected to provide the PSO by way of competitive, transparent, non-discriminatory and unconditional tender procedure, nor was the level of compensation (both for carriage and for reduced tariffs) determined through a benchmarking exercise. Therefore, the fourth condition appears not to be met. Since the case-law requires that all four aforementioned Altmark conditions must be cumulatively satisfied in order to exclude the presence of an advantage where compensation is granted to undertakings in consideration for PSO discharged by them, in view of the above, there is no need to assess whether the third condition was met or not. On this basis it appears that the ex-post compensation conferred an economic advantage on PR.

21 Regulation of the Minister of Finance on the subsidy for passenger rail transport of 10 June 2002

(Official Journal of Laws 2002, number 77, position 696) and amending regulations of 6 August 2002 (Official Journal of Laws 2002, number 69, position 764), 17 December 2002 (Official Journal of Laws 2002, number 128, position 1095), 21 December 2002 (Official Journal of Laws 2002, number 236, position 1984) and 29 April 2003 (Official Journal of Laws 2003, number 77, position 683).

12

Selectivity, distortion of competition and effect on trade between Member States

(47) The conclusion concerning selectivity, the distortion of competition and the effect on trade made in recitals (36) and (38) with respect to Measure 1 applies accordingly to the present measure.

Conclusion on the existence of aid

(48) On the basis of the above, the Commission is of the preliminary view that Measure 2 constitutes State aid within the meaning of Article 107(1) TFEU.

(49) Poland argues that the ex-post compensation does not constitute aid but a "compensatory payment" in relation to the outstanding and due payments for the entrusted PSOs ("PSO"), which had a character of damages. As such it did not confer any advantage on PR but reflects only compensation for damages due for the past under-compensation. Poland refers in this respect to the Asteris judgment.22

(50) The Commission notes that the Asteris judgment related to damages which Member State might be ordered to pay to individuals due to a technical error in the EU law. By contrast, the present measure concerns payment of compensation for the provision of public services in the past and not of damages. Notably, the PKP Law did not provide for any damages in case compensation is not paid on time. Thus, the Commission considers that the reference to the Asteris case law is inappropriate in view of the different nature of the measures at issue.

(51) Poland also claims that the ex-post compensation should not be assessed by the Commission as it relates to the pre-accession period and therefore constitutes existing aid.

(52) In this respect the Commission notes that the measure was not notified by Poland as existing aid. In particular, Programme PL 7/2004/TREN (see recital (17) does not provide for any compensation to be paid ex-post. Moreover, the compensation for carriage (accounting for 90% of total ex-post compensation) was granted (and paid) more than three years after EU accession, i.e. after the deadline envisaged in the interim procedure. Therefore, in the view of the Commission the measure cannot be considered as existing aid.

4.1.3. Measure 3 - Debt restructuring in 2004-2009


(53) All the creditors of the PKP Group which participated in the restructuring of PR's debt were public undertakings. The resources of public undertakings constitute State resources within the meaning of Article 107(1) TFEU because the State is

22 Judgment of the Court of 27 September 1988 in Joined Cases 106 to 120/87 Asteris EA and Others v

Hellenic Republic and European Economic Community ECLI:EU:C:1988:457, paragraph 24. The Court ruled that "Damages that the national authorities of a Member State may be ordered to pay to individuals in compensation for damage [caused by the non-payment of aid under the CAP resulting from a technical error in the Community legislation] they have caused to those individuals do not constitute aid within the meaning of Articles 92 and 93 of the Treaty".

13

capable of directing the use of these resources.23 In addition, as envisaged in the amended PKP Law (see recital (15)), the debt restructuring was initiated by the decision of the minister responsible for transport upon agreement of the minister responsible for public finance. Therefore, it was clearly imputable to the State.

Advantage

(54) According to the original debt restructuring agreement signed on 29 March 2004, 40% of the principal debt amount of PR and interest accrued until the entry into force of the agreement were to be written off, 19.18% of the principal amount was to be repaid in three equal instalments on 30 April 2004, 31 May 2004 and 30 June 2004 and the remaining balance principal amount was to be repaid in 24 monthly instalments, payable from January 2006 to December 2007. Interest accrued after the entry into force of the agreement was to be written off on the final day of the implementation of the agreement, that is to say 31 December 2007 at the latest. Finally, PR was to repay in each calendar year at least 54% of its current liabilities resulting from contracts signed with the PKP Group companies and to settle all outstanding current liabilities due from previous periods until 31 December 2007.24

(55) On 20 December 2005 and on 28 December 2006, PR signed agreement with PKP PLK which confirmed the cancellation of interest accrued in 2005 and 2006. 25 On 2 April 2007, PR signed with PKP Group companies an annex to the 2004 agreement, which envisaged notably an extension of the repayment period from 31 December 2007 until 29 November 2009. All new current liabilities were to be fully repaid as from 1 January 2008, as envisaged in the 2004 agreement. On 6 May 2008, PR signed an agreement with PKP PLK and on 29 July 2008, PR signed an agreement with PKP Cargo. These agreements confirmed the amount of liabilities owed by PR to PKP PLK and PKP Cargo as of 31 December 2007 (PLN 1,908 million) and provided for a detailed schedule of repayment until 29 November 2009. It was also agreed that interest on debt restructured under the 2004 agreement will not accrue until 29 November 2009 (under the original agreement interest was not to accrue until 31 December 2007).

23 Judgment of the Court of Justice of 16 May 2002, France v Commission (Stardust), C-482/99,

ECLI:EU:C:2002:294, paragraph 38. See also Judgment of the Court of Justice of 29 April 2004, Greece v Commission, C-278/00, ECLI:EU:C:2004:239, paragraphs 53 and 54, and Judgment of the Court of Justice of 8 May 2003, Italy and SIM 2 Multimedia SpA v Commission, Joined Cases C-328/99 and C-399/00, ECLI:EU:C:2003:252, paragraphs 33 and 34.

24 These terms of debt restructuring were applicable to the creditors from the PKP Group, accounting for 99.3% of the restructured debt amount. Debt towards other creditors was to be restructured as follows: 30% of principal amount, interest accrued until entry into force of the agreement and thereafter was to be written off and 70% of principal amount was to be repaid in 28 monthly instalments, starting one year after the entry into force of the agreement. From the information provided by Poland it appears that the original terms of debt restructuring towards these creditors (not belonging to the PKP Group) agreed in 2004 were not subsequently modified.

25 There were interpretation differences between PR and PKP PLK as regards provisions of the 2004 agreement concerning interest accrued after its entry into force. Finally, the parties confirmed the original interpretation according to which the 2004 agreement provided for write-off of all interest, including interest accrued from entry into force of the 2004 agreement until its final settlement.

14

(56) As regards the original debt restructuring agreement, considered on a stand-alone basis (i.e. without the subsequent modifications), there is no need to assess whether it conferred an economic advantage on PR, because it had been signed more than 10 years before the notification of the present restructuring aid, i.e. beyond the limitation period for the recovery of aid by the Commission laid down in Article 17 of Council Regulation (EU) 2015/1589.

(57) When it comes to the subsequent modifications described above, in order to determine whether they conferred an economic advantage on PR, the Commission must establish whether by agreeing to postpone the repayment of debt on the agreed terms the creditors of PR behaved in a way comparable to that of a private creditor in a similar situation (the so called market economy creditor principle, or "MECP"). The Commission's assessment focuses on the transaction from the perspective of the hypothetical prudent private creditor26.

(58) A rational private creditor would have normally compared the financial outcome of contemplated courses of action, i.e. (i) the extension of debt repayment period agreement and (ii) the enforcement of the original debt restructuring agreement, in order to choose the one ensuring the higher expected recovery amount.

(59) In the present case Poland has not provided any evidence or arguments demonstrating that the creditors of PR performed any such comparative analysis, nor that the chosen course of action, i.e. modification of the original debt restructuring agreement, ensured the highest expected debt recovery. On the contrary, Poland considers the whole measure (i.e. both the original debt restructuring agreement and its subsequent modifications) to constitute State aid (see recital (65)) and thereby implies that it conferred an economic advantage on PR.

(60) The Commission notes that the modification of the original debt restructuring agreement described in recital (55), in particular those made in 2007 and 2008, effectively consist in a 23-month interest free postponement of repayment of liabilities owed by PR to the PKP Group companies (as compared to the terms of the debt restructuring agreement signed in 2004) in the amount of at least PLN 1,908 million.27 Such interest-free postponement of the repayment period by almost two years relieved PR from meeting its payment obligations according to the original schedule agreed in 2004 and thus provided PR with additional liquidity which could have been used to finance PR's operations. PR would arguably not have been able to raise such interest-free liquidity on the market from private creditors even if it was in a very good financial situation, let alone as a company in financial difficulties. In the past the Commission concluded that similar interest-free postponement of the repayment of debt constituted aid.28

26 Case C-300/16P Commission v Frucona Košice, ECLI:EU:C:2017:706, paragraph 28. 27 This is the amount of liabilities owed to PKP PLK and PKP Cargo as of 31 December 2007, as

confirmed by the agreements signed on 6 May 2008 and 29 July 2008, respectively. This amount does not include liabilities owed by PR to the remaining PKP Group companies (PKP S.A., PKP Intercity and PKP Energetyka) participating in the original debt restructuring agreement, whose repayment was also postponed (by the annex of 2 April 2007), as Poland did not provide the relevant amount.

28 Commission Decision of 9 July 2014 in case SA.38324 Restructuring aid for Alestis, OJ C 418, 21.11.2014, p. 1, rec. 38-39.

15

(61) In view of the above, the Commission at this stage considers that the measure does not comply with the MECP and therefore conferred an economic advantage on PR. If there is evidence to the contrary, Poland and any interested parties are invited to provide comments on the existence of aid and any available contemporaneous evidence (e.g. internal analyses by the creditors, reports prepared by external consultants) demonstrating that the decision to postpone the repayment of debt, as agreed in 2007 and 2008, was more beneficial to the creditors than the alternative scenario of enforcing the repayment according to the original schedule, agreed in 2004.



Conclusion


(64) The Commission considers at this stage that the aid amount can be determined e.g. as a difference between the NPV of the debt calculated according to the original repayment schedule (i.e. agreed on 29 March 2004) and the NPV of the debt calculated according to the new repayment schedule, as modified in 2007 and 2008, i.e. assuming the postponement of debt repayment by 23 months without interest, discounted at an appropriate discount rate. Commission does not have enough information, in particular the precise repayment schedules and information on collateral securing the restructured liabilities, to calculate the exact aid amount. On the basis of available information the aid amount can be roughly approximated to PLN 173-260 million (EUR 41-61 million) assuming the application of discount rates according to the Reference Rate Communication29 for companies in difficulty with high (lower range of the estimated aid amount) and low (higher range) level of collateral.

(65) Poland argues that the measure "fits into the objective of the structural reform of the railway sector" and was notified as existing aid under the interim procedure. Poland claims that subsequent modifications resulted directly from the implementation of the original debt restructuring agreement of 2004 and did not in principle deviate from the original framework. Therefore the measure should be considered as existing aid.

(66) As noted in recital (55) the original debt restructuring agreement signed on 29 March 2004, was subsequently modified by annexes and agreements signed between 2005 and 2008. In view of that the Commission must assess whether these subsequent modifications were indeed only a mere implementation of the original debt restructuring agreement and did not change its main parameters, as claimed by Poland, or whether they were of such a nature that they should rather be considered as new aid.

29 Communication from the Commission on the revision of the method for setting the reference and

discount rates, OJ C 14/6, 19.1.2008.

16

(67) The Commission considers that modifications affecting the main parameters of the original debt agreement, such as e.g. interest rate, repayment period or debt amount, should be viewed as amounting to an alteration of existing aid. In this respect the Commission notes firstly that these modifications changed the duration of debt restructuring from 45 to 68 months. Secondly, they lowered the real amount of PR's debt. This is because the longer the repayment period, all other factors constant, the lower the net present value ("NPV") of debt liabilities to be repaid. On this basis the Commission is of the opinion that the annexes and agreements signed between 2005 and 2008 entailed a significant modification of the original debt restructuring agreement as they changed its main parameters in favour of PR and therefore, the subsequent modifications of the original debt restructuring agreement must be considered as new aid.

4.1.4. Measure 4 - Deferral of liabilities in 2009-2014

(68) Poland argues that the deferral agreements signed with the State-owned creditors do not constitute aid because they were granted on market terms. Firstly, Poland claims that PR was an important customer of PKP PLK and PKP Energetyka, therefore these creditors had particular interest in continuing their business relations with PR despite delayed repayment of liabilities. In addition, they granted deferrals to PR on terms comparable to those offered to other creditors. Secondly, taking into account the average duration of execution of debt in Poland as well as the average recovery rates from insolvent debtors30, deferrals can be considered to be more favourable to creditors than the alternative scenario of PR's insolvency. This was also demonstrated by an ex-post NPV analysis made by Poland. Thirdly, the interest rates were set at levels comparable to the average interest rates charged in the non-financial sector in Poland. Fourthly, the risk for creditors was limited by the expectation that PR will continue to receive PSO compensation. Finally, the late payment of liabilities would be a common market practice in Poland, where only 23% of payments were made on time and 57.8% of payments were at least 30 days overdue in 2012.


(69) First of all, the Commission observes that all the creditors who signed deferral agreements with PR were either State-owned undertakings or a public institution (ZUS).

(70) As regards ZUS, it is part of public administration, under full supervision by the State and is financed from the State budget. Therefore there is no doubt that its decisions to defer PR's liabilities are imputable to the State and that these deferrals involve State resources.

(71) As regards the remaining creditors, as mentioned in recital (53), resources of public undertakings constitute State resources within the meaning of Article 107(1) TFEU. Because the deferrals involve a potential loss of resources by these creditors, they must be considered as involving State resources.

30 According to Poland (i) the average time to execute receivables in Poland according to the World

Bank – 830 days in 2008-2012 and 685 days in 2013-2016; (ii) the average recovery rate from insolvent debtors in Poland according to the World Bank – 34.1% in 2009 and 2010, 35.8% in 2011, 31.5% in 2012, 54.5% in 2013, 54.8% in 2014, 57.0% in 2015 and 58.3% in 2016.

17

(72) Considering imputability, the Commission notes that in 2009-2014, PKP S.A., PKP Intercity, PKP PLK and PKP Energetyka all belonged to the PKP Group which is 100% owned by the State and is supervised by the minister responsible for transport. Although the mere fact that a measure is taken by a public undertaking is not per se sufficient to consider it imputable to the State, the imputability may be inferred from a set of indicators arising from the circumstances of the case and the context in which the measure was taken.31 These indicators include e.g. the nature of its activities and the exercise of the latter on the market in normal conditions of competition with private operators, the degree of the supervision exercised by the public authorities over the management of an undertaking and whether an undertaking could autonomously take a decision in question or any other indicator showing the involvement of the public authorities in adopting the measure in question or the unlikelihood of their not being involved, taking account of the scope of the measure, its content or the conditions it contains.

(73) In this respect, the Commission observes that PR provides public transport services which are not exercised in normal market conditions, but are largely directly procured and financed by the State. Also the creditors, at least PKP PLK (the monopolist infrastructure manager) and PKP Intercity (to the extent it provided public inter-regional services), did not compete in normal market conditions with private operators. Moreover, insolvency of PR, the only provider of regional rail transport in almost half of the regions, could have led to serious disruption in the provision of important public service. Therefore, the State had particular interest in ensuring the liquidity of PR.

(74) The State has traditionally exercised a high degree of supervision over the management and activities of the PKP Group companies, not least through its influence on selection of their boards of directors and management boards, whose composition often fluctuated in coincidence with changes in the political scene. In addition, in the past the PKP Group companies were not always autonomous in taking important business decisions. For example, the State was directly involved in structural reorganization of the railway sector, transfer of assets among the PKP Group companies or financial restructuring. Most notably, the State initiated the restructuring of PR's debt (Measure 3), which included the same creditors who later agreed to defer PR's liabilities. This is not surprising, given that the PKP Group is one of the largest employers in Poland (the creditors concerned employed more than 50,000 people in 2014) and plays an important role in shaping transport policy of the State.

(75) Finally, taking into account the scope of the measure (the amount of deferred liabilities accounted for approximately [>120] % of PR's average annual revenue in the period concerned), its impact on the creditors (PR was the third biggest customer of PKP PLK and PKP Energetyka), the strong organisational links between the debtor, the creditors and the State and, last but not least, the apparently non-market conditions on which the deferrals were granted (see below), it seems unlikely that the decisions of the public undertakings concerned to defer liabilities of PR could have been taken without any involvement whatsoever of the State.

31 Judgment of the Court of Justice of 16 May 2002, France v Commission (Stardust), C-482/99,

ECLI:EU:C:2002:294, paragraph 55.

18

(76) On the basis of the above, the Commission is of the opinion that the public authorities can be considered as having been involved in one way or another in the decisions to defer PR's liabilities. Poland itself does not argue that the measure is not imputable to the State. On this basis, the Commission is of the preliminary view that the measure imputable to the State.

Advantage

(77) In order to determine whether the measure conferred an economic advantage on PR, the Commission must establish whether by agreeing to defer liabilities of PR the creditors behaved in a way comparable to that of a private creditor in a similar situation. In this respect, the Commission has found what follows.

(78) As a matter of fact, between 2009 and 2014, four State-owned undertakings and ZUS concluded with PR, a company in difficult financial situation and also owned by the State, 25 agreements to defer repayment of overdue liabilities in the total amount of PLN [950 – 1 250] million, accounting, as mentioned above, for approximately [>120] % of PR's average annual revenue in this period.

(79) Poland has not submitted any contemporaneous evidence demonstrating that the decision to defer liabilities on the agreed terms was more favourable to the creditors than alternative courses of action, such as e.g. execution of debt. The ex-post NPV analysis made by Poland cannot be considered as sufficiently reliable evidence because it is not independent (the State is an interested party as the owner of the debtor and the creditors) and, more importantly, it was prepared ex-post, i.e. after the decisions to defer liabilities were taken. A rational market creditor would have assessed different scenarios before taking a decision to defer liabilities, with the aim to choose the one that would have guaranteed the highest expected recovery rate.

(80) Moreover, the terms on which the deferrals were granted (see Annex 1) appear rather favourable, taking into account the poor financial condition of the debtor. More concretely, the deferral periods were long, ranging from six to 21 months, and in case of one agreement concluded with PKP PLK, this period amounted to […] months, that is to say, much longer than the average period of the execution of debt from an insolvent debtor, as claimed by Poland (see footnote 30). Notably, this agreement accounted for […] % of the total deferred liabilities concerned.32 In addition, the interest rates applied by the creditors were low if compared to the plausible benchmark, such as the proxy market rates resulting from the application of the Reference Rate Communication ("reference rate").33 In particular, under all the agreements the interest rates applied were lower than the reference rate applicable to a company in difficulty, such as PR.34 Even if assumed, as claimed by

32 The shares of liabilities provided in this recital have been calculated by the Commission on the basis of

information provided by Poland.

33 Communication from the Commission on the revision of the method for setting the reference and discount rates, OJ C 14/6, 19.1.2008.

34 The reference rate is established assuming "low" collateral for all agreements (submission to execution or no collateral at all) except from one agreement with PKP PLK of 2013 where collateral might be considered as "high" (pledge on rolling stock covering, according to Poland, 100% of secured liability amount).

19

Poland, that PR merited a rating "B" (weak) in 2009-2013 and CCC (bad/financial difficulties) from 2014 onwards, the interest rates actually applied were lower than the corresponding reference rates under as many as 18 agreements, accounting for […] % of total deferred liabilities. Moreover, under six agreements (accounting for […] % of total deferred liabilities) the interest rates were even lower than the reference rate applicable to an AAA (strong)-rated company. Finally, the collateral was weak under all but one agreement (see footnote 34) and consisted merely in the submission to execution.35 Under 18 agreements (accounting for […] % of total deferred liabilities) there was no collateral at all.

(81) Poland argues that PR was an important customer of PKP PLK and PKP Energetyka, therefore these creditors had a particular interest in continuing their business relations with PR. Indeed, as mentioned above, PR was the third biggest customer of PKP PLK and PKP Energetyka during the period concerned, accounting for an average of […] % and […] % of their revenue, respectively. This can be one of the factors that a private creditor would have taken into account, but it is not per se sufficient to justify market-conformity of the deferrals on the agreed terms. In any case, this argument does not apply to the remaining creditors, for whom PR was not such an important customer.

(82) The argument of Poland that PKP PLK and PKP Energetyka concluded similar deferral agreements with other business partners is not sufficient evidence of market-conformity of their agreements with PR. Without knowing the precise conditions of these agreements and the financial situation of the debtors, it cannot be excluded that these deferrals were also not granted on market terms. In any case, what is clear is that these deferrals involved smaller amounts of liabilities and shorter repayment periods. In any event, in order to argue market-conformity, Poland would rather have to demonstrate that private creditors have or would have granted deferrals to PR on similar terms as the public creditors concerned. In this respect, the Commission notes that PR did actually sign deferral agreements with two private creditors. Nevertheless, these agreements do not seem to demonstrate market-conformity either, since they involved smaller amount of liabilities and, crucially, envisaged a combination of higher interest rate and shorter repayment periods than the deferral agreements signed by PR with PKP Group companies and ZUS.

(83) Poland argues that the interest rates applied in the deferral agreements were set at levels comparable with the average interest rates charged in the non-financial sector in Poland36. This does not however suffice to justify that they were market-conform, because the average debtor in the non-financial sector could have been in a better financial condition and/or could have offered a better collateral, and thus could have had higher credit worthiness than PR. Likewise, the argument that late payment of liabilities is allegedly a common market practice in Poland does not prove that the terms of the deferral agreements were market-conform.

35 Submission to execution, provided for in article 777 of the Civil Proceedings Code, is a popular form

of the collateral in Poland which enables a creditor to initiate the execution without the necessity to open court proceedings and to substantiate the creditor's rights. The court has three days to validate a registered claim of a creditor, upon which the creditor can ask a bailiff to implement the execution.

36 According to the National Bank of Poland the average interest rate on enterprise loans with maturity of up to one year was 6.5% in 2009, 6.2% in 2010 and 2011, 6.4% in 2012, 5.0% in 2013 and 4.3% in 2014.

20

(84) Finally, the argument of Poland that the risk for creditors was limited by the expectation that PR will continue to receive PSO compensation is disputable, given that such compensation must be used to finance PSO services and not to repay overdue liabilities. In addition, it does not justify the particular terms on which the deferral agreements were concluded. Therefore, the Commission considers that the measure conferred an economic advantage on PR.



Conclusion

(86) On the basis of the above, it is the Commission's preliminary view that Measure 4 constitutes State aid within the meaning of Article 107(1) TFEU.

4.1.5. Measure 5 - Contribution of assets in 2008 and 2010


(87) The assets were contributed to PR by PKP S.A., a public undertaking 100% owned by the State. As mentioned in recital (53), resources of public undertakings constitute State resources within the meaning of Article 107(1) TFEU. The contributions were made on the basis of the PKP Law (see recital (14)), therefore they are clearly imputable to the State. Poland does not contest it.

Advantage

(88) The measure conferred an undue economic advantage, as no rational market vendor would have supplied assets to PR free of charge.



Conclusion

(90) The measure appears to fulfil all the criteria of State aid under Article 107(1) TFEU. Nevertheless, the Commission observes that it was notified by Poland as existing aid under the interim procedure. In particular, the programme PL 7/2004/TREN (see recital (17)) clearly includes the measure consisting in the contribution by PKP S.A. to its newly-created subsidiaries of the assets, necessary to carry out the latter's activities. In addition, although the actual transfer of assets to PR formally took place only in 2008 and 2010, i.e. more than three years after accession, it was a mere implementation of the provisions of the PKP Law of 2000.

(91) According to Article 17(1) of the PKP Law, PKP S.A. was obliged to supply its subsidiaries with the assets necessary to carry out their activities. Poland demonstrated that the assets ultimately transferred to PR were indeed necessary to

21

carry out PR's activities and were actually used by PR long before the formal transfer took place.

(92) In particular, two buildings transferred in 2008 had been rented by PR from PKP S.A. already since 2001 and 2005, while the locomotives transferred in the same year were previously used by PR on the basis of agreements signed with PKP Cargo (after the establishment of the PKP Group all locomotives and associated staff were initially allocated to PKP Cargo with the task to provide traction services to the whole PKP Group). As regards the buildings transferred in 2010, the vast majority of them was included in the business plan of PR in 2001 and all of them had been rented by PR from PKP S.A. since 2001.37

(93) On the basis of the above, the Commission concludes that Measure 5 constitutes existing aid under the interim procedure.

(94) Without prejudice to the previous recital, the measure can also be seen as a mere reallocation of assets within the newly-created PKP Group. The subsidiaries of PKP Group, including PR, continued to perform the same operations with essentially the same assets as the former State Enterprise Polish State Railways, their predecessor. PKP S.A., the mother company of the new PKP Group, was legally obliged to distribute these assets among its subsidiaries, which de facto used them from their establishment. Thus the reallocation was in substance only a legal and accounting operation which did not confer any real economic advantage on PR.

4.1.6. Measure 6 - State subsidy for rolling stock in 2006

State resource and imputability

(95) The measure was granted by the State on the basis of the Programme until 2006 and the agreement concluded with the Minister of State Treasury on 27 December 2006 (see recital (16)). Therefore it clearly involves State resources and is imputable to the State. Poland does not dispute that.

Advantage

(96) The measure conferred an undue economic advantage, as no rational market investor would have provided a non-repayable grant to PR.



Conclusion

(98) The measure appears to fulfil all the criteria of State aid under Article 107(1) TFEU. Nevertheless, the Commission notes that it was notified to the Commission as existing aid under the interim procedure. The programme PL 7/2004/TREN (see

37 Except from one building in Wroclaw (regional headquarters of PR), for which PKP S.A. cancelled

rent agreement (due to reconstruction of the railway station) and instead transferred to PR a replacement building.

22

recital (17) explicitly provides for the purchase and modernisation of rolling stock. The subsidy was granted on the basis of the Programme until 2006 adopted on 16 December 2003 (i.e. before accession) by which the government committed to grant financial support to PR in the amount of PLN 100 million for improving the quality of rolling stock used for regional carriage. Finally, the subsidy was paid based on the agreement, which was signed less than three years after EU accession, i.e. within the deadline envisaged under the interim procedure.

(99) On the basis of the above, the Commission concludes that Measure 6 constitutes existing aid under the interim procedure.

4.1.7. Measure 7 - Training, recruitment and de minimis aid in 2006-2015

(100) Poland does not contest the qualification of the measure as aid.


(101) The measure was granted by public authorities, such as the Polish Agency for Enterprise Development, Labour Office and the State Fund for Rehabilitation of the Disabled. It therefore clearly involves State resources and is imputable to the State.

Advantage

(102) It was granted to PR only and on terms that PR, being in a difficult financial condition, would not have received on the market. The measure therefore conferred on PR an undue economic advantage.

Selectivity

(103) The conclusion concerning selectivity made in recital (36) with respect to Measure 1 applies accordingly to the present measure.

Distortion of competition and effect on trade between Member States

(104) Regulation (EU) 1407/201338 ("de minimis Regulation") provides that aid granted to a single undertaking shall be deemed not to meet all the criteria of Article 107(1) TFEU if the total amount of such aid does not exceed EUR 200,000 over any period of three fiscal years. As recital (3) of that regulation explains, aid granted to a single undertaking not exceeding that threshold should be deemed not to have any effect on trade between Member States and not to distort or threaten to distort competition. That provision also applies to aid granted prior to the entry into force of the de minimis Regulation (i.e. 1 January 2014), pursuant to Article 7(1) thereof.

(105) Based on the information received from Poland the aid granted to PR under Measure 7 exceeded the de minimis threshold in the period from 2009 to 2011, when it amounted in total to PLN 1 177 421 (c. EUR 277 040). Since this amount exceeds the de minimis threshold, and for the same reasons as set out in recital (38) with respect to Measure 1, the measure distorted or threatened to distort competition and had an effect on trade between the Member States.

38 Commission Regulation (EU) 1407/2013 of 18 December 2013 on the application of Articles 107 and

108 of the Treaty on the Functioning of the European Union to de minimis aid, OJ L 352/1 of 24.12.2013.

23

Conclusion


(107) Poland is invited to explain what was the legal basis for aid granted under Measure 7, e.g. whether it was granted under an authorised scheme or block-exempted.

4.1.8. Overall conclusion on the existence of State aid

(108) On the basis of the assessment made in Section 4.1 above the Commission is of the preliminary view that Measures 1, 2, 3, 4 and 7 constitute aid within the meaning of Article 107(1) TFEU. As regards Measures 5 and 6, the Commission concludes that they constitute existing aid.

4.2. Legality of the aid

(109) Pursuant to Article 108(3) TFEU, Member States must notify any plans to grant or alter aid, and must not put the proposed measures into effect until the notification procedure has resulted in a final decision. Article 3 of Council Regulation (EU) 2015/1589 provides that aid shall not be put into effect before the Commission has taken, or is deemed to have taken, a decision authorising such aid.

(110) In so far as the ex-post compensation may constitute State aid, the Commission must first assess whether such aid could qualify for the exemption from the notification obligation under Regulation (EEC) No 1191/69.39

(111) According to Article 17(2) of Regulation (EEC) No 1191/69, compensation paid pursuant to the Regulation is exempted from the preliminary information procedure laid down in Article 108(3) TFEU and thus from prior notification. It follows from the Combus judgment that the concept of ‘public service compensation’ within the meaning of that provision must be interpreted in a very narrow manner40. The exemption from notification provided by Article 17(2) covers only compensation for PSO imposed unilaterally on an undertaking, pursuant to Article 2 of that Regulation, which is calculated using the method described in Articles 10 to 13 of that Regulation (the common compensation procedure), and not to public service contracts as defined by Article 14.

(112) The question of whether Article 17(2) indeed dispensed Poland from prior notification in the present case therefore depends, first, on whether a PSO was in fact unilaterally imposed on PR by Poland and, second, on whether the compensation paid pursuant to that obligation complies with Regulation (EEC) No 1191/69.

(113) As mentioned in recital (43), the PSO was imposed on PR by the fact of its establishment on the basis of the PKP Law. In 2001-2004, PR did not conclude

39 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, OJ L 156, 28.6.1969, p. 1.

40 Case T-157/01 Danske Busvognmænd [2004] ECR II-917, paragraphs 77 to 79.

24

any contracts with the minister responsible for transport to provide inter-regional services. It did conclude agreements with local authorities to provide regional services but these agreements were a mere implementation of the PKP Law. Likewise, the obligation to respect statutory reduced tariffs was imposed on PR on the basis of the Law of 20 June 1992 on entitlements to reduced tariffs for carriage by public transport means (see footnote 7). On this basis, the Commission considers that the obligation to carry out the services for which ex-post compensation was paid was unilaterally imposed on PR.

(114) In order to be exempted from prior notification under Article 17(2) of Regulation (EEC) No 1191/69, any compensation would still need to comply with the common compensation procedures set out in Section IV thereof.

(115) Article 10 of Regulation (EEC) No 1191/69 provides, inter alia, that the amount of the compensation must, in the case of an obligation to operate or to carry, be equal to the difference between the reduction in financial burden and the reduction in revenue of the undertaking if the whole or the relevant part of the obligation in question were terminated for the period of time under consideration. Article 11 provides a detailed formula on how compensation should be established in the case of tariff obligations. Poland has not demonstrated that the ex-post compensation was calculated according to Article 10 and Article 11 and is invited to do so.

(116) According to case law and Regulation (EEC) No 1191/6941, transport undertakings must keep separate accounts for activities subject to PSO and for other activities. In this respect, Poland confirmed that the accounting system of PR consisted of separate accounts for cost and revenues related to PSO and other activities.

(117) Article 13 of Regulation (EEC) No 1191/69 requires that the amount of the compensation should be fixed in advance. As argued in recital (44), the compensation for carriage was fixed ex-post and was not based on any ex-ante parameters. As regards the compensation for reduced tariffs, it was determined ex-ante (see recital (45)).

(118) Therefore, it is the Commission's preliminary view that the ex-post compensation was not exempted from compulsory prior notification pursuant to Article 17(2) of Regulation (EEC) No 1191/69.

(119) The other measures, considered at this stage as aid, do not appear to be exempted from the notification obligation either.

41 According to the Court of Justice in the Antrop judgment, the requirement set out in Article 10 of

Regulation (EEC) No 1191/69 is not fulfilled where ‘it is not possible to ascertain on the basis of reliable data [from the company’s accounts] the difference between the costs imputable to the parts of [its] activities in the areas covered by the respective concessions and the corresponding income and consequently it is not possible to calculate the additional cost deriving from the performance of public service obligations by [that undertaking]’(Case C-504/07 [2009] ECR I-3867). As of 1 July 1992Article 1(5)(a) of Regulation (EEC) No 1191/69 requires transport undertakings which operate not only services subject to PSOs but also engage in other activities to operate the public services as separate divisions, whereby: (i) the operating accounts corresponding to each of those activities are separate and the proportion of the assets pertaining to each is used in accordance with the accounting rules in force, and (ii) expenditure is balanced by operating revenue and payments from public authorities, without any possibility of transfer from or to another sector of the undertaking’s activity.

25

(120) Therefore the Commission considers that Measures 1, 2, 3, 4 and 7, which in the preliminary view of the Commission constitute aid and were granted by Poland without the Commission's decision, breach Article 108(3) TFEU and Article 3 of Council Regulation (EU) 2015/1589. Therefore, they constitute unlawful State aid.

4.3. Compatibility of the aid under the rescue and restructuring guidelines

4.3.1. Measure 1

(121) Poland has notified Measure 1 as restructuring aid. Therefore, the Commission should first assess it under the conditions laid down in the Guidelines.42

Eligibility

(122) According to point 19 of the Guidelines only undertakings in difficulty are eligible for restructuring aid. Under point 20(a) of the Guidelines a limited liability company, such as PR, is considered to be in difficulty where more than half of its subscribed share capital has disappeared as a result of accumulated losses.

(123) On the basis of the financial statements of PR the Commission observes that PR reported a negative equity in each financial year since at least 2004 until it received a capital injection from IDA in 2015. A negative equity means that PR lost more than 100% of its subscribed share capital. Therefore, PR appears to qualify as an undertaking in difficulty under point 20(a) of the Guidelines in difficulty from at least 1 January 2004 until 30 September 2015.

(124) PR was established and started operations in 2001, i.e. more than three years before receiving the notified restructuring aid. It is thus not a newly-created undertaking in the meaning of point 21 of the Guidelines. It does not belong to and is not being taken over by a larger business group, and therefore the condition of point 22 of the Guidelines does not apply to it. In view of the above, PR was eligible to receive restructuring aid.

Contribution to an objective of common interest

• (i) Demonstration of social hardship or market failure

(125) Member States must demonstrate that the failure of the beneficiary would be likely to involve serious social hardship or severe market failure. In accordance with point 44(d) of the Guidelines, this can be demonstrated in particular by showing that there is a risk of interruption to the continuity of the provision of an SGEI.

(126) Poland argues that liquidation of PR would lead to the interruption to the continuity of the provision of an SGEI as PR is the only regional rail operator in seven out of 16 voivodships and the only operator providing services countrywide. As such it could not be replaced to a sufficient extent in a short to medium term by a different provider.

42 Since Poland notified Measure 1 after 1 August 2014, the Commission must assess it under the 2014

Guidelines (see footnote 12), in line with the provisions of Chapter 10 thereof.

26

(127) The Commission notes firstly that PR is indeed the only regional rail operator in seven voivodships and, moreover, has a significant market share (between 66% and 95%) in three others. Secondly, there are high barriers to entry in the relevant market, e.g. large initial capital investment required to begin operations, which limits the number of possible entrants. Thirdly, according to Poland, no external operator (except Arriva, which has an estimated market share of 2%) has ever expressed interest in entering the Polish market, while the "in-house" operators have not been interested or able to provide services outside "their" voivodships. Fourthly, where in the past organisers of transport selected operators through a competitive tender, PR was very often the only bidder.

(128) On this basis, it is reasonable to assume that, had PR gone out of the market, no other operator would be able to replace it in the short to medium term, let alone to provide services on such a wide scale and on such terms to passengers as PR. Therefore, Poland's argument that liquidation of PR would lead to the interruption of the continuity of the provision of an SGEI seems plausible. In view of that, the Commission considers at this stage that Poland has demonstrated social hardship by showing that the condition of point 44(d) of the Guidelines is met.

• (ii) Restructuring plan and return to long-term viability

(129) According to point 46 of the Guidelines, the grant of restructuring aid must be conditional on implementation of a restructuring plan which must be endorsed by the Commission. Point 47 of the Guidelines requires that the restructuring plan must restore the long-term viability of the firm within a reasonable timescale and on the basis of realistic assumptions as to future operating conditions, and highlights that the restructuring period must be as short as possible. According to point 48 of the Guidelines the restructuring plan must identify the causes of the beneficiary's difficulties and outline how the proposed restructuring measures will remedy the beneficiary's underlying problems. It should demonstrate the expected results of the planned restructuring in a baseline scenario as well as in a pessimistic (or worst-case) scenario, including a market survey and a sensitivity analysis (point 50 of the Guidelines). Long-term viability is achieved when the beneficiary undertaking is able to provide an appropriate projected return on capital after having covered all its costs including depreciation and financial charges, allowing the restructured undertaking to compete in the marketplace on its own merits (point 52 of the Guidelines).

(130) The restructuring plan of PR dated 1 September 201543 covers the restructuring period running from 2015 to 2018 and envisages a return to profitability in 2016 and the restoration of long-term viability in 2019-2020 (see table below). Poland submitted financial projections in a baseline scenario and basic data (operating profit, net profit and net margin) in the worst-case and best-case scenarios as well as a market survey and a sensitivity analysis. The expected results under the baseline scenario are summarised in table below.

Tab. 2 Financial projection under the baseline scenario (numbers in PLN million)

2015 2016 2017 2018 2019 2020

43 With amendments of 17 September 2015.

27

Sales revenue44

[600-720]

[500-600]

[490-590]

[460-560]

[470-570]

[475-575]

PSO compensation

[720-880]

[675-825]

[705-865]

[725-885]

[710-870]

[680-830]

Net result [-104 to -84]

[39-47] [36-44] [27-34] [20-24] [20-24]

Net margin [-7.1 to -

5.9] %

[3.0-3.6] %

[2.7-3.3] %

[2.1-2.5] %

[1.4-1.8] %

[1.5-1.9] %

Return on equity (ROE)

[-39 to -

29] %

[11-15] %

[10-13] %

[6-9] % [4.0-6.5] %

[3-7] %

Source: Restructuring plan

(131) The financial projections are based on the following major assumptions:

The cumulated planned traffic volume is assumed to amount to a total of […] million train/km in the period 2015-2020 and to decrease by […] % in 2020 as compared to 2015;

Revenue from tickets is assumed to decrease by […] % in 2020 as compared to 2015 (a decrease/increase of the revenue from tickets as compared to the assumption will in principle lead to an increase/decrease of PSO compensation). Total sales revenue is expected to decrease by […] % in 2020 as compared to 2015;

The planned amount of PSO compensation is based on the contracts signed with local authorities;

Costs independent from PR (cost of infrastructure, energy, fuel) are essentially based on historical cost adjusted by inflation. These costs are in principle compensated in full on the basis of PSO contracts;

Salaries (the biggest cost item among the costs dependent on PR) are assumed to increase at inflation rate until 2019 and by […] % in real terms in 2020. This, in conjunction with the planned reduction of employment by […] %, is expected to lead to a decrease of salary cost by […] % in 2020 as compared to 2015;

(132) The restructuring plan identifies the following causes of PR's difficulties:

Long-term underfinancing leading to increasing indebtedness and negative equity;

Poor quality and insufficient quantity of rolling stock;

Low operating efficiency;

Bad condition of infrastructure managed by PKP PLK;

(133) To remedy the identified difficulties PR plans to implement the following restructuring measures:

44 Includes revenue from tickets, compensation for reduced tariffs and revenue from activities other than

public service (e.g. rent and repair of rolling stock).

28

(i) financial restructuring, consisting of the repayment of debt in the amount of PLN […] million and write-off of interest by PKP PLK in the amount of PLN […]million, respectively, and of an increase of share capital by PLN 770.3 million;

(ii) modernisation of rolling stock, consisting of the modernisation of […] vehicles and the acquisition of […] vehicles, for the amount of PLN […] million;

(iii) optimisation of operating activity (in total 19 restructuring initiatives), most notably through employment restructuring (workforce reduction by […] employees in 2015-2018), the reduction of capacity on unprofitable routes and the introduction of new technologies, costing in total PLN […] million.

(134) Poland is invited to justify why it considers that the write-off of interest by the State-owned PKP PLK in the amount of PLN […] million does not constitute State aid.

(135) The restructuring costs and sources of financing are summarised in table below.

Tab. 3 Restructuring costs and sources of financing (in PLN million)

Restructuring costs Sources of financing Measure Amount Source Amount (% of

total) Financial restructuring […] External financing […] Sale of scrap […]Modernisation of rolling stock

[…] Own contribution […] ([40-42] %)

Employment restructuring […] State aid 770,3 ([58-60] %)

Other initiatives45 […] Total restructuring costs [1 100 – 1

450]Total sources of financing

[1 100 – 1 450]

Source: Letter from Poland DMP-552-1(36)/15/IK of 28 July 2017 (136) The Commission observes that after the restructuring PR is expected to generate

net profit (i.e. to all its costs including depreciation and financial charges) and ROE of around [3-7] %. This should allow PR to compete on the market on its own merits within a reasonable time. The fact that private banks and the EIB, upon conducting a credit assessment, agreed to grant loans of significant amount to PR (see recitals (155)-(156)) can be seen a sign that the market has confidence in the restructuring plan and the restoration of long-term viability.

(137) The restructuring period of four years does not seem to be excessively long, given the gravity and long history of PR's difficulties, the nature of the planned restructuring measures and the decisional practice of the Commission.46

45 E.g. implementation of IT solutions, construction of fuel tanks, revenue assurance initiatives,

development of technological base in Rzeszów, establishment of company archives, improvement of sales system.

29

(138) The proposed restructuring measures appear to properly address the identified problems. In particular, the repayment of debt by PR and capital injection by IDA have already reduced PR's indebtedness and turned equity to positive. The planned modernisation of rolling stock, for which PR has already generated the necessary financing, should improve its quality and increase its quantity. The optimising initiatives, such as the reduction of employment and excessive capacity as well as the introduction of new technologies, seem well-designed to address the problem of low operating efficiency. As regards the bad condition of infrastructure, its improvement is not under PR's control but rather a responsibility of PKP PLK, however, the Commission notes that the National Railway Programme envisages significant investment in infrastructure in the amount of PLN 67 billion (c. EUR 15.8 billion) until 2023.

(139) As regards the assumptions underlying the financial projections, they do not appear to be overly optimistic, with the planned traffic volume and sales revenue forecasted to decrease by [>15] % and […] %, respectively, until 2020. At the same time the total costs are expected to decrease only by […] %. The risk of cost underestimation is partially mitigated by the fact that a significant part (costs independent from PR) will in principle be reimbursed in full from PSO compensation.

(140) The restoration of long-term viability is also based on the assumption that PR will sign multi-annual public service contracts until 2020 with 15 voivodships. Although PR has already signed almost all such contracts47, it appears that the total volume in train/km resulting from the signed contracts account for only […] % of the traffic volume assumed in the restructuring plan.48 A lower than assumed volume of work would however threaten the restoration of viability as it determines the amount of PSO compensation, which accounts for [>50%] % of PR's forecasted revenue in 2015-2020. Poland is therefore invited to submit the analysis of assumed vs. actually contracted volume of work for each year in the period 2015-2020 and, in case of negative deviations, to explain how restoration of long-term viability would nevertheless be ensured. Poland is also invited to submit a full financial projection in the worst-case scenario, as required in point 50 of the Guidelines.

(141) Finally, by letter of 28 July 2017, Poland informed the Commission that PR is currently preparing an update of the restructuring plan. As a result of planned modifications, the costs of individual restructuring measures will change (the total restructuring costs, amount of aid and own contribution will remain the same) and the financial projections will be updated to account for the actual financial results

46 In the past the Commission approved restructuring periods of up to six years (see Commission

Decision of 14 December 2010 on the State aid C 8/10 – Varvaressos S.A., OJ L 184, 14.7.2011, p. 9. See as well Commission Decision of 9 July 2014 on the State aid SA.34191 (2012/C) – A/S Air Baltic Corporation, OJ L 183, 10.7.2015, p. 1.).

47 In Śląskie voivodship PR has signed public service contract for years 2016-2019 and must still negotiate the contract for 2020.

48 The total volume resulting from the signed contracts amounts to […] thousands train/km (according to the map of the regional carriage market in Poland dated January 2017, submitted by Poland on 1 February 2017), whereas the total volume assumed in the restructuring plan amounts to […] thousands train/km (according to the restructuring plan, table 40).

30

of PR after the original restructuring plan was submitted. The Commission awaits the updated restructuring plan and will re-assess restoration of long-term viability on its basis.

(142) All interested parties are invited to comment on the capability of the restructuring plan to restore long-term viability of PR.

Need for State intervention

(143) According to point 38(b) of the Guidelines, in order to declare restructuring aid compatible aid, the Commission will consider whether the measure is targeted at a situation where the aid can bring about a material improvement that the market cannot deliver itself, for example, by remedying a market failure or addressing an equity or cohesion concern. Point 53 of the Guidelines states that Member States intending to grant restructuring aid must provide a comparison with a credible alternative scenario not involving State aid, demonstrating how the relevant objective or objectives in relation to social hardship or market failure would not be attained, or would be attained to a lesser degree, in the case of that alternative scenario.

(144) According to Poland, without the aid, PR would have been unable to repay its debt as it was not able to obtain the necessary financing on the market. This would have led to its insolvency and likely liquidation. Indeed, two biggest creditors called upon PR to repay its liabilities towards them immediately.

(145) The liquidation of PR would have caused serious social hardship by the likely interruption to the continuity of the provision of an SGEI (see recitals (126)-(128)). It would have also increased unemployment and had negative effect on economy49.

(146) Poland analysed alternative scenarios to the restructuring aid assuming continuity of services, such as debt reorganisation, asset disposal and raising of private capital, however, they all turned out to be not realistic. The Commission considers this plausible. In particular, debt reorganisation, given that the biggest creditors of PR were State-owned, would have entailed further State aid. Disposal of assets would likely be insufficient and could have undermined restoration of viability. As regards private capital, no private investor expressed interest in entering the Polish market, let alone in saving PR.

(147) In view of the above the Commission at this stage considers that points 38(b) and 53 of the Guidelines are fulfilled and that the intervention of the State is necessary in order to remedy a market failure.

Appropriateness

(148) In line with point 38(c) of the Guidelines, an aid measure will not be considered compatible with the internal market if other, less distortive measures allow the same objective to be achieved. Member States are free to choose the form that restructuring aid takes, although they should ensure that the instrument chosen is

49 Poland estimates that the liquidation of PR would bring about the loss of 15,000 to 17,500 jobs and

cause accumulated decrease of value added in Polish economy of PLN 1,100-1,700 million within 2-3 years.

31

appropriate to the issue that it is intended to address. In particular, Member States should assess whether beneficiaries' problems relate to liquidity or solvency and select appropriate instruments to address the problems identified (point 58 of the Guidelines).

(149) The financial difficulties of PR relate to liquidity problems (inability to repay short-term liabilities). Therefore, the restructuring aid in the form of equity investment seems to be an appropriate form of aid to address the liquidity problems of PR in the longer term. This is because it can ensure the long-term financial stability and enable the effective implementation of the restructuring plan. On this basis the Commission considers that the conditions laid down in points 38(c) and 58 of the Guidelines are met and is of the preliminary view that the form of aid is appropriate to achieve the objective of restructuring.

Incentive effect

(150) In line with points 38(d) and 59 of the Guidelines, the Member State must show that in the absence of the aid, the beneficiary would have been restructured, sold or wound up in a way that would not have achieved the objective of common interest. This demonstration can form part of the analysis presented in accordance with point 53 of the Guidelines justifying the need for the State intervention.

(151) In view of the conclusion reached in recital (147) on the need for State intervention, the Commission at this stage considers that the requirements of points 38(d) and 59 of the Guidelines are met.

Proportionality of the aid / aid limited to the minimum

(152) Point 61 of the Guidelines, in line with point 38(e) thereof, explains that the amount and intensity of the restructuring aid must be limited to the strict minimum necessary to enable restructuring to be undertaken, in the light of the existing financial resources of the beneficiary, its shareholders or the business group to which it belongs. In particular, a sufficient level of own contribution to the costs of the restructuring and burden sharing must be ensured, taking account of any rescue aid granted beforehand.

• (i) Own contribution

(153) According to point 62 of the Guidelines, in order to limit the amount of aid to the strict minimum, there must be a significant (free of State aid) contribution to the restructuring from the beneficiary's own resources, its shareholders or creditors or the business group to which it belongs, or from new investors. The own contribution should normally be comparable to the aid granted in terms of effects on the solvency or liquidity position of the beneficiary. The own contribution must be real, i.e. actual, excluding all future expected profits such as cash flow and must be as high as possible (point 63 of the Guidelines). Contribution by the State or a public company may only be taken into account provided that it is free of aid. The Commission usually considers in case of large enterprises, such as PR, an own contribution of at least 50 % of the restructuring costs to be adequate. In exceptional circumstances and in cases of particular hardship, the Commission may accept own contribution that does not reach 50% of the restructuring costs (point 64 of the Guidelines). Where the specific circumstances of assisted areas so require, for example, where a beneficiary faces particular difficulties in raising

32

new market financing as a result of its location in an assisted area, the Commission may accept a contribution which is less than 50 % of the restructuring costs (point 98 of the Guidelines).

(154) The notified own contribution amounts to PLN […] million and accounts for [40-42] % of total restructuring costs. It consists of: (i) external financing (PLN […] million) and (ii) sale of scrap (PLN […] million).

- External financing

(155) On 28 September 2016, PR signed a loan agreement with a consortium of banks, consisting of Bank Gospodarstwa Krajowego ("BGK"), Bank Zachodni WBK S.A. ("BZ WBK") and PKO BP S.A. ("PKO BP"), for the total amount of PLN […] million, of which Poland considers PLN […] million (tranches A and B of the loan) as own contribution and the remaining PLN […] million (tranches C and D) is envisaged to […]. 50 The share of the banks in the consortium loan is as follows: BGK ([…] %), PKO BP ([…] %) and BZ WBK ([…] %). The ultimate financing structure of tranches A and B, assuming that full amount of the EIB loan (see below) is used by PR, will be as follows: EIB ([…] %), BZ WBK ([…] %), PKO BP ([…] %) and BGK ([…] %).

(156) On 16 December 2016, PR signed a finance contract with the European Investment Bank ("EIB") for the amount of PLN 200 million to be granted from the European Fund for Strategic Investments (the so called Juncker Plan).51 The EIB loan is conditioned on a positive decision by the Commission on the restructuring aid (the consortium loan is not). The EIB loan will either replace or refinance part of the consortium loan.

(157) The Commission is of the view that both the consortium and the EIB loan constitute a "real" source of own contribution in the meaning of the Guidelines as PR has signed with the banks binding loan agreements.

(158) The EIB loan does not constitute aid. According to the Joint Statement by the EU Commissioner for Competition and the President of the EIB52 own resources awarded directly by the EIB Group do not constitute State aid under Article 107(1) TFEU, and as such fall outside the scope of the State aid rules.

(159) As regards the loan of consortium banks, the Commission observes that BZ WBK is a private bank. Therefore its participation in the loan does not involve State resources and is not imputable to the State. Moreover, its decision to finance PR does not appear to be influenced by the participation of the other consortium banks. According to Poland during the final negotiations within the consortium

50 The main terms of the consortium loan (tranches A and B) are as follows: interest rate […] %, maturity

[…] (disbursement upon fulfilment of conditions precedent, not later than on […]), collateral – most notably mortgage on real estate and pledge over assets (loan to value ratio not greater than […]), pledge over PSO contracts and declaration of submission to execution up to […] % of the total loan amount.

51 The main terms of the EIB loan are as follows: interest rate […] %, maturity […] years after disbursement of the last tranche (disbursement – […] from the conclusion of the loan agreement), collateral – analogical to the consortium loan agreement.

52 http://ec.europa.eu/competition/state_aid/modernisation/joint_statement_en.pdf

33

the loan margin was ultimately agreed at the level proposed by BZ WBK (higher than the initial proposals of PKO BP and BGK).

(160) PKO BP is majority privately-owned and is listed on the Warsaw Stock Exchange. The State holds a minority shareholding (29.43%) but there is no evidence that the State exerted any pressure on the bank to grant the loan to PR. In similar case in the past the Commission concluded that the decisions of the companies with minority shareholding held by the State in Poland were not imputable to the State and did not involve State resources.53 In view of that, the contributions of BZ WBK and PKO BP do not constitute aid.

(161) BGK is 100% State-owned. It cannot be excluded that its decision to finance PR could be imputable to the State and involve State resources. In earlier cases the Commission concluded that decisions of similar banks in Slovenia were imputable to the State and involved State resources 54 In the present case the Commission does not have evidence indicating that the State incited BGK to participate in the consortium loan for PR.

(162) In any event, even if the decision of BGK to finance PR were to be considered as imputable to the State and involving State resources, BGK's contribution to the consortium loan would not have conferred an economic advantage on PR, as it was granted on pari passu terms with two other consortium banks. In particular, the loan was granted by all consortium banks at the same time and on the same terms and conditions, the contribution of private banks is significant ([…] % of the total loan amount) and none of the banks had prior exposure to PR.

(163) In addition, Poland provided evidence providing further assurance that the loan by the consortium of banks was granted on market terms. In particular, the cost of financing for PR is higher than the comparable cost of financing (loans and bonds) of other railway companies in Europe and higher than the cost of financing offered by lenders specialised in financing railway investment projects (Bank DVB SE and Eurofima). Poland has also provided an ex-post study by […] which concludes that the consortium loan is market-conform. Finally, the interest rate of the consortium loan corresponds to the reference rate applicable to a B(weak)-rated company with high level of collateralisation.55 The rating B, i.e. one notch higher than CCC (applicable to undertaking in difficulty) seems to be reasonable, given that the financial situation of PR has improved after it received the restructuring aid. Therefore, the contribution of BGK does not constitute aid.

(164) In view of the above, the loan in the amount of PLN […] million can be considered at this stage as a valid source of own contribution.

- Sale of scrap

53 Commission Decision of 29 July 2014 in case SA.36874 (2013/C) Restructuring aid for LOT Polish

Airlines, OJ L 25, 30.1.2015, p. 1, recital 179.

54 See e.g. Commission Decision of 8 June 2015 Restructuring aid for the Cimos Group, OJ L 59, 4.3.2016, p. 168, rec. 114-115.

55 Collateral can be considered as "high" in this case, given that the loan to value ratio is not greater than […].

34

(165) According to the restructuring plan PR originally planned to generate PLN […] million from scrapping in 2015-2018 of unnecessary and damaged rolling stock (electric multiple, rail buses, diesel locomotives and wagons). In 2015, PR sold scrap for PLN […] million. In addition, Poland submitted an independent valuation of scrap to be sold in 2016-2018 for the total amount of […] million. Nevertheless, Poland has ultimately decided56 to limit the amount of own contribution from this source to the actually generated revenue so far, i.e. PLN […] million. In view of the above the Commission can accept the amount of PLN […] million as a valid source of own contribution.

(166) In conclusion, the own contribution of PR amounts to PLN […] million and accounts for [40-42] % of the restructuring costs.

(167) This is below the 50% threshold required from large enterprises. Nevertheless, in line with point 98 of the Guidelines, in assisted areas contribution below 50% can be accepted. The Commission notes that all regions in which PR operates are eligible for regional aid under Article 107(3)(a) TFEU and PR was not able to raise market financing before it received the restructuring aid. For example, in 2010-2013 PR made several attempts to obtain financing for the investment in rolling stock but failed. Poland is invited to provide detailed information on these unsuccessful attempts to obtain financing in the past.

(168) In addition, under point 64 of the Guidelines, in exceptional circumstances and in cases of particular hardship, a contribution below 50% can be accepted. PR is the only provider of public regional passenger rail services in almost half of the regions. As argued in recitals (127)-(128), had PR gone out of the market, no other operator would reasonably be able to replace it in the short to medium term. This would have caused serious social hardship by the likely interruption of the continuity of the provision of an SGEI, the increase of unemployment and negative effects on the overall economy (see recital (145)).

(169) According to point 62 of the Guidelines the own contribution should normally be comparable in form to the aid granted. In this respect, the Commission notes that the own contribution of PR in the form of loans and proceeds from the disposal of scrap is liquidity-enhancing and as such does not match the notified aid in the form of capital investment which is equity-enhancing. The Commission first observes that the requirement of point 62 is not absolute but applies to "normal" circumstances. In this respect it should be noted that all current owners of PR (IDA and local authorities) are public entities and thus any equity-enhancing contribution from them would constitute State aid in the same way as the notified restructuring aid. Since the own contribution cannot involve State aid such additional capital investment by shareholders would not be considered as a valid source of own contribution. As regards possible private investment, this scenario was analysed and turned out to be not realistic (see recital (146)). Therefore, it can be considered that the particular circumstances of PR justify a different form of the aid and own contribution.

(170) In view of the above, the Commission is of the preliminary view that the own contribution generated by PR, although lower than 50% of the restructuring costs, can be accepted. The interested parties are invited to provide their comments.

56 According to the letter DMP-552-1(36)/15/IK of 28 July 2017.

35

• (ii) Burden sharing

(171) Point 65 of the Guidelines indicates that where State support is given in a form that enhances the beneficiary's equity position, this can have the effect of protecting shareholders and subordinated creditors from the consequences of their choice to invest in the beneficiary, creating moral hazard and undermining market discipline. Consequently, aid to cover losses should only be granted on terms which involve adequate burden sharing by existing investors. According to point 67 of the Guidelines the aid should be granted on terms that afford the State a reasonable share of future gains in value of the beneficiary.

(172) The present aid has not been granted to cover losses but to finance the restructuring measures, mostly debt repayment. In addition, it does not protect existing shareholders and subordinated creditors from potential capital losses if the restructuring fails. Furthermore, since the existing shareholders and major creditors of PR are State-owned, any further equity investment or debt write-off by them would constitute aid. Finally, the State shareholders (IDA and voivodships authorities) will have a share in future capital gains of PR in proportion to their shareholding. Therefore, the Commission's preliminary view is that the burden sharing requirement is met.

Negative effects

(173) According to point 38(f) of the Guidelines, the negative effects of the aid must be sufficiently limited, so that the overall balance of the measure is positive. The Commission therefore has to examine whether the 'one time, last time' principle is respected and whether measures have been taken to limit distortions of competition.

• (i) The "one time, last time" principle

(174) Aid should be granted to undertakings in difficulty in respect of only one restructuring operation. Therefore, where less than 10 years have elapsed since rescue aid, restructuring aid or temporary restructuring support were granted to the beneficiary in the past (including any such aid granted before the entry into force of the Guidelines and any non-notified aid) or the restructuring period came to an end or implementation of the restructuring plan was halted – whichever occurred the latest –, the Commission will not allow further aid (the 'one time, last time' principle) (points 70 and 71 of the Guidelines).

(175) As stated in recital (108), the Commission is of the preliminary view that Measures 2, 3, 4 and 7, granted within a 10-year period prior to the granting of the present restructuring aid, constitute aid. The Commission notes57 that an undertaking in difficulty cannot be considered an appropriate vehicle for promoting other public policy objectives until its viability is assured and, consequently, any aid granted to it should in principle meet the conditions of the Guidelines. PR appears to qualify as an undertaking in difficulty at least from 1 January 2004 (see recital (123)). Therefore, on the basis of information currently

57 Based on p. 23 of the 2014 Guidelines and p. 20 of the 2004 Guidelines (Community guidelines on

State aid for rescuing and restructuring firms in difficulty, OJ C 244, 1.10.2004, p.2.).

36

at the Commission's disposal, it appears that Measures 2, 3, 4 and 7 should be considered as restructuring aid.

(176) The Commission observes that the restructuring plan of PR dated 1 September 2015 does not provide for any other restructuring aid measures than Measure 1. Measures 2, 3, 4 and 7 were granted starting from 2006, i.e. long before the restructuring period beginning in 201558. They were not granted to finance the measures included in the restructuring plan (see recital (133)). It is evident that they were not considered as part of one continuous restructuring operation with the measures implemented many years later. In addition, such operation, if considered as one restructuring continuum, would last 13 years (2006-2018) and would obviously go beyond the reasonable timescale required in point 47 of the Guidelines.

(177) In view of the above, it appears that Measure 1 does not comply with the "one time, last time" principle of the Guidelines.

• (ii) Measures to limit distortions of competition

(178) When restructuring aid is granted, measures must be taken to limit distortions of competition, so that adverse effects on trading conditions are minimised as much as possible and positive effects outweigh any adverse ones (point 76 of the R&R Guidelines). Measures to limit distortions of competition will usually take the form of structural measures although in particular cases the Commission may accept certain behavioural measures or market opening measures in place of some or all of the structural measures that would otherwise be required (point 77 of the Guidelines). In particular, under point 86 of the Guidelines, Member State can alternatively commit to adopt market opening measures. Finally, according to point 102 of the Guidelines, in the case of SGEI providers, the Commission may require alternative competition measures to be taken, in particular by introducing fair competition in respect of the SGEI in question as soon as possible. In assisted areas, the Commission will assess the measures to limit distortions of competition in such a way as to limit the negative systemic impacts for the region. This could, in particular, involve less stringent requirements in terms of reductions of capacity or market presence. A distinction will be drawn in such cases between areas eligible for regional aid under Article 107(3)(a) TFEU and those eligible under Article 107(3)(c) TFEU, to take account of the greater severity of the regional problems in the former areas (point 98 of the Guidelines).

(179) Poland argues that PR cannot divest profitable activity because its core business (the provision of SGEI) is loss-making. In addition, a reduction of this activity would, according to Poland, not benefit any competitor (due to lack of a real competition) but would disrupt the provision of SGEI. Poland observes that as a result of the restructuring, PR will by 2018 reduce the traffic volume (measured by train/km) by [>10] %, the number of electric multiple units by […] % and the number of wagons by […] %, as compared to 2014.

(180) Poland has proposed the following market opening measures:

58 Save for a small part of Measure 7, constituting less than 6% of its total amount, which was granted in

2015.

37

(i) Award of all new PSO contracts through a competitive tender from December 2020 (i.e. three years before the deadline of the fourth Railway Package). The last directly-awarded contract should expire before December 2030;

(ii) Earlier than in December 2030 (i.e. more than three years before the deadline set in the fourth railway package) expiry of directly awarded contracts on some of the routes59, accounting for around […] % of the current market (i.e. the total traffic volume in train/km in the 2016/2017 timetable);

(iii) Irrevocable commitment to keep open to competition already liberalised routes, for which competitive award procedures have been organised in the past, accounting for around […] % of the current market (i.e. the total traffic volume in train/km in the 2016/2017 timetable).

(181) In addition, Poland has acknowledged that rolling stock will not be put at the disposal of the railway operator outside the execution of a PSO, that is to say publicly funded rolling stock will be linked to the execution of a PSO both in terms of scope and duration; once the PSO contract expires the rolling stock will be given back to the granting authority or will be remunerated at market terms.

(182) First of all, the Commission notes that in particular cases Member States may commit to adopt market opening measures in place of the structural measures (divestment and reduction of profitable business activities) that would otherwise be required. The activities performed by PR, i.e. the provision of public transport services, are loss-making and thus require additional financing by the State in the form of PSO compensation. Therefore, PR does not have any profitable business activities to divest. In this context, the adoption of market opening measures in place of the structural measures appears justified in the present case.

(183) The Commission further observes, based on the information provided by Poland, that the part of the market being opened or declared to be opened in the future accounts for c. [>20] % of the total traffic volume and for c. [>40] % of the traffic volume of PR in the 2016/2017 timetable. The Commission also takes into account that the conditions for authorising aid as regards measures to limit distortions of competition may be less stringent in assisted areas and even more so if the beneficiary is located in an assisted area eligible for regional aid under Article 107(3)(a) TFEU (all regions in which PR operates are eligible for such aid).

(184) In addition, Poland has irrevocably committed to award public service contracts on the basis of a competitive tendering procedure from December 2020 so that the last directly awarded contract will expire in December 2030, i.e. three years before the deadline set in the Regulation (EU) 2016/2338. While the latter date may appear distant, this commitment should be seen in conjunction with a much earlier partial market opening described above.

59 Seven regions have already voluntarily declared to award contracts for some routes by competitive

tender from 2020/2021 and one region from 2017. This effectively means that the contracts directly awarded by these regions, under which the routes concerned are currently operated, will expire even sooner than proposed under the first market opening measure.

38

(185) Furthermore, the Commission notes that according to the restructuring plan, PR will reduce capacity, measured by volume of work in train/km, by [>10] % within the restructuring period and by [>15] % in years 2015-2020, i.e. until the end of the financial projections horizon. This alone cannot be considered as a valid measure to limit distortions of competition, as the routes concerned may be loss-making, however, it may potentially free some capacity for competition and again should be seen in combination with the market opening measures.

(186) Finally, PR will refrain from acquiring shares in any company and from publicising State support as a competitive advantage when marketing its products and services, as required by point 84 of the Guidelines.

(187) Against this background, the Commission calls in particular for comments on the impact that the market opening measures proposed by Poland may have, including on other market players.

Aid to SGEI providers in difficulty

(188) In line with points 100 and 101 of the Guidelines, public service compensation that meets the compatibility requirements of Regulation (EC) N° 1370/2007 can be taken into account in the assessment of the restoration of long-term viability and can be disregarded when determining the own contribution.

(189) PR's restoration of viability relies on it receiving public service compensation. Therefore the Commission must assess the compliance of PSO compensation with Regulation (EC) N° 1370/2007.

(190) Under Regulation (EC) N° 1370/2007 public service compensation is compatible with the internal market if it has been granted by way of a public service contract that (i) clearly defines the PSO and the geographical areas concerned; (ii) establishes in advance, in an objective and transparent manner, the parameters of compensation in a way that prevents overcompensation60; (iii) determines the arrangements for the allocation of costs connected with the provision of services and revenue from the sale of tickets; (iv) does not exceed the duration of 15 years (or 10 years if contracts are directly awarded).

(191) The Commission observes that PR has signed 72 public service contracts with responsible local authorities (15 voivodship self-governments) covering the period 2015-2021. All of the contracts clearly define PSO as the provision of passenger rail transport services on the specified regional routes. The allocation of costs connected with the provision of PSO and of revenue from the sale of tickets, taken into account in the calculation of the compensation, appears to be in line with Regulation (EC) N° 1370/2007. The duration of the contracts is much shorter than the allowed limit (the last contract is to expire in 2021). Therefore, conditions (i), (iii) and (iv) appear to be met.

60 The compensation should be calculated in accordance with the rules laid down in the Annex to

Regulation (EC) N° 1370/2007, that is to say it cannot exceed the net financial effect of discharging PSO, essentially equivalent to costs incurred in relation to a PSO less associated revenues and revenues induced by network effects plus a reasonable profit.

39

(192) As regards condition (ii), the interpretative guidelines concerning Regulation (EC) N° 1370/200761 distinguish between the ex-post and ex-ante investigation into compensation. The compensation already received can be assessed on the basis of actual financial data and should not exceed the amount to which the undertaking was entitled according to the parameters set out in the contract in advance. In this respect, the Commission notes that the actual compensation for the year 2015 does not appear to exceed the amount to which PR was entitled according to the parameters set out in the contracts. PR reported a significant loss for the year 2015, which indicates that it was not overcompensated.

(193) In assessing the compensation ex-ante, i.e. planned for the years 2016-2021 (based on the restructuring plan dated 1 September 2015), attention should be paid to the cost categories that are taken into account for the calculation of the compensation, the proposed level of reasonable profit and existence of an adequate control mechanism to avoid overcompensation. In this respect, the Commission notes what follows.

(194) The cost categories taken into account in the calculation of the compensation, including the cost of access to infrastructure, energy, labour, rolling stock, other transport-related activities and administrative expenses, appear to be in line with Article 4(1)(c) of Regulation (EC) N° 1370/2007.

(195) According to Poland PR has a mechanism to address the risk of overcompensation consisting in the accounting system, which allows the separation of costs and revenues attributable to PSO from those attributable to other activities. The allocation system is periodically audited to confirm lack of cross-subsidisation. In addition, the PSO contracts oblige PR to return the compensation exceeding the justified amount and prohibit PR from using the compensation to finance activities other than those covered by the contracts.

(196) Finally, the contracts assume a maximum return on capital employed (ROCE) of [5-7] %, which according to Poland is in line with the level applied by other providers of public transport services in Poland.

(197) PR is forecasted to generate a return on equity (ROE) of [>10] % in 2016, [>10] % in 2017, [6-9] % in 2018, [4-6] % in 2019 and [4-6] % in 2020. This appears high, at least in 2016 and 2017. By way of comparison, in an earlier case62 the Commission accepted a ROE of 6% (with a 10% annual cap over three years justified by efficiency and qualitative improvements). Poland argues that ROE is not an appropriate profitability measure for PR because of an abnormally low level of equity prior to the restructuring (before September 2015 equity was negative) and high leverage resulting from the previous owners' financing policy.

(198) The Commission considers that there may be some merit in this argument as regards the period before 2015. However, after PR was recapitalised and repaid a significant amount of debt, it seems less convincing. In this context, it seems that

61 Communication from the Commission on interpretative guidelines concerning Regulation (EC) no

1370/2007 on public passenger transport services by rail and by road, OJ C 92 of 29.3.2014, p. 1.

62 Commission Decision C(2010) 975 final of 24 February 2010 concerning the case C 41/08 (ex NN 35/08) concerning public transport service contracts between the Danish Ministry of Transport and Danske Statsbaner, OJ L 7 of 11.1.2011, p. 1.

40

in 2016 and 2017 PR may have been overcompensated (based on data forecasted in the restructuring plan), given that also other profitability measures, such as return on assets (ROA) and net margin appear to be relatively high. On the other hand, the proposed level of profit in the years 2018-2020 seems reasonable. The Commission invites Poland and other interested parties to comment on this issue.

(199) Finally, the interested parties expressed concern that the five-year PSO contracts directly awarded to PR would foreclose the market. In this respect, the Commission notes that Poland has directly awarded PSO contracts to PR for the period 2015-2021 (see recital (191)). In line with Article 5(6) of Regulation (EC) N° 1370/2007 the competent authorities of the Member States may directly award public service contracts in the rail transport sector for the period of up to 10 years, i.e. until December 2029, unless prohibited by national law. This period has been extended until December 2033 by Regulation (EU) 2016/2338 (see recital (9)). According to the Commission's knowledge the direct award of such contracts is not prohibited by Polish law. Therefore, the direct award of PSO contracts to PR until 2021 is not per se against EU rules.

(200) In conclusion, the PSO compensation for the years 2015 and 2018-2020 appears to be compatible with Regulation (EC) N° 1370/2007, whereas the compensation planned for the years 2016 and 2017 may lead to overcompensation. Poland is invited to justify why in its view the compensation envisaged for years 2016 and 2017 does not lead to overcompensation.

Conclusion on Measure 1

(201) In view of the preliminary assessment made in recitals (121) - (200), the Commission has doubts as regards compatibility of Measure 1 with the internal market due to a possible breach of the "one time, last time" principle of the Guidelines.

4.3.2. Measures 2, 3, 4 and 7

(202) As mentioned in recital (175), it appears at this stage that Measures 2, 3, 4 and 7 should be considered as restructuring aid and therefore the Commission should assess them first under the conditions laid down in the 2004 Guidelines63, which are applicable to any non-notified restructuring aid granted between 1 October 2004 and 31 July 2014.

(203) It is the Member State which must invoke possible grounds of compatibility and demonstrate that the conditions for such compatibility are met.64 However, Poland does not consider the measures in question as restructuring aid and has therefore not provided any grounds for compatibility, nor has it demonstrated that the conditions of the 2004 Guidelines are met.

(204) Based on Chapter 3.2 of the 2004 Guidelines, the grant of restructuring aid is conditional on the implementation of a restructuring plan which must be endorsed

63 See footnote 57.

64 See, for instance, judgment in Italy v Commission, C-364/90, EU:C:1993:157, paragraph 20. See as well judgment of 27 September 2012, Italy v Commission, T-257/10, ECR, EU:T:2012:504, paragraph 135.

41

by the Commission in all cases of individual aid. The beneficiary of restructuring aid must provide sufficient own contribution to the restructuring cost and adequate compensatory measures to mitigate distortive effects of such aid on competition. Poland has not put forward any elements that would enable the Commission to assess whether the requirements for finding restructuring aid compatible are met.

Conclusion on Measures 2, 3, 4 and 7

(205) Consequently, on the basis of currently available information, the Commission has doubts on the compatibility of Measures 2, 3, 4 and 7 with the internal market under the Guidelines.

4.4. Compatibility of the aid under the PSO regulations

(206) Since PR provides services that can be classified as PSO (see recital (42)), the Commission should also examine whether the measures under assessment can be considered compatible under the PSO regulations.

(207) As regards the ex-post compensation (Measure 2), it was granted and paid before 3 December 2009, i.e. before entry into force of Regulation (EC) N° 1370/2007, but has been never notified and thus constitutes unlawful aid. In such case, the Commission considers it appropriate to assess its compatibility with the internal market both under Regulation (EEC) No 1191/69 and under Regulation (EC) N° 1370/2007. 65

(208) Regulation (EEC) No 1191/69 does not seem to include clear compatibility criteria for public service contracts. In the present case, however, PSO were not defined in public service contracts but were unilaterally imposed on PR (see recital (113)). In cases of unilaterally imposed PSO, the compatibility criteria of Regulation (EEC) No 1191/69 are laid down in Section II, III and IV. In view of the assessment made in recitals (115)-(117), the ex-post compensation does not comply with Section IV of Regulation (EEC) No 1191/69 (common compensation procedures). This is sufficient to consider at this stage that the ex-post compensation is not compatible under Regulation (EEC) No 1191/69.

(209) As regards compatibility under Regulation (EC) N° 1370/2007, first, pursuant to Article 3 thereof, where a competent authority decides to grant the operator of its choice an exclusive right and/or compensation in return for the discharge of PSO, it must do so within the framework of a public service contract. The ex-post compensation was not granted within the framework of public service contracts but on the basis of the PKP Law and the Law on the Railway Fund (see recital (40)). Therefore, it does not appear to comply with Article 3 of Regulation (EC) N° 1370/2007.

(210) Second, Article 4 of Regulation (EC) N° 1370/2007 establishes the mandatory content of public service contracts. For instance, Article 4(1)(b) requires the parameters on the basis of which the compensation is calculated to be established in advance in an objective and transparent manner in a way that prevents

65 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) Nos 1191/69 and 1107/70, OJ L 315, 3.12.2007, p. 1.

42

overcompensation. As explained in recitals (43) and (113), in the period concerned (2001-2004) PR in did not conclude public service contracts, but discharged its PSO on the basis of a general national law. In addition, the Commission has reached the preliminary view that the compensation for carriage was not calculated on the basis of parameters established in advanced but was calculated and granted ex-post (see recital (44)). The compensation for reduced tariffs was calculated on the basis of ex-ante parameters (see recital (45)).

(211) Therefore, the Commission at this stage considers that the ex-post compensation does not comply with Regulation (EEC) No 1191/69 and Regulation (EC) N° 1370/2007.

(212) As regards Measures 1, 3, 4 and 7, the Commission observes that the equity investment, the debt restructuring, the deferral of liabilities, the training, recruitment and de minimis aid do not appear to constitute compensation for discharge of PSOs, let alone to meet the requirements of Regulation (EEC) No 1191/69 or Regulation (EC) N° 1370/2007. Poland does not claim that Measures 1, 3, 4 and 7 constitute compensation or comply with PSO regulations and accordingly has not provided any arguments to demonstrate that.

(213) In view of the above, the measures under assessment do not appear to be compatible with the internal market under the PSO regulations. This is without prejudice to any assessment that may be carried out directly on the basis of TFEU (see below).

4.5. Compatibility of the aid directly under the TFEU

(214) The Commission normally assesses the compatibility of restructuring aid on the basis of the Guidelines. The Guidelines do not provide for any derogation to passenger railway undertakings.

(215) However, the Commission is of the view that domestic passenger rail sector is in a specific situation that makes it justified to reflect on whether the aid granted to undertakings in difficulty operating in this sector which does not meet all conditions of the Guidelines could, under certain circumstances, be considered compatible with the common market.

(216) Unlike other rail transport sectors, such as freight and international passenger, which are already open to competition, the domestic rail passenger sector has not been liberalised at the EU level yet. Member States are allowed to directly award public service contracts with a duration until December 2033 (see recital (9)). The sector is still dominated by incumbents and there is little competition, save in those few Member States which partially opened their markets under national law. Therefore, it may be wondered whether the distortive effects of the aid would be smaller in this sector than in other sectors that are fully open to competition.

(217) Furthermore, the domestic rail passenger sector provides an important public service. Since incumbents may not always be timely and sufficiently replaced by other operators, their exit from the market would often lead to a disruption in the provision of an SGEI and thus have serious economic and social consequences. This makes the domestic rail passenger sector different from sectors that have been previously liberalised in the EU, be it rail or other, such as e.g.

43

telecommunication or airlines. For example, a traditional airline carrier provides a purely commercial service that can be easily replaced by a competitor.

(218) In addition, the operation of services under PSO is typically insufficiently profitable, if not loss-making, and may therefore require PSO compensation. However, some of the operators may have not been sufficiently compensated in the past. To the extent that this was the case, aid granted to them can be seen not as an undue advantage but as a settlement of past under-compensation.

(219) Finally, it appears that some incumbents, just like PR, may struggle with a legacy of unfinished restructuring due to reasons which were not always under their control, such as e.g. prolonged reorganisation by the State of the entire railway sector. As a result, they may have received aid that, although formally qualifies as restructuring aid, was de facto not used to restore their long-term viability but to remedy recurring liquidity problems. Because of that they may not have had chance to conduct proper restructuring ahead of the upcoming liberalisation of the sector in the EU. Therefore, one last opportunity to restructure may be justified to ensure long-term viability and make them better prepared to compete on the market on their own.

(220) These specific features of the domestic rail passenger sector are recognised in the Railway Guidelines66 and are also reflected in the fact that the Commission has never approved aid granted to passenger railway undertakings in difficulty on the basis of the Guidelines.67

(221) The Commission therefore believes that it is justified to consider whether an approach that would take these specific features of the domestic passenger rail transport sector into account could be identified.

(222) It is recognised in jurisprudence68 that the Commission may depart from State aid guidelines, in particular where exceptional circumstances not envisaged in those guidelines distinguish a given sector of the economy, in which case it may apply the Treaty provisions directly.

(223) In this respect the Commission notes that Article 107(3)(c) TFEU provides that aid to facilitate the development of certain economic activities or of certain economic areas may be considered to be compatible with the internal market. Taking into account the nature of PR's activities and their economic impact at both regional and national level (see recitals (128) and (145)), Article 107(3)(c) TFEU appears to be an appropriate compatibility basis.

66 Community Guidelines on State aid for railway undertakings, OJ C 184, 22.7.2008, p. 13 (see in

particular point 34 and Chapter 5 thereof).

67 In case of the Greek Railway Group TRAINOSE S.A. the Commission approved the aid on the basis of Article 107(3)(b) TFEU (Commission Decision C(2017) 4047 final of 16 June 2017 on the State aid SA.32544 implemented by Greece in favour of the Greek Railway Group TRAINOSE S.A., not yet published) and in the case of the Bulgarian railway company BDZ the Commission approved the aid under Chapter IV of the Railway Guidelines (Commission Decision C(2017) 4051 final of 16 June 2017 on the State aid SA.31250 planned to be implemented by Bulgaria in favour of BDZ Holding EAD SA, BDZ Passenger EOOD and BDZ Cargo EOOD, not yet published).

68 Judgment of the Court of Justice of 8 March 2016, Hellenic Republic v Commission, C-431/14, ECLI:EU:C:2016:145, paragraphs 70-72.

44

(224) Based on publicly available financial data it appears that some of the railway operators may be in a difficult financial situation which indicates that they may also need restructuring aid. Any new approach that may take into account the specific features of the domestic passenger rail transport sector (see recital (221) would then necessarily translate into the modification of the applicable framework for assessing compatibility of restructuring aid to domestic passenger railway undertakings.

(225) The Commission invites interested parties to comment on the proposed approach to compatibility assessment.

5. CONCLUSION

(226) For the reasons stated above, at this stage of the investigation, the Commission has doubts about the compatibility of Measures 1, 2, 3, 4 and 7 with the internal market and invites Poland and all interested parties to submit their comments.

In the light of the foregoing considerations, the Commission, acting under the procedure laid down in Article 108(2) TFEU, requests Poland to submit its comments and to provide all such information as may help to assess the measure, within one month of the date of receipt of this letter. It requests your authorities to forward a copy of this letter to the recipient of the aid immediately.

The Commission wishes to remind Poland that Article 108(3) TFEU has suspensory effect, and would draw your attention to Article 14 of Council Regulation (EC) No 659/1999, which provides that all unlawful aid may be recovered from the recipient.

The Commission warns Poland that it will inform interested parties by publishing this letter and a meaningful summary of it in the Official Journal of the European Union. It will also inform interested parties in the EFTA countries which are signatories to the EEA Agreement, 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.

If this letter contains confidential information which should not be disclosed to third parties, please inform the Commission within fifteen working days of the date of receipt. If the Commission does not receive a reasoned request by that deadline, you will be deemed to agree to the disclosure to third parties and to the publication of the full text of the letter in the authentic language on the Internet site: http://ec.europa.eu/competition/elojade/isef/index.cfm.

Your request should be sent electronically to the following address:

European Commission, Directorate-General Competition State Aid Greffe B-1049 Brussels [email protected]

Yours faithfully For the Commission

45

Margrethe VESTAGER

Member of the Commission

Annex: Deferral agreements signed by PR with the State-owned creditors

Date of agreement Amount of deferred liabilities, PLN million

Period of deferral in months* Interest rate Collateral

Agreements signed with PKP S.A. 1 10.09.2010 […] […] […] % Submission to execution

2 08.12.2011 […] […] […] %69

Submission to execution

Sub-total PKP S.A. […]

Agreements signed with PKP Energetyka3 19.02.2010 […] […] […] % Submission to execution

4 19.05.2010 […] […] […] % None

5 21.02.2012 […] […] […] % None

6 03.09.2012 […] […] […] % None

7 28.03.2013 […] […] […] % None

8 12.12.2013 […] […] […] % Submission to execution

9 12.12.2014 […] […] […] % Submission to execution

Sub-total PKP Energetyka […]

Agreement signed with PKP Intercity 10 26.11.2009 […] […] […] % Submission to execution

Agreements signed with PKP PLK 11 07.04.2011 […] 7 […] % None

12 21.01.2013 […] (i) […] (PLN […] million) (ii) […] (PLN […] million)

(i) […] % (ii) […] %

(i) pledge on rolling stock and mortgage on real estate (100% coverage according to Poland) (ii) none

Sub-total PKP PLK […]

Agreements signed with the Social Security Institution (ZUS) 13 27.08.2010 […] […] […] % None

14 27.08.2010 […] […] […] % None

15 27.08.2010 […] […] […] % None

16 27.08.2010 […] […] […] % None

17 27.04.2012 […] […] […] % None

18 27.04.2012 […] […] […] % None

19 10.05.2012 […] […] […] % None

69 […] % to be lowered to […] % in case of timely repayment of instalments.

47

20 14.06.2012 […] […] […] % None

21 26.04.2013 […] […] […] % None

22 26.04.2013 […] […] […] % None

23 20.05.2013 […] […] […] % None

24 10.06.2013 […] […] […] % None

25 11.07.2013 […] […] […] % None

Sub-total ZUS […]

Grand total [950 – 1 250] * Counting from the latest invoice date or due period (in case of ZUS) until the final payment date under agreement.

SA 43127 Restructuring aid to PR opening decision en...

Documents

Transcript of SA 43127 Restructuring aid to PR opening decision en...