Róisín Shortall (Dublin North West, Labour)
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Question 528: To ask the Minister for Transport, further to Parliamentary Question No. 50 of 7 March 2006 and his statement that Government investment in Aer Lingus would be challenged in Brussels immediately, the basis for this statement in view of the advice from former EU Commissioner Mario Monti of 30 August 2004, that is, the Commission has no objection of principle to capital injections effected by a member state as a shareholder in a public company, provided it conforms with the market economy investor principle; and if he will make a statement on the matter. [11121/06]

Martin Cullen (Waterford, Fianna Fail)
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When the Government reached a decision last May on the company's need for access to equity, it decided that the investment should not come from the Exchequer. The Government's strategic aim for Aer Lingus is to ensure the company has access to sufficient resources over the long term to enable it to compete successfully, to develop its business as market opportunities emerge and also to ensure it has the strength in its balance sheet to withstand the industry downturns and external shocks that are recognised features of the aviation industry. This requires that the company has ongoing access to capital on the same basis as its main competitors.

In principle, a State investment in a State company made in accordance with the so-called "market economy investor principle" is capable of surviving a challenge under the European Union's state aid rules. In practice the application of this principle is not straightforward and it cannot be assured that an investment in Aer Lingus could be made in accordance with this principle as and when required. The Commission's guidelines published in 1994 concerning the application of the treaty provisions concerning state aids in the aviation sector states the following in the conclusion of its introduction:

"An important element in the Commission's judgement will be the fact that the company has already been granted State aid (see Chapter V). Therefore the Commission will not allow further aid unless under exceptional circumstances, unforeseeable and external to the company. Moreover, given the fact that Article 222 of the Treaty is neutral with regard to property ownership, the Commission cannot impose the privatisation of an airline as a condition of the State aid. However, the participation of private risk sharing capital will be taken into account in the Commission's analysis."

It will be recalled that a State investment in the company was made in accordance with the 1993 "Cahill Plan". State investment in Aer Lingus could, therefore, be expected to be the subject of a particularly critical appraisal by the European Commission.

In the aftermath of the terrorist attacks of 2001 and the ensuing aviation industry downturn, it was clear from contacts with the European Commission that the prospect of approval for a Government investment to support the survival plan was remote, even though it was argued that there were compelling reasons that an investment would satisfy the market economy investor principle. The following points were made in legal advice given by the Attorney General in 2001 on a possible investment in Aer Lingus: no state aid, no matter what its form, may be given to Aer Lingus without prior Commission approval; if the Commission is to be satisfied that an investment by the Government would have been made by a private investor and would therefore not be a state aid, it would be advisable to have a fully reasoned report by a reputable expert on investment in the airline industry supporting such a case; and giving Aer Lingus state aid without Commission approval could lead, in a matter of weeks, to an injunction either by the Commission or by the High Court for repayment of the aid with interest.

It is clear the rules relating to state aid are complex and that there are particular issues of approval and susceptibility to legal challenge that do not obtain in private sector investments. Even if a particular investment by the Government in Aer Lingus were to withstand scrutiny, there could be no guarantee that this would always be the case. This absence of certainty on access to funds creates, of itself, a hindrance to effective business planning. In these circumstances, even if competing priorities facilitated Exchequer investment in Aer Lingus, the possibility of an investment being made by the Government as and when needed without raising state aid concerns would be far less certain than would be the case if the company could access investment through the equity markets.