Welsh government loans to airport 'could breach rules'

Cardiff Airport was bought by the Welsh government in 2013 for £52m

Multi-million pound Welsh government loans to Cardiff Airport may break European state aid rules, UK government officials have warned.

The airport received a £10m loan to improve its terminal and the Welsh government has also agreed a further £13m loan for route development.

The UK government said Welsh ministers were in the process of providing assurances the loans are in order.

A Welsh government source said the warning was "politically motivated".

Both loans have to be repaid with interest over the next decade.

The airline Flybe announced in June it was opening a new base operating 11 flights out of Cardiff - the biggest boost to the airport since it was bought by the Welsh government in 2013.

BBC Wales has seen a leaked letter outlining how £12m is due to be spent on marketing support for the Flybe routes over the next three years.

A leaked letter from a senior official at the Department for Transport (DfT) in London to a senior Welsh government official, in June, says that if the European Commission was to look at the loans it "would deem them not to be compliant with European Commission state aid rules for aviation".

In the letter, the official at the DfT, which has responsibility for state-aid issues, also expresses concern about repayment of the loans and the forecast of future passenger numbers.

Both are connected because most of the money is to be repaid from airport charges to airlines and extra money spent in the terminal due to increasing passenger numbers.

Flybe says the new and expanded routes are expected to generate half a million extra passengers over the next 12 to 18 months.

But the DfT official says the independent consultancy York Aviation suggested the airline's predictions are likely to have been overestimated by around a fifth.

"There does not appear to have been rigorous consideration of the risks involved around delivering the projected return, the passenger figures only need to be 2.2% below forecast for the deal to be loss making," the letter said.

The letter also said that, were 87% of the loan to be repaid from passenger spending in the terminal, it "is likely to be considered a direct subsidy to the airport".

The latest figures from the Civil Aviation Authority show that the number of passengers rose by 12% in June, compared with June 2014, partially as a result of the impact of the new Flybe services.

It follows a previous decline in passenger numbers - they fell by 38,000 (3.6%) during 2014 to just over one million.

Spending by increasing numbers of passengers is to be used to repay the loans

A source at the Welsh government has accused the DfT of putting up "politically motivated obstacles" to the airport.

In a statement, the Welsh government said: "As a pro-business government, the agreement of commercial loans with businesses is neither novel nor outside of the usual range of Welsh government practice.

"In this regard, Cardiff Airport is being treated no differently to any other commercial organisation."

Cardiff Airport managing director Debra Barber added: "We wish to point out that the York Aviation report to which you refer was an early draft, which has subsequently been corrected by them.

"Having taken independent legal advice in connection with these loans and their uses, we are confident there are no state aid issues."

The Welsh government has also released a copy of a letter from one of its senior officials in response to the DfT saying the mentioned figures in the York Aviation report are incorrect and now out of date.

It says the terms and conditions of the loan for route development have not been confirmed and appropriate details are being finalised.

"I would wish to challenge the inference that (the) Welsh government exercises undue influence over the Cardiff Airport company, its borrowing and business plans," the letter states.

Assurances

"The airport company operates on a commercial basis and at arm's-length from government - commercial and operating decisions, including levels of borrowing and its business plans are a matter for its board."

However, the leader of the Welsh Conservatives Andrew RT Davies said there were "serious questions" for the Welsh government to answer.

"The Welsh Government must issue categorical assurances that no breach of EU rules has occurred, including publishing any relevant paperwork," he said.

"Otherwise they risk leaving the impression that the rules may have been bent to support the commercial activities of a company owned wholly by them."

A DfT spokesman said: "The Welsh government is in the process of providing assurances to the UK government that it is complying with European Union state aid rules on funding provided to airports or airlines."