IRELAND S REGIONAL AIRPORTS PROGRAMME

Transcription

1 IRELAND S REGIONAL AIRPORTS PROGRAMME Airports Division July

2 Ireland s Regional Airports Programme CONTENTS Page PART 1 Background 5 Revised EU Guidelines on State aid to airports and airlines 9 The Altmark Judgment 12 Financing of Airports Categorisation of Airport Activities and Public Policy Remit 13 IWAK Study 14 Ireland s National Aviation Policy 15 The 2014 EU Guidelines and Ireland s National Framework 17 Conditions to be met by Regional Airports to qualify for funding under PART 2 or 3 18 PART 2 Core Airport Management Operations/Activities (OPEX) 20 PART 3 Regional Airports Capital Expenditure Grant (CAPEX) Scheme 25 PART 4 Public Service Obligation (PSO) Air Services Scheme 31 PART 5 Transparency & Monitoring 34 2

3 PART 6 Appendices Tables providing an analysis of financial performance based on the most recent audited financial statements, 1.2 giving a breakdown of the administrative expenses for the same period, 2.1 providing an analysis of projected performance for the current year 2.2 giving a breakdown of projected administrative expenses for the same period. 2. Guidance Notes - Regional Airports Core Airport management operational expenditure Subvention (OPEX) Scheme 3. Guidance Notes - Application of 2014 EU Guidelines on State aid to airports and airlines to CAPEX Scheme 4. Framework for Public Service Obligations (PSO) air services 5. EU Commission Decision: State aid SA (2015N) Ireland Regional Airports Programme The contents of this Regional Airports Programme reflect developments at EU level, both in terms of the 2014 Guidelines on State aid to Airports and Airlines and the relevant judgments, to date, arising from a number of cases heard before the European Court of Justice. Any queries in relation to its contents should be addressed to Airports Division (Regional Airports Programme ) Department of Transport, Tourism & Sport 44 Kildare Street Dublin 2 IRELAND airports@dttas.ie July

4 IRELAND S REGIONAL AIRPORTS Donegal Airport, Ireland West Airport Knock (IWAK), Waterford Airport and Kerry Airport Donegal IWAK 1 2 Kerry Waterford 3 Ireland s State Airports Dublin Shannon Cork 4

5 PART 1 BACKGROUND Regional airports in Ireland were developed in the 1980s to provide for improved connectivity both nationally and internationally. There was a recognition that such airports could deliver significant social and economic benefits to the regions that they serviced at a time when rail and road connections were poor. Accordingly, the focus of policy on regional airports has been on assisting in optimising the contribution that the airports can make to balanced regional development. However, the development of the major interurban roads programme and improvements to the rail network in the intervening period has reduced the importance of regional airports for connectivity within Ireland. Today, regional airports are viewed as being important because of a level of international connectivity that they bring to a region for tourism and business. That connectivity is seen as being a significant contributory factor underpinning Ireland s economic recovery and sustainable development into the future. Following a Government Decision in June 2011, which arose from a Value for Money Review published earlier in that year, the Exchequer provided financial support, under the Regional Airports Programme , to four regional airports (Donegal, Ireland West Airport Knock (IWAK), Kerry and Waterford), where previously it supported six. That financial support was administered by the Department of Transport, Tourism & Sport through three separate Schemes A Core Airport Management Operational Expenditure Subvention (OPEX) Scheme - the general economic interest that is served by an airport in a regional location is recognised and supported. The Department of Transport, Tourism & Sport s Core Airport Management Operational Expenditure Subvention Scheme (OPEX) operated in accordance with the EU Commission s 2005 Guidelines on airport funding. Under the Scheme, the Minister could compensate the regional airports for subventible losses - the costs incurred in providing core airport services, insofar as these costs could not be fully met by prudent commercial management and from any surpluses generated by non-core activities, such as car parking charges and catering. The Scheme expired on 31 December

6 A Regional Airports Capital Expenditure Grant (CAPEX) Scheme - Additional funding was also provided to the regional airports to support capital investment under a Regional Airports Capital Expenditure Grant Scheme. In recent times, such grant aid has only been given to those projects or project elements that are essential for safety and security reasons and were limited to 90% of the total eligible costs. The Scheme also ended in December A Public Service Obligation (PSO) air services Scheme which provides financial support to airlines, based on a competitive tender, to operate essential air services. It is a response to a need to ensure appropriate connectivity in areas not otherwise served by adequate transport services. The PSO air services routes were Donegal/Dublin (operated by Loganair) and Kerry/Dublin (operated by Aer Arann/Stobart Air). Previously, PSOs air services were operated on Galway/Dublin and Derry/Dublin routes (ceased in 2011). The contracts under the Regional Airports Programme PSO Scheme were due to end in November 2014, but were extended to end January 2015 to allow for a new public tender competition to be held. Table 1: Distances by road between the various airports Distance by road (where appropriate) between airports Airports State Airports Northern Ireland Dublin Cork Shannon IWAK Donegal Derry Donegal 307kms 484kms 358kms 205kms N/a 123kms 4hrs16mins 6hrs37mins 5hrs3mins 3hrs2mins 1hr52mins Waterford 190kms 136kms 167kms 292kms N/a N/a 2hrs12mins 1hr59mins 2hrs28mins 3hrs59mins Kerry 300kms 105kms 117kms 265kms N/a N/a 3hrs29mins 1hr32mins 1hr38mins 3hrs32mins IWAK 214kms 274kms 158kms N/a 206kms 202kms 2hrs48mins 3hrs46mins 2hrs5mins 3hrs2mins 2hrs52mins Source: AA Route Planner 6

7 State funding of regional airports under the above three Schemes was administered by the Department in compliance with the 2005 EU Guidelines on State aid to airports and airlines 1 and in the case of the PSO air services Scheme, in compliance with Regulation (EC) No. 1008/ Furthermore, the Minister for Transport, Tourism & Sport made it clear, in providing funding to the four regional airports, the importance of working towards achieving financial viability in the medium term. Table 2 provides details of the number of passengers (including those on the PSO routes) carried, the Exchequer supports under the PSO Scheme for each route, along with level of supports under the OPEX and CAPEX Schemes during the lifetime of the Regional Airports Programme. In addition to the PSO air services on the Galway and Derry routes ceasing in 2011, Exchequer supports under the OPEX and CAPEX Schemes to both Galway and Sligo also ceased in 2011 following a Value for Money Review 3. 1 EU OJ 2005/C 312/01 2 EU OJ L : Regulation (EC) No 1008/2008 of the European Parliament and of the Council of 28 September 2008 on common rules for the operation of air services in the Community 3 Value for Money Review of Exchequer Expenditure on Regional Airports Programme

8 Table 2: Total number of passengers/exchequer funding Airport Number of passengers (all)(1) Exchequer funding (OPEX & CAPEX) m Donegal 35,415 33,768 29,326 40, , , ,417 2,153,943 IWAK 703, , , ,553 2,474,013 2,667,599 1,288, ,189 Kerry 295, , , , ,380 1,177,876 2,183,946 1,349,348 Waterford 34,607 28,169 76,554 81,521 1,572,004 1,483,085 2,566,794 2,067,653 Galway , ,532,135 Sligo , ,065 Totals 1,068,525 1,033,152 1,078,103 1,163,271 5,118,156 5,668,034 6,150,808 9,392,333 PSO Route Number of passengers (PSO only)(1) Exchequer funding (PSO)(2) m Donegal/ Dublin Galway/ Dublin Derry/ Dublin Kerry/ Dublin 23,755 21,404 19,796 25,187 3,701,295 3,598,803 3,451,683 4,719, , ,190, n/a ,857,753 37,303 32,887 31,003 27,178 4,061,373 4,021,261 3,917, ,721 Totals 61,058 54,291 50,799 63,912 7,762,668 7,620,064 7,369,677 10,126,980 Total annual Exchequer funding under the Regional Airports Programme ,880,824 13,288,098 13,520,485 19,519,313 Total Programme Exchequer funding 59,208,720 (1) Based on information provided by airports (2) PSO supports are paid directly to the carrier and NOT to the airport 8

9 REVISED EU GUIDELINES The EU s initiative to update and revise the 2005 Guidelines sets out the parameters for both CAPEX and OPEX supports for regional airports post 2014, along with Start-Up aid for airlines. The revised Guidelines (the 2014 Guidelines ), which replace the 1994 and 2005 Guidelines and were adopted by the Commission on 20 February 2014, limit the CAPEX and OPEX supports which can be given by the State (Exchequer and Local Authorities) under any future Regional Airports Programme. The Guidelines were published 4 on 4 April 2014 and became applicable on that date. Ireland is required to bring existing Schemes into line with the 2014 Guidelines within 12 months following that publication date. As the Regional Airports Programme Schemes were due to expire at end 2014, it was decided that the Schemes post 2014 would be developed in line with the new Guidelines. The 2014 Guidelines take stock of the new legal and economic situation concerning the public financing of airports and airlines and specify the conditions under which such public financing may constitute State aid within the meaning of Article 107(1) of the Treaty on the Functioning of the European Union, and when it does constitute State aid, the conditions under which it can be declared compatible with the internal market. The Commission considers only State aid which is proportional and necessary to contribute to an objective of common interest can be acceptable. In this context, it believes that operating aid (OPEX) constitutes, in principle, a very distortive form of aid and can only be authorised under exceptional circumstances. The general view expressed through the 2014 Guidelines is that airports and airlines should normally bear their operating costs and public investment should be used to finance the construction (CAPEX) of viable airports meeting the demand of airlines and passengers. However, in recognition of the difficulties that some smaller regional airports are faced with, the 2014 Guidelines continues to allow compensation for uncovered operating costs for a transitional period, where such airports qualify for such supports under the Guidelines. This reflects the important role played by such airports in terms of regional connectivity of isolated, remote or peripheral regions of the EU. This is of particular importance to Ireland, given its island status and peripheral location in Europe. 4 EU OJ 2014/C 99/03 9

10 There are, however, a number of changes to the previous levels of permissible State supports under the 2005 Guidelines, which will impact on regional airports from 2015 onwards and the need to secure alternative funding in addition to State support. Whereas the 2005 Guidelines left open the issue of investment aid, the 2014 Guidelines define maximum permissible aid intensities depending on the size of the airport. Maximum level of investment aid - A maximum intervention rate of 75% investment aid (CAPEX) for airports with less than one million passengers will apply from This will most likely put some regional airports under greater pressure to fund the balance of at least 25%. Under the Regional Airport Programme CAPEX Scheme, the State provided 90% of funding for essential safety and security related investment projects at airports to ensure compliance with the associated regulations. The 2014 Guidelines provide that regional airports located in peripheral regions of the Union, with average traffic below 1 million passengers per annum, such as Ireland s four regional airports, should contribute at least 25% to the financing of the total eligible investment costs. However, the Guidelines also recognise that such airports may face a funding gap which is higher than the maximum permissible aid intensities. Subject to a case-by-case assessment and depending on the particular characteristics of each airport, the investment project and the region served, intensity exceeding 75 % may be justified in exceptional circumstances for such airports. If so, specific authorisation from the EU Commission for increased funding will be sought by Ireland. Under the 2014 Guidelines, the amount of the aid should not exceed the funding gap of the investment project (so-called capital cost funding gap ), which is determined on the basis of an ex ante business plan as the net present value of the difference between the positive and negative cash flows (including investment costs) over the lifetime of the investment. The residual value of the asset(s), along with the projected earnings to the airport as a result of the investment, will also need to be determined and factored into the level of the capital cost funding gap. Uncovered operating costs - In terms of compensation for uncovered operating costs (OPEX), the 2014 Guidelines provide that such aid will be considered as contributing to the achievement of an objective of common interest, thereby compatible with the internal market pursuant to Article 107(3)(c) of the Treaty on the Functioning of the European Union, provided that such aid (a) increases the mobility of Union citizens and the connectivity of the regions by establishing access points for intra- Union flights; or 10

11 (b) combats air traffic congestion at major Union hub airports; or (c) facilitates regional development. Operating costs funding gap - In order to provide proper incentives for efficient management of the airport, the 2014 Guidelines also provide that the aid amount is, in principle, to be established ex ante as a fixed sum covering the expected funding gap of the operating costs (determined on the basis of an ex ante business plan) during a maximum transitional period of 10 years. That operating funding gap is now defined in the 2014 Guidelines as the operating losses of the airport over the relevant period, discounted to their current value using the cost of capital, that is to say the shortfall (in Net Present Value terms) between airport revenues and operating costs of the airport. Additional clarification received by the Department from the Commission (DGCOMP) clearly states that such costs-v-revenues should be identified on the basis of EBITDA 5. The 2014 Guidelines also provide that the initial operating funding gap is the average of the operating funding gaps (i.e. the amount of operating costs which is not covered by revenues) during the five years (2009 to 2013) that precede the beginning of the transitional period. Member States are required, when calculating the operating costs funding gap, to distinguish between the airport s costs associated with economic activities and those associated with non-economic activities over that 5-year period. Only those costs relating to economic activities will be eligible for OPEX supports and will form the basis of calculations to identify the operating funding gap. Costs associated with non-economic activities will be dealt with outside of State aid rules and under Public Policy Remit (see page 13). While the maximum permissible aid amount during the whole transitional period will be limited to 50% of the initial funding gap for a period of 10 years, the 2014 Guidelines also provide that under the current market conditions, airports with annual passenger traffic of up to 700,000 may face increased difficulties in achieving the full cost coverage during the 10-year transitional period. For this reason, the maximum permissible aid amount for airports with up to 700,000 passengers per annum will be 80% of the initial operating funding gap for a period of 5 years after the beginning of the transitional period. Where the 80% maximum is applied, the Commission will reassess the need, on a case by case basis, for continued specific treatment beyond that 5-year period and the future 5 Earnings Before Interest Taxes Depreciation and Amortization 11

12 prospects for full operating cost coverage for this category of airport, in particular with regard to the change of market conditions and profitability prospects. The Department will also carry out a Value-for-Money Review on the Programme, which will reflect the outcomes of any such Commission reassessment. THE ALTMARK JUDGMENT In finalising the 2014 Guidelines, the EU Commission has again drawn attention to the Court judgment in the Altmark case, which established case law in respect of State aid. The Court ruled that compensation for public service activities does not constitute State aid within the meaning of Article 107 of the EC Treaty provided that the following four criteria are met: (1) the recipient undertaking must actually have public service obligations to discharge and the obligations must be clearly defined; (2) the parameters on the basis of which the compensation is calculated must be established in advance in an objective and transparent manner; (3) the compensation cannot exceed what is necessary to cover all or part of the costs incurred in the discharge of public service obligations, taking into account the relevant receipts and a reasonable profit for discharging those obligations; and (4) where the undertaking which is to discharge public service obligations, in a specific case, is not chosen pursuant to a public procurement procedure which would allow for the selection of the tenderer capable of providing those services at the least cost to the community, the level of compensation needed must be determined on the basis of an analysis of the costs which a typical undertaking, well run and adequately provided with means of transport so as to be able to meet the necessary public service requirements, would have incurred in discharging those obligations, taking into account the relevant revenues and a reasonable profit for discharging the obligations. The Commission has stated that when it complies with the conditions established by the Altmark judgment, compensation for public service obligations imposed on an airport operator does not constitute State aid. 12

13 FINANCING OF AIRPORTS - CATEGORISATION OF AIRPORT ACTIVITIES UNDER THE 2014 GUIDELINES & PUBLIC POLICY REMIT The Commission's 1994 Aviation Guidelines set out the view that the construction or enlargement of infrastructure projects (such as airports, motorways, bridges, etc.) represents a general measure of economic policy which cannot be controlled by the Commission under the Treaty rules on State aids. However, the 2014 Guidelines make it clear that the activity of airlines, which consists in providing transport services to passengers and/or undertakings, constitutes an economic activity. The 2014 Guidelines position is supported by the judgment in the "Aéroports de Paris case 6 in which the European Court of Justice ruled in favour of this latter view and held that the operation of an airport, consisting in the provision of airport services to airlines and to the various service providers, also constitutes an economic activity. In its judgment in the "Leipzig-Halle airport" case 7, the General Court clarified that the operation of an airport is an economic activity, of which the construction of airport infrastructure is an inseparable part. Therefore, the airport activities that are covered by this Programme can be categorised as follows: (i) (ii) construction of airport infrastructure and equipment or facilities that directly support them that are safety and/or security related operation of the infrastructure, comprising the maintenance and management of airport infrastructure In addition to the activities listed at (i) and (ii) above, the 2014 EU Guidelines also provide for the distinction to be made in respect of airport activities that have an associated economic activity and those that don t. The latter normally fall under the responsibility of the State in exercising its official powers, come within the area of Public Policy Remit and, as they are not of an economic nature, do not fall within the scope of State aid Rules. 6 Case T-128/98 Aéroports de Paris v Commission, [2000] ECR II-3929, confirmed by Case C-82/01, [2002] ECR I-9297, paragraphs Joined Cases T-443/08 and T-455/08 Mitteldeutsche Flughafen AG and Flughafen Leipzig Halle GmbH v Commission, ("Leipzig-Halle airport" judgment), [2011] ECR II-1311, in particular paragraphs 93 and 94; confirmed by Case C-288/11 P Mitteldeutsche Flughafen and Flughafen Leipzig-Halle v Commission, [2012] not yet reported. 13

14 Public Policy Remit in reflecting the judgments in the above two cases, the 2014 Guidelines also provide clarification regarding the funding of certain non-economic activities at an airport that normally fall within a Public Policy Remit. Activities such as air traffic control, police, customs, firefighting, those necessary to safeguard civil aviation against acts of unlawful interference and the investments relating to the infrastructure and equipment necessary to perform those activities are considered in general to be of a non-economic nature. Therefore, under this Regional Airports Programme, public funding of such investments will fall within Ireland s Public Policy Remit for regional airports and will not constitute State aid. Subject to the availability of resources, the Exchequer will provide compensation 8 to the airports at 90% of the total cost of such eligible capital investments (PPR - C). Furthermore, airports will be compensated (at 100%) for operational costs relating to such non-economic activities (PPR - O). This will require regional airports to maintain separate cost accounting for core airport activities. Payments under the OPEX Scheme will only be made in respect of those core airport operations with associated economic activity. IWAK 9 STUDY In an Irish context, the outcomes of the IWAK Study, our largest regional airport, published in December 2013, also provide a basis for the planning of future supports for regional airports. The options and opportunities for the growth and development of the Airport were the subject of a Study Group established following a meeting of the Taoiseach, the Minister and Minister of State for Transport, Tourism and Sport and local Deputies with the IWAK Board on 28 January 2013 and chaired by Deputy John O Mahony. The Minister for Transport, Tourism & Sport presented the IWAK Study Group Report to Government on 16 December 2013, with the Study recommendations and the impact of those outcomes on future State supports for regional airports, being noted at that time by Government. In summary, the recommendations of the Study Group are that - 8 Separate Contracts, under this Programme, between the airports and the Department will provide for supports under Public Policy Remit 9 Ireland West Airport Knock 14

15 It is reasonable to expect that, in line with draft EU Guidelines, regional airports should be financially viable within at most a 10 year period. However, a policy position which would see Exchequer support terminate at the end of 2014, would leave a situation whereby IWAK, and likely all regional airports, would face closure within a short timeframe. Given the contribution that key regional airports make to their regional and local economy, as illustrated in the case of IWAK, they should be given an opportunity beyond 2014 to grow to a viable position. In facilitating their future development, regional airports should have local authority, local business and Exchequer support. In the case of IWAK, the route to growth lies in developing tourism numbers. Local interests, with the support of national agencies, should draw up and implement a plan to develop this market. In the case of Exchequer support, a framework should be developed by the Department for approval by the EU Commission for implementation at the end of the current programme (i.e. from 2015). That framework should provide a level of certainty around support over a multiannual period, where regional airports can provide a business plan leading to stand alone commercial viability within a ten year period. The framework should include requirements in relation to o Local authority, business and Exchequer involvement, o Catchment areas served, o Size of airports and level of public support, o Route to viability, o In the case of Exchequer capital support, conditions relating to safety and security. In the case of IWAK, it is also recognised that in relation to the present debt level a separate parallel solution, not involving Exchequer support, must be identified. These recommendations have been taken into consideration in compiling both Ireland s National Aviation Policy and this Regional Airports Programme. IRELAND S NATIONAL AVIATION POLICY Ireland s National Aviation Policy will be adopted in That Policy proposes that regional airports be given the opportunity beyond 2014 to grow to a viable, selfsustaining position, particularly considering the contribution that they make to their 15

16 regional and local economy. As a result, the Policy provides that Exchequer support (OPEX and CAPEX) for the regional airports will be continued, where appropriate, beyond This decision will facilitate the airports in developing and implementing new business plans leading to self-sufficiency within a ten year period. Central to these will be the need for regional and local business investment. There are many demands on the funding available to the Department and maintaining an attractive Regional Airports Programme will be challenging post 2014, particularly when competing with public transport provision and road maintenance financial requirements. The Policy recognises the impact that the 2014 Guidelines on State aid to airports and airlines will have in delivering future State supports to the regional airports and that careful consideration will be given to how such supports are best distributed between the three Schemes (CAPEX, OPEX and PSO). Finally, with a particular focus being placed on maintaining and working towards improving essential international connectivity services, it will be essential that the regional airports work together and create synergy in operational activity and promote the overall role of regional airports as access points for both tourism (e.g. the Wild Atlantic Way) and business benefits. In summary, Ireland s National Aviation Policy contains a number of specific policy proposals in respect of regional airports, including Ireland will implement an EU approved Framework (Regional Airports Programme ) of supports for regional airports. Exchequer support for operational expenditure at regional airports will be phased out over a maximum period of 10 years, in accordance with EU Guidelines. Exchequer support for capital expenditure will be limited to safety and security related expenditure. Clear business plans will be required from the airports seeking supports. In considering funding to regional airports, the Department will take account of the level of regional involvement, including investment by local authorities and/or business. PSO contracts, following tender competitions, for Kerry/Dublin and/or Donegal/Dublin air services will run for two years initially and, subject to a satisfactory review after 18 months, may be extended by a maximum of one year. 16

17 THE 2014 EU GUIDELINES AND IRELAND S NATIONAL FRAMEWORK In the absence of some form of State support after 2014, it is likely that all of the current four regional airports would be forced to close over time. A funding model comprising of a combination of financial supports from the Exchequer, Local Authorities and local business interests would be more difficult to realise should Exchequer support be withdrawn. This position was made clear by the IWAK Study and noted by Government on 16 December Therefore and in accordance with the 2014 EU Guidelines, a National Scheme or Framework has been designed (i.e. this Programme) for approval by the EU Commission, reflecting the main principles underlying Ireland s policy on funding supports for the regional airports over the lifetime of the Programme. It has been decided to continue supports to the regional airports, where appropriate, under the two Schemes Core Airport Management Operational Expenditure Subvention (OPEX) and Capital Expenditure Grant (CAPEX) and to airlines under the Public Service Obligation (PSO) Air Services Scheme. Having decided to continue providing State support for the four regional airports, the 2014 EU Guidelines clarify the circumstances under which the Department of Transport, Tourism & Sport or other State Agencies would be allowed to provide such direct financial assistance. In determining which airports will continue to receive OPEX supports under this Programme, the initial operating funding gap for each airport will be identified on the basis of operating costs relating to economic activities not covered by revenues (using EBITDA criteria) for the years 2009 to 2013, in respect of each airport. Non-core activities not directly linked to the airport s core activities, such as the provision or operation of shops, restaurants or car parks, will not be regarded as eligible for State subvention. However, subsidisation of core airport operations from such commercial activities would be encouraged to promote the airport s financial sustainability. More specifically, future State support will be rebalanced towards capital expenditure, concentrated on safety and security related infrastructure projects. The level of future PSO supports on the other hand, including the number and frequency of subvented routes, will be very much dependent on the cost/benefit of such a Scheme and in particular, the outcome of the review of the contract(s) after the first 18 months of operation. 17

18 It should be noted, however, that while the 2014 Guidelines provide a period of 10 years for regional airports to achieve a position of self-sufficiency in terms of operating costs, that period is a maximum and should not be interpreted as a period of continued State support. CONDITIONS TO BE MET BY REGIONAL AIRPORTS TO QUALIFY FOR FUNDING UNDER PART 2 OR 3 Following the publication of the 2014 EU Guidelines on State aid to airports and airlines, the character of future State supports to regional airports in Ireland has changed. A greater onus will be placed on airports to demonstrate the economic benefits of such support to the region, with a particular emphasis on demonstrating the airport s path to viability. The 2014 EU Guidelines are quite specific in reflecting the view of the Commission in that regard. With respect to capital infrastructure investment projects, for example, the Guidelines provide that any investment which does not have satisfactory medium-term prospects for use, or diminishes the medium-term prospects for use of existing infrastructure in the catchment area, cannot be considered to serve an objective of common interest. Therefore, to qualify for State support post 2014, regional airports will have to provide the following a study showing the economic value of the airport to the region, including details of the catchment area served, a five-year business plan demonstrating the airport s path towards commercial viability over the course of the plan and the details and level of support to be provided by Local Authorities and local business interests, the safety and security related infrastructural projects, if any, planned for implementation by the airport during the period of the business plan, distinguishing between those with associated economic activity from those without such activity, a statement of the local funding available towards the overall costs of the planned infrastructural project(s). The Department of Transport, Tourism & Sport will, if so required, fund up to 33% of the total costs of the economic study on the understanding that the balance of the total costs is funded locally (Airport, Local Authority etc). 18

19 It should be noted by airports that, in accordance with the 2014 EU Guidelines, works on an individual investment projects can only commence after an application has been submitted to the Department for such projects and approval granted accordingly. In addition to the above and as a requirement of continued State support during the life of this Programme, regional airports in receipt of such supports must demonstrate annually evidence of progress towards viability. Where such progress cannot be demonstrated over a consecutive 3-year period, State supports may be suspended pending a detailed examination of the future prospects of the airport. 19

20 PART 2 CORE AIRPORT MANAGEMENT OPERATIONS/ACTIVITIES (OPEX) In order for State supports under the OPEX Scheme to be compatible with the internal market pursuant to Article 107(3)(c) of the Treaty, the cumulative conditions set out in section of the 2014 EU Guidelines must be met, namely (a) Contribution to a well-defined objective of common interest (b) Need for State intervention (c) Appropriateness of State aid (d) Existence of incentive effect (e) Proportionality (f) Avoidance of undue negative effects on completion and trade Ireland will operate the Regional Airports Programme OPEX Scheme in strict compliance with the above conditions. Eligible Activities for Exchequer Subvention The eligible Core Airport Management Expenditure activities under the OPEX Scheme include the following management and general overheads associated with the operation of the airports - Wages and Salaries, Pension costs, Rent, Rates, Insurance, Light & Heat, Repairs and Maintenance, Training, Flight Checking Services, Baggage handling, Ground handling, Passenger flows within terminal buildings, Cleaning & Refuse and Bank Charges. While the majority of these activities are in respect of economic activities at Ireland s regional airports, some will relate to costs associated with non-economic activities (under Public Policy Remit) such as security, fire fighting and ATC services etc. Under Ireland s Regional Airports Programme OPEX Scheme, airports will be required to maintain separate cost accounting distinguishing between economic and non-economic activities. The tables provided at Appendix 1 to this Programme in respect of the OPEX Scheme provide for such a distinction. The Department will closely monitor the airports accounts to ensure that public funding for non-economic activities is not used to compensate airports for any possible shortfalls under the OPEX Scheme. 20

21 Non-eligible Activities for Exchequer Subvention In addition to operational costs associated with non-economic activities (Public Policy Remit) and in line with the 2014 EU Guidelines, expenditure on commercial activities not directly linked to the airport s core activities, including the construction, financing, use and renting of land and buildings for offices, ground handling, storage, hotels, industrial enterprises, shops, restaurants and car parks will not be regarded as eligible expenditure for the purpose of assessing the level of subvention under the OPEX Scheme. However, airport operators will be encouraged to generate revenues from such activities to enhance commercial performance and profits of the regional airport concerned and thereby minimise and, if possible, remove the requirement for subvention. Ex-Ante Aid Amounts As detailed in PART 1 of this Programme, the maximum permissible aid amount will be based on the average of the airport s operating funding gap during the five years 2009 to Where the 80% maximum is applied under paragraph 130 of the 2014 EU Guidelines, the maximum amount of operating aid in respect to economic activities that will be available to the airport will be established as an ex-ante fixed sum over 5 years (i.e. the total maximum aid available for the period 2015 to 2019 inclusive). The amount of aid to be paid to qualifying airports in respect of any particular year (during the period 2015 to 2019) will be set out in a contract between the Department and the airport and will be subject to the overall amount of voted Exchequer funds available to the Minister in respect of that year being sufficient to pay the amount due to all airport operators who have contracts under the Scheme. Where sufficient funds are not available to pay the full amount otherwise due to all airport operators under such contracts, the total amount paid to each airport operator shall be determined by allocating the total Exchequer funds available on a pro rata basis to each airport operator. Any overpayments arising from the submitted projected operating costs and the airport s subsequent annual audited financial statement for that year will be offset against the following year s submission. Any over-payment in 2019 must be returned to the Department as soon as practicable following the completion of the airport s annual audited financial statements for that year. Administration of the scheme - The following stages will apply to the implementation of the scheme on a year by year basis: 1. Invitation to each airport to submit proposals for the year in question, together with relevant financial projections 2. Subvention application 21

22 3. Appraisal of proposals received from each airport 4. Payment process 5. Monitoring (ex-post monitoring and evaluation of effectiveness of scheme by reference to identified performance indicators) Submission of Proposals for subvention - The airports will be invited on an annual basis to submit an estimate of the amount of subvention, relating to economic activities only, that may be required for the year in question, having regard to the expected shortfall between (1) proposed expenditure on eligible activities and (2) revenue from eligible activities and any contribution earned from non-core activities (using EBITDA). Irrespective of the estimated amount submitted by qualifying airports, the supports available under the Regional Airports Programme OPEX Scheme may not exceed the maximum annual allocation established following the calculation of the operational costs funding gap under paragraph 130 of the 2014 EU Guidelines. Specifically, each applicant will be required to submit - a table providing an analysis of projected performance for the year in question, together with a further table giving a breakdown of projected administrative expenses, and a table providing an analysis of financial performance based on the most recent audited financial statements for the previous year, together with a further table giving a breakdown of the administrative expenses for that same period. The Chairman of the Board must sign these tables, which involve separate reporting of core airport management operations/activities and any non-core activities. The tables are set out in Appendix 1 and guidance notes on their completion are given in Appendix 2. In association with the tables set out at Appendix 1, the process will entail the submission of the following financial and business strategy information: General Information on the airport, to include the Airport s Business Plan and most recent audited accounts and financial statements. Commentary on its core airport activities as stipulated in the contract and the efficiency with which those activities are being delivered in terms of quality and cost. Strategy on airport charges and commercial revenue to maximise its potential as a financially sustainable airport. 22

23 Information on projected passenger numbers and the range of existing and new air services. Contribution the airport makes to local / regional economy, including evidence of importance of role that the airport plays in terms of the level of international connectivity that it brings to the region for tourism and business. Relationship and foreseen impact on operational expenditure of capital expenditure programme. Declaration from the regional airport, including - o an undertaking that public funds would not be used for any other purpose, including the use of PPR funding supports o a statement of compliance with the 2014 EU Guidelines o a copy of statement from an independent auditor in respect of the mechanisms utilised in distinguishing between the economic and noneconomic activities regarding operating costs (i.e. OPEX related v PPR related). The Department reserves the right to seek additional information as may be required, such as more detailed financial projections for the year in which subvention is sought and for subsequent years. Appraisal of Subvention Proposals - An Appraisal Panel will be formed comprising relevant officials from the Department s Airports Division and the Department s Financial Advisor. Additional technical advice will be sought, as necessary, from the Irish Aviation Authority (IAA) and the Aviation Services Division (ASD) of the Department of Transport, Tourism & Sport. Specific subvention allocations will be appraised in terms of: Assessment of the financial case made by the Airport Company, including a review of the Company s Business Plan, maximisation of non-core airport revenues and assessment of financial risk to the company in event of reduction or deferral of subvention. Insofar as practical, particularly in the light of the relatively small scale of the regional airport operations, analysis of the costs based on a typical airport of its size and location that is well run and adequately equipped with infrastructure and necessary equipment/facilities to meet necessary operational obligations - taking into account the relevant revenues and reasonable profit for discharging such obligations. 23

24 Prevention and, as may be appropriate, correction of any over-payment or underpayment of the airport subvention that may emerge through examination of the audited financial statements Projected outcome, by reference to key performance indicators identified in the contract with the regional airport, e.g. implementation of the IAA and the ASD recommendations passenger throughput, particularly inbound tourists A report on the outcome of the appraisal process, including any proposed subvention allocations will be submitted to the Minister for approval. Airports will be formally notified of the subvention allocation (if any), subject to any conditions as may be imposed to promote efficiency, revenue generation and value for money to the State. Claim and Payment Procedures - Payments under this scheme will be made in accordance with Government Financial Procedures and the relevant procedures and control systems operated by Airports Division for payment of subvention to regional airports. Review and Monitoring - Airports Division will also monitor the performance of each airport and the effectiveness of the operational grant scheme as a whole on an ex-post basis by means of the following: Review of actual outcome of scheme i.e. performance indicators results (e.g. fulfilment of licensing obligations, passenger throughput,) in respect of each airport. Consultation with IAA and ASD regarding the satisfactory performance, or otherwise, of mandatory safety and security requirements. Review the annual audited financial statements, in consultation with the Department s Financial Advisor. Qualifying airports will be expected to demonstrate a path towards future viability as required under the 2014 EU Guidelines. 24

25 PART 3 CAPITAL EXPENDITURE GRANT (CAPEX) SCHEME Previously, Exchequer support for capital investment projects at regional airports was directed through the National Development Plan (NDP) programme and the Transport 21 Investment Framework. Under these, carefully targeted investments in some regional airports received grant assistance, where demand for additional air services were satisfactorily demonstrated and where an economic case was made to support and justify increased investment. Priority was given to projects deemed necessary by the Irish Aviation Authority (IAA) for compliance with safety standards set down in ICAO Annex 14. The Exchequer provided (under the Regional Airports Programme ) 90% of funding (CAPEX) for essential safety and security investment projects at airports to ensure compliance with safety and security regulations. Other infrastructure projects had to be funded from own resources/local investment. Under the Regional Airports Programme CAPEX Scheme, funding will again be restricted to safety and security related projects, but with an associated economic activity only. Safety and Security related investment projects with no associated economic activity will be dealt with outside of the EU Rules on State aid and under Ireland s Public Policy Remit (see page 13) In order for State supports under the CAPEX Scheme to be compatible with the internal market pursuant to Article 107(3)(c) of the Treaty, the cumulative conditions set out in section of the 2014 Guidelines must be met, namely (a) Contribution to a well-defined objective of common interest (b) Need for State intervention (c) Appropriateness of State aid (d) Existence of incentive effect (e) Proportionality (f) Avoidance of undue negative effects on completion and trade Ireland will operate the Regional Airports Programme CAPEX Scheme in strict compliance with the above conditions. 25

26 In recognition of the distinction being made under this Programme, the Irish Aviation Authority (IAA) and/or the Aviation Security Division (ASD) of the Department of Transport, Tourism & Sport, will be consulted to determine what investment projects fall within the category of added economic value to the airport and those that do not. In providing State supports (Exchequer and Local Authority) to regional airports for capital projects, the 2014 EU Guidelines on State Aid to airports and airlines require that airports with average traffic below 1 million passengers per annum should, normally, contribute at least 25% to the financing of the total eligible investment costs. State supports, therefore, will be limited to 75% of the total eligible costs of safety and security related projects coming under the CAPEX Scheme, unless Commission approval has been granted following the submission of a business case by the airport in accordance with paragraphs 99 to 103 of the 2014 Guidelines (see page 10 of this Programme). Such business cases must be submitted for the consideration of the Department of Transport, Tourism and Sport in the first instance and where appropriate, forwarded thereafter to the Commission for approval to exceed the 75% maximum aid intensity level. When preparing submissions, the template provided at Appendix 3 provides guidance to airports for calculating the capital cost funding gap. In addition, submissions should, at a minimum, contain the information listed in the table at page 30 of this Programme. Where such a case is being submitted for approval, it is important for airports to note that the level of aid intensity, while exceeding the 75% maximum provided in the EU Guidelines, may not exceed the actual capital costs funding gap of the investment project. Furthermore, works on an individual investment projects can only commence following approval from the Department. Eligible airports subject to meeting the required criteria under the 2014 EU Guidelines, the possible beneficiaries of the financial assistance under this Programme s CAPEX Scheme are the four regional airport companies:- Connaught Airport Development Company Ltd. (Ireland West Airport Knock, Co. Mayo) Aerphort Idirnáisiúnta Dhún na ngall Teo. (Carrickfin, Co. Donegal) Kerry Airport plc (Farranfore, Co. Kerry) South East Regional Airport Waterford (Killowen, Co. Waterford) 26

27 Submission of proposals by airports - The Department will formally invite proposals from each of the four regional airport based on a 5-year planning framework. Where a proposal is successful, the approved project(s) would be eligible under this Regional Airports Programme for grant assistance (CAPEX) for the period Airports will be required to provide the following information in respect of each proposal: Business Plan covering the period of the proposed investment, from planning to completion of the project(s) An Economic Evaluation of airport s contribution to the region Statement identifying the airport s path to viability with clear measurable targets for delivery Recent audited accounts and financial statements Statement on access to and availability of additional sources of funding Airport charges strategy Corporate structures in place for project management and cost control Specific information in respect of proposed projects, including - 1. Description of project, including timelines 2. Estimated cost 3. Amount being provided from local funding sources 4. Safety or security case supporting project 5. Recommendation of the IAA/ASD, as appropriate 6. Consideration of alternative approaches to compliance with IAA/ASD recommendations Project (CAPEX) appraisal and selection by the Department of Transport, Tourism & Sport - (i) Preliminary Screening - This aims to assess if the project(s) has sufficient merit to justify a full detailed appraisal. This would take the form of a screening process to ensure that proposed projects, as set out in the airport s business plan, are broadly consistent with the objectives of the Scheme and that sufficient information has been provided to allow for detailed appraisal. Urgent safety & security projects necessary to comply with national/international regulations could be approved at this stage, depending on the nature and scale of projects, without reference to the capital appraisal process set out below. (ii) Capital Appraisal - The type and depth of an appraisal is dependent on the size and nature of the proposed project and will be proportionate to its anticipated scale. The 27