EFTA SURVEILLANCE AUTHORITY DECISION

No 167/09/COL

of 27 March 2009

on the lease and sale of Lista air base (Norway)

THE EFTA SURVEILLANCE AUTHORITY (1),

HAVING REGARD to the Agreement on the European Economic Area (2), in particular to Articles 61 to 63 thereof and Protocol 26 thereto,

HAVING REGARD to the Agreement between the EFTA States on the Establishment of a Surveillance Authority and a Court of Justice (3), in particular to Article 24 thereof,

HAVING REGARD to Article 1(3) of Part I and Article 4(2) of Part II of Protocol 3 to the Surveillance and Court Agreement (4),

HAVING REGARD to the Authority‘檚 Guidelines on the application and interpretation of Articles 61 and 62 of the EEA Agreement (5), and in particular Part V thereof on State aid elements in sales of land and buildings by public authorities,

HAVING CALLED on interested parties to submit their comments pursuant to Article 6(1) of Part II of Protocol 3 (6),

HAVING REGARD to their comments,

Whereas:

I. FACTS

1. PROCEDURE

Decision No 183/07/COL to initiate the formal investigation procedure was published in the Official Journal of the European Union and in the EEA Supplement thereto. The Authority called on interested parties to submit their comments. The Authority received comments from Lista Lufthavn AS. By letter dated 4 December 2007 (Event No 455712), the Authority forwarded these to the Norwegian authorities who were given the opportunity to respond. By letter dated 12 December 2007 (Event No 457245), the Norwegian authorities submitted their comments.

The Authority appointed an expert, Mr Geir Saastad, to carry out an independent expert evaluation of Lista air base. The appointment of the expert took effect on 14 April 2008. The scope of the expert‘檚 mission was to determine (i) the market value of the air base and (ii) the value that should be attached to the obligations relating to the land and buildings.

The final report of the independent expert was communicated to the Authority in May 2008.

By letter dated 18 July 2008 (Event No 486089), the Authority requested that additional information be provided by the Norwegian authorities.

The Norwegian authorities provided the information required by letter dated 28 August 2008 (Event No 489312).

2. DESCRIPTION OF THE MEASURES INVESTIGATED

Two distinct measures were investigated by the Authority: the lease and the sale of Lista air base.

2.1. DESCRIPTION OF LISTA AIR BASE

In Proposition No 50 (1994-1995) to the Parliament (7), the Ministry of Defence presented its proposal on the closing of the air base. The Ministry of Defence put forward a so-called ‘榙evelopment alternative‘� Under that plan, the Norwegian Armed Forces would evaluate the conglomeration of buildings to decide on the buildings which could not or should not be used for industrial or commercial purposes. The buildings which could be used for commercial/industrial purposes should be maintained for a period of maximum 10 years in order to review the possibilities of commercial development and arrange for the best possible commercial use of the air base.

To follow up on the resolution from the Parliament, several reports were drawn up to get an overview of the general condition of Lista air base (the Norwegian authorities have only submitted a fire safety report dated 24 January 2002 in which Tek脴k reported on standards at the time, recommended upgrades and calculated the costs of the recommended works).

Lista air base covers 5 000 000 m2 of land. The conglomeration of buildings consists of storage buildings, barracks, mess halls and hangars representing in total approximately 28 000 m2. The estate also includes an airstrip and a wetland area.

According to the municipal sector plan of Lista air base approved by the Municipal Council of Farsund, the property could be used for commercial activities including aviation services, public development, crafts and industry. The area around Slevdalsvannet, which encompasses the wetland area and an ammunition depot for the Norwegian Armed Forces, was reserved for the use of the Norwegian Armed Forces, airport services and nature conservation. Around 1 900 000 m2 could be used for industrial purposes. Parts of the land and some buildings are protected in accordance with the national Protection Plan from the Norwegian Armed Forces, including:

2.2. THE LEASE OF LISTA AIR BASE

In the context of the reorganisation of the estates owned by the Norwegian Armed Forces, it had been decided in 1994-1995 that the military air base activities at Lista air base should cease as from 1 July 1996.

On 27 June 1996, the Norwegian Defence Estates Agency (hereinafter ‘the NDEA‘� entered into a 10 year lease agreement with Lista Airport Development AS (LAD) to enter into effect on 1 July 1996 until 30 June 2006 with the possibility for LAD to rent the air base for another 10 year period. The company was owned by the Municipality of Farsund (20 %) and by local investors (80 %). The agreement covered nine buildings, corresponding to approximately 12 500 m2, and the runway, which accounts for 421 610 m2.

The main objective of the agreement was to develop, as part of the implementation of the ‘榙evelopment alternative‘�and within a period of maximum 10 years, commercial air services on the air base.

On 1 July 1996, the lease agreement was transferred to Lista Lufthavn AS (LILAS) which, as such, was established on 3 May 1996.

The lease agreement provided that LILAS would rent a specified part of the buildings and the airstrip at an annual price of NOK 10 000 to be adjusted every fifth year. The NDEA would also be entitled to 15 % of LILAS‘�income from the sub-lease of the buildings. During the period from 1 July 1996 until September 2002, LILAS entered into several sub-lease contracts. The income from sub-leasing paid to the NDEA was NOK 245 405.

The lease agreement provided that the owner of the air base was responsible for external maintenance of buildings and maintenance of the airstrip. The liability was limited to NOK 1 500 000 annually. As consideration for this obligation, the owner was entitled to a split of the profits. Article 3 of the lease agreement provided that in case the profit generated as a result of the commercial use of the air base exceeded NOK 4 500 000, the owner of the air base would be entitled to 20 % of the profits in excess of that figure.

Commercial services were operated for some time. Braathen Safe and Air Stord ran commercial services until 1 November 1999. During 2000, LILAS continued to investigate the possibility of re-establishing scheduled flights and to develop the airport as a freight terminal with international air freight distributed to Europe. LILAS managed to re-establish a scheduled flight between Oslo and Lista run by Cost Air throughout 2001. There were no scheduled flights operating at Lista airport in 2002. As LILAS did not achieve its initial goal of creating commercial air services at the air base, the income during the years 1996-2002 never exceeded NOK 4 500 000 annually.

At the end of the initial 10 year period, LILAS had the possibility to prolong the lease for another 10 years. If that right was not exercised, LILAS could buy a specified area of the air base at a price of NOK 10 000 000. Moreover, the contract provided that LILAS had the possibility, should NDEA decide to sell LISTA air base en bloc during the lease period, to buy the entire air base at a price of NOK 25 000 000. By letter dated 13 December 2002, LILAS waived its pre-emptive right to buy Lista air base en bloc and the air base was sold to Lista Flypark AS.

In June 2006, in conformity with the terms of the lease agreement, LILAS exercised its pre-emptive right to purchase parts of the Lista air base for an amount of NOK 10 000 000 from Lista Flypark AS.

2.3. THE SALE OF LISTA AIR BASE

On 12 September 2002, the NDEA sold Lista air base to Lista Flypark AS. The sale resulted in a net disbursement from the Norwegian State to Lista Flypark AS of NOK 10 875 000. In order to analyse the terms and conditions of the sale, two successive steps must be distinguished: the assessment of the market value of the estate on the one hand, and of the obligations attached to the land and buildings on the other.

2.3.1. Steps taken in order to find a purchaser for the air base

In 1997, LILAS contacted the NDEA in order to negotiate the purchase of the air base. On 21 October 1998, the Municipality of Farsund and LILAS agreed on a strategy for buying the property. The negotiations between the NDEA, the Municipality of Farsund and LILAS were however interrupted on 22 February 1999 as the parties could not agree on a price.

During the course of 2000, the NDEA had put several advertisements in local (Farsund Avis) and regional newspapers (Fedrelandsvennen and Stavanger Aftenblad) for the sale of the property. The sale as it was envisaged at that time was of parts of the estate. The advertisements did not lead to any sale.

On 16 and 17 August 2001, the NDEA organised the Lista Conference to which 7 000- 8 000 potential investors were invited. The purpose of the conference was to present Lista air base, and the possible transformation of the air base from military to civilian commercial use, to interested parties. After the conference, a consultant, Mr Hjort, was appointed to assist with the sales process. He concluded that ‘the air base was difficult to sell to real estate developers as there were no viable buyers, and the fact that the property‘檚 potential for utilisation was very limited due to the LILAS‘�agreement‘�

In August 2001, the NDEA decided that the property should be sold en bloc in order to prevent that certain areas of the air base would become totally unattractive to potential purchasers.

In the context of negotiations in early 2002 with real estate developers Intervest Eiendom AS and Interconsult Prosjektutvikling AS, the NDEA ordered two value assessments by the real estate value assessors Verditakst and OPAK. Those negotiations failed, but on 12 September 2002, a sales agreement was reached between the NDEA and Lista Flypark AS.

2.3.2. The purchase price

The purchase price was based on three elements: (i) the actual price to be paid for the property, (ii) an additional payment corresponding to 50 % of the net resale and (iii) an amount corresponding to 30 % of the net income from the lease agreement.

(i) Price of the property

The OPAK report, dated 29 May 2002, distinguished between the three following scenarios: sale of the property to a new purchaser (NOK 32 000 000), sale of the property to the lessee on the basis of its pre-emptive right to buy part of the leased building and land at the end of the 10 year lease (NOK 34 000 000) and sale of the property to the lessee on the basis of its pre-emptive right to buy the property en bloc during the lease period (NOK 25 000 000).

The Verditakst report, dated 7 June 2002, concluded that the market value of the property was NOK 11 000 000.

The sales price was actually agreed on the basis of the valuation carried out by Verditakst, i.e. NOK 11 000 000.

Based on the fire safety report referred to above, an amount of NOK 7 500 000 was deducted from the value of the property to take into account the works that needed to be carried out in order to comply with applicable fire safety standards. The sales price of the property was therefore reduced to NOK 3 500 000.

(ii) 50 % split of the net resale

According to Article 3 of the sales agreement, the NDEA was entitled to 50 % of any income generated from sale of plots on the property. The sales of two plots has resulted in a transfer of NOK 795 263 to the NDEA. In addition, NOK 5 000 000 is outstanding pending disagreement as to the interpretation of that provision in relation to the purchase by LILAS of the area on which it had an option under the lease agreement.

(iii) 30 % of the net income from the lease agreement

The NDEA was also entitled to 30 % of any profit after tax generated under the lease agreement. However, no income was generated from Lista Flypark AS in the period from 2003 until 2006.

2.3.3. The value attached to the obligations relating to the land and buildings

It was agreed that the purchaser would be compensated for obligations attached to the property which had not been taken into account in the valuation. Compensation covered the following:

The total compensation, amounting to NOK 14 375 000, was set off against the purchase price of NOK 3 500 000. The Norwegian authorities thus paid the purchaser NOK 10 875 000.

3. COMMENTS BY THE NORWEGIAN AUTHORITIES

3.1. COMMENTS REGARDING LILAS‘�LEASE AGREEMENT

3.1.1. No aid or advantage was granted to LILAS under the lease agreement

The Norwegian authorities indicated that even though the rent as specified in the lease agreement was indeed NOK 10 000 per year, this value did not accurately reflect the actual amounts paid to NDEA. Indeed, NDEA was also entitled to 15 % of LILAS income from the sublease of the buildings. Furthermore, in case the gross income related to commercial aviation exceeded NOK 4 500 000 annually, the NDEA was also entitled to 20 % of the income in excess of that figure.

The income from subleasing paid to the NDEA was NOK 245 405. According to the Norwegian authorities, the income from subleasing of NOK 245 405 must be added to the yearly rent of NOK 10 000. The total rent during the lease until the sale in 2002 amounted to NOK 310 405.

The Norwegian authorities argue furthermore that LILAS was to develop, operate and maintain the property for commercial air services on the air base, which amounted to a public service obligation. In this context, the amount of rent paid should be considered as somewhat immaterial for the assessment of the lease agreement. In case the project had been successful, LILAS‘�profits under the lease agreement could have been significant. On the other hand, if the more moderate forecasts were to be fulfilled, then the lease of the air base, due to the financial risk of the lease agreement based on substantial unavoidable costs, would not be profitable for LILAS.

3.1.2. No effect on trade between EEA States

The Norwegian authorities have argued that there was no indication that intra-EEA trade was affected and that competition was distorted by that aid. They referred to the State Aid Guidelines on financing of airports and start up aid to airlines departing from regional airports (8) according to which Lista would be classified as a category D airport, i.e. a small airport with an annual passenger volume of less than 1 million. The total passenger basis of Lista airport is 32 000 people. The Airport Guidelines provide that ‘榝unding granted to small regional airports (category D) is unlikely to distort competition or affect trade to an extent contrary to the common interest‘�a href="#ntr9-L_2011058EN.01008601-E0009" id="ntc9-L_2011058EN.01008601-E0009" shape="rect"> (9)