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STATE AID — UNITED KINGDOMAid C 46/2002 (ex N 56/2001) — CDC Group plcInvitation to submit comments pursuant to Article 88(2) of the EC Treaty
(2002/C 223/03)
(Text with EEA relevance)
By means of the letter dated 2 July 2002, reproduced in the authentic language on the pages following thissummary, the Commission notified United Kingdom of its decision to initiate the procedure laid down inArticle 88(2) of the EC Treaty concerning the abovementioned aid.Interested parties may submit their comments within one month of the date of publication of thissummary and the following letter, to:European CommissionDirectorate-General for CompetitionState Aid Registry B-1049 BrusselsFax (32-2) 296 12 42.These comments will be communicated to United Kingdom. Confidential treatment of the identity of theinterested party submitting the comments may be requested in writing, stating the reasons for the request.
SUMMARY
1. DESCRIPTION
By letter dated 17 January 2001, registered 19 January 2001,the United Kingdom authorities notified the scheme ‘CDCGroup plc’ to the Commission pursuant to Article 88(3) EC.The legal basis of the scheme is the CDC Act 1999.Responsible for the scheme and its implementation is theDepartment for International Development.The overall purpose of the scheme is to support the UKGovernment's international development policy. According tothe UK, most foreign investment in developing countries isfocused on only a few of the richer developing countries. Itis believed that financial sectors in poorer countries are under-developed and that official and market information aboutinvestment opportunities and potential returns is inadequate.The CDC Group plc (CDC) is the UK Government's maininstrument for investing in the poorer countries. By trans-forming CDC into a public private partnership, the UK auth-orities seek to encourage private investment flows to thepoorer countries. CDC is expected to remedy the marketfailure by demonstrating that commercial returns areavailable from such investments. The Government hastherefore imposed an operating framework on CDC,according to which it is required to make 70 % of neinvestments (by aggregate value) in poorer developingcountries (
1
) over a rolling five-year period and to seek tomake at least half of new investments in Sub-Saharan Africaand South Asia.Up to 75 % of the shares of CDC will be offered to privateinvestors. There will be open competition and full publicisingof the CDC investment opportunity. It is proposed to grantCDC investment company status, although CDC does notmeet all the technical requirements of an investmentcompany as set out in the Companies Act. The main impli-cation is that CDC will enjoy an exemption from tax onincome and chargeable gains derived from its investmentactivities in the same way that investment companies do.Investors in CDC will pay tax according to their own circum-stances. The UK authorities argue that if CDC is not taxefficient, private investors will not support the partnership.Moreover, the UK authorities submit that nobody knows how long it will take to obtain the demonstration effect, but it isexpected to take more than 10 years. Therefore, they claim thatthey would not be able to attract private investors if theCommission's initial approval were limited to 10 years. Themeasure has therefore been notified for an unspecified period.
EN
C 223/6 Official Journal of the European Communities 19.9.2002
(
1
) ‘Poorer developing countries’ are those classified as ‘low income’ by the World Bank in 1998, and those classified as ‘lower middleincomeby the World Bank in 1998 and that are below theweighted mean of GNP per capita for lower middle incomecountries. The definition also includes 11 countries for which theWorld Bank does not currently collect GNP data.
 
The tax revenue forgone by the State is estimated at aboutGBP 50 million (about EUR 80 million) per year.
2. ASSESSMENT AND THE COMMISSION'S DOUBTS
The Commission finds that the measure fulfils all therequirements of Article 87(1) of the EC Treaty, and that themeasure therefore constitutes State aid. The tax revenueforgone by the State constitutes a loss of State resources, theaid favours a certain undertaking, and the tax treatment whichfollows from the investment company status is an advantagefor CDC, because it would not have been able to attract any private capital without it. Finally, it is the Commission'sconstant position that when the State intervenes to create anew player on the international financial markets, there is aneffect on the investment flows between Member States.The Commission has assessed the compatibility of the aid withthe common market. It finds that the objective of the aid is inline with Article 177 of the EC Treaty, which states thatMember States should foster the sustainable economic andsocial development of the most disadvantaged developingcountries.The further assessment was made with reference to theCommission Communication on State aid and risk capital (
2
).The notified aid contains a number of positive elements,notably that it serves to remedy a market failure, that it isproportionate, and that CDC will make equity investmentsand be profit driven. It is also the intention that the majority of the capital of CDC should be private.The Commission has doubts as regards the compatibility withthe common market of an aid scheme with an unspecifiedduration for the following reasons:— the Commission does not, in principle, approve fiscalnon-quantifiable State aid for an unlimited period of time,the Commission finds that it is appropriate to review Stateaid schemes regularly in order to ascertain whether the aidis still necessary in view of market developments. It cannotbe excluded that the market for ethical investment fundswill develop, so that the aid to CDC distorts competitionand affects trade between Member States to a significantly greater extent than it does now,the Commission does not find the arguments put forwardby the UK authorities convincing enough to deviate fromits practice. In particular, the Commission is not convincedthat an approval initially limited to 10 years in itself wouldreduce significantly the willingness of private investors toinvest in CDC,regular renotifications of aid schemes leading toCommission decisions, which are published, give allparties concerned transparency as to aid in force,— the European Council meeting in Barcelona on 15-16March 2002 renewed its call to the Member States toreduce the overall level of State aid. The request for atime limit is in line with this policy,an indefinite tax exemption would appear to be difficult toreconcile with the principles of the EU and OECDinitiatives to curb harmful tax competition,— several countries in which CDC may invest are currently candidate countries negotiating accession to the EU.
TEXT OF THE LETTER
‘The Commission wishes to inform the United Kingdom that,having examined the information supplied by your authoritieson the aid referred to above, it has decided to initiate theprocedure laid down in Article 88(2) of the EC Treaty.1.
PROCEDURE
By letter dated 17 January 2001, registered 19 January 2001,the United Kingdom authorities notified the aid ‘CDC Groupplc’ to the Commission pursuant to Article 88(3) EC. By lettersdated 19 March 2001 and 17 May 2001, the UK authoritiesstated that they intended to submit further information. Theinformation was submitted by letter dated 5 June 2001,registered on 8 June 2001. A meeting between representativesof the Commission and the UK authorities was held on 11 July 2001. Following this meeting, the UK authorities submittedfurther information by letter dated 18 September 2001,registered on 21 September 2001. By letters dated 23November 2001 and 24 January 2002, the UK authoritieswrote that they intended to submit more information. Thelatest information was submitted by letter dated 29 Ma2002, registered on 7 June 2002.2.
DETAILED DESCRIPTION OF THE MEASURE
2.1.
Aim of the scheme
The overall purpose of the scheme is to support the UKGovernment's international development policy, which aimsto reduce by one half the proportion of people living inextreme poverty by 2015. For this to be achieved, theeconomic growth of developing countries must be greaterthan population growth.Although foreign investment in developing countries hasincreased significantly in the last few years, most of it,according to the UK authorities, is focused on only a few of the richer developing countries. In 1997 over 90 % went tomiddle income countries and over 50 % to only five countries.
EN
19.9.2002 Official Journal of the European Communities C 223/7
(
2
) OJ C 235, 21.8.2001, p. 3.
 
Sub-Saharan Africa and South Asia received less than 4 % of allprivate flows to developing countries in 1997 (
3
).It is believed that financial sectors in poorer countries areunderdeveloped and that official and market informationabout investment opportunities and potential returns is inad-equate. According to the UK authorities, foreign investors' fearsof the risks are exaggerated. These fears cause under-investment in such countries. In particular, equity investmentsare relatively under-utilised. The UK authorities seek toencourage private investment flows to the poorer countriesand to demonstrate that commercial returns are availablefrom such investments. This should help to correct investors'perceptions of the net return ratio in poorer countries.Increasing investment will also promote economic growthand stability and thereby lower the risks for investors.2.2.
CDC Group plc
The CDC Group plc is the UK Government's main instrumentfor investing in the poorer countries. The purpose of CDC, aswritten in its Memorandum, is to maximise the creation andlong-term growth of viable businesses in developing countries,especially poorer countries, to achieve attractive returns to itsshareholders and implement social, environmental and ethicalbest practice". Since its foundation in 1948, CDC has beenpresent as an investor in developing countries with a specialfocus on poorer countries and territories in the Common-wealth. It currently has interests in over 50 countries.In December 1999, CDC was transformed from a statutory corporation into a public limited company. As a next step,up to 75 % of the shares will be offered to private investors.There will be open competition and full publicising of the CDCinvestment opportunity, allowing investors from any MemberState to participate in the venture. The Government willmaintain at least 25 % of the shares. It will also hold aspecial share in CDC, consisting of one special rightsredeemable preference share of GBP 1 in the capital of CDC,which allows it to control that CDC makes its investments inaccordance with the UK development policy objectives.When CDC was transformed in 1999, an operating frameworkfor the company was put in place. Under the operatingframework, CDC is required to make 70 % of new investments(by aggregate value) in poorer developing countries (
4
) over arolling five year period and to seek to make at least half of new investments in Sub-Saharan Africa and South Asia. Through itsspecial share in CDC, the UK Government is able to ensure thatCDC complies with this operating framework. However, theGovernment does not intervene in the individual investmentdecisions taken by the CDC Board. Once the Government givesup its special share, CDC will no longer be bound by theseobjectives and will lose its investment company status (see alsopoint 2.7 on the duration of the scheme).2.3.
Capital restructuring
CDC comes from a State sector background. Prior to CDC'stransformation into a plc, there was no mechanism other thandebt from the Government to provide funding to the statutory corporation. This debt carried no interest and was normally rolled over on maturity. At present CDC has an interimcapital structure. CDC's new capital structure will have toaccommodate the different parts of its portfolio:A lower risk portfolio of loans, which produces corre-spondingly low returns. At 31 December 1999 about20 % of CDC's outstanding loans were loans to the publicsector. They were removed from CDC's balance sheet inSeptember 2000 by an arrangement which gives theGovernment the net benefit flowing from them. Publicsector loans is a discontinued line of business for CDC.A higher risk higher return equity portfolio, which will bethe focus of all CDC's new business.CDC has assets of around GBP 600 million of loans to theprivate sector and about GBP 500 million of risk capitalinvestments (
5
). This will be funded by a combination of equity and debt. Existing debt will be converted into equity.Approximately GBP 200 million of new debt will be structuredso that the UK Government has the option to sell the debt.CDC also has the option to refinance it in the public debtmarket. The rate will be set on the basis of formal advicefrom an independent investment bank.Under this scheme, the UK Government will sell shares in asmaller CDC. However, the UK authorities consider that thecharacteristics of this entity will be such that investors mightpay a better price proportionately. When added to assetsretained in public ownership, better value is likely to besecured overall.2.4.
Investment company status
For the period that the UK Government holds its special shareand CDC is subject to the operating framework, the UK auth-orities propose to grant CDC investment company status,although CDC does not meet all the technical requirementsof an investment company as set out in the Companies Act.The UK authorities are able to ensure that CDC will carry outits intended role as an investor in developing countries by various means. These include the special share arrangements,a deed of covenant relating to CDC's implementation of theagreed investment policy and remedies available through theCompanies Act for any non-compliance. The UK authoritiesstate that they would not have the same possibilities tocontrol other fully private operators claiming to have thesame investment policy as CDC, and therefore wanting tobenefit from the same tax benefits without answering to thedefinition of an investment company in the Companies Act.Consequently, the investment company status is only availableto CDC.
EN
C 223/8 Official Journal of the European Communities 19.9.2002
(
3
) Source: UNCTAD World Investment Report. The numbers refer toworld FDI, which mainly comes from OECD countries. In 2000,Africa's share of FDI in developing countries was still about 4 %(0,8 % of all FDI).(
4
) ‘Poorer developing countries’ are those classified as ‘low income’ by the World Bank in 1998, and those classified as ‘lower middleincomeby the World Bank in 1998 and that are below theweighted mean of GNP per capita for lower middle incomecountries. The definition also includes 11 countries for which theWorld Bank does not currently collect GNP data. (
5
) Figures submitted at the time of notification.

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