Introduction
The Commission recently approved State aid granted by Czech Republic for the construction of a multifunctional arena in Brno, with a capacity of 13300 visitors [see SA.58891].
The aid measure was unusual because it foresaw possible future public funding to cover certain financial costs in case the net operating revenue would not be enough. However, the Commission approved possible future aid for two reasons. First, the total amount of aid at any point of the economic life of the arena could not exceed the funding gap of the project as established on the date the aid was granted. Second, the Czech authorities would put in place a claw-back mechanism to prevent excessive aid.
The arena would be built according to international standards and would provide modern facilities for the organisation of a wide range of cultural, sports, social and conference events and exhibition, at local, regional, national, and international level.
The Czech authorities aimed to address the lack of sufficient capacity in Brno and its surrounding region for sports and other large-scale events such as sport competitions, concerts, shows, and exhibitions that would otherwise not be organised there because of a lack of facilities of sufficient size.
The arena would be open to multiple users on market terms, as its owner and aid recipient – SPV Arena Brno – would pursue profit maximisation. SPV Arena Brno is wholly owned by the state.
Form and amount of aid
SPV Arena Brno would receive an initial capital contribution from the city of Brno and direct grants from the South Moravian region and the National Sports Agency. The remaining part of the investment would be financed with loans from the National Development Bank and Česká Spořitelna, which were also considered to be state resources. In addition, the city was committed to make future capital contributions to cover any outstanding interest and principal payment of the loans.
The amount of aid was determined on the basis of funding gap analysis.
Funding gap
Without State aid, the project would not be carried out. This is because the project suffered from a funding gap. That is, the discounted sum of the expected future net revenue was not enough to offset the initial investment expenditure. The Commission decision describes the method by which the funding gap was established.
“(29) The funding gap calculations include, for the entire infrastructure, all construction, maintenance and repair costs and, for all activities, the operational costs and revenues.”
“(30) All assumptions of the financial model have been based upon several independent sources and discrepancies were cross-checked with available current market prices and investigated in further detail. In case where no market comparison was available, substitute sources were used. A typical cascade of input sources consisted of the following: market prices obtained through the open tender procedures for the construction and the operation of the Arena, market data obtained by open-sources research, regulatory caps on prices (energy sector), preliminary market consultations, macro-economic indicators and predications by financial sources, certified expert opinions and valuations, independent expert opinions. None of the assumptions in the financial model were based upon a single source without verification by alternative sources or expert opinions.”
“(31) The nominal discount rate used in the model amounts to 12.43%. The Czech authorities initially established this discount rate on the basis of the Communication from the Commission on the revision of the method for setting the reference and discount rates (“Reference rate communication”) applying the reference rate of Czechia on 1 January 2023 (7.43%) plus a margin of 500 basis points because of the absence of a credit history for a special-purpose company. The rate of 12.43% obtained as such was then tested against SPV Arena Brno’s expected costs of financing, given the current situation on the market (mainly financial market), the conditions of a bank loan for the project, and the risk profile of the project.”
“(32) The construction of the Arena is planned to be completed within 30 months. The operation of the Arena is expected to start in 2025/26. The first years of operation are considered to be a “start up”-period during which the Arena will establish itself on the market and will acquire new customers and during which the volume of contracted events will gradually grow. Revenues will gradually increase during that period with full operation as from the fifth year. An operating profit is expected from the second year of operation. The assumed operating cycle of the project is 25 years, after which the complete refurbishment / reconstruction of the Arena would be required.”
“(33) The expected investment costs of the project amount to CZK 5 763 million (nominal) (EUR 245.1 million). Those costs include the costs related to the purchase of land and the construction of the Arena. The land will be transferred from the existing owner Veletrhy Brno / Trade Fairs Brno (100% owned by the City of Brno) to SPV Arena Brno. The land value was established on the basis of a certified independent expert valuation report in 2022. The construction costs have been determined on the basis of the contract concluded with the construction company Hochtief that has been awarded after a tender procedure conducted in line with the rules applicable to public procurement, in compliance with Union law.”
“(34) The revenues are estimated at CZK 300 million (EUR 12.8 million) (nominal) as from the first stable year of operation (i.e. in year five of operation). They consist of revenues related to the skyboxes and club seat, food & beverage, rents, services, and marketing rights. Operating costs as from that year are estimated at CZK 285 million (EUR 12.1 million) (nominal). They are categorised in food & beverage costs, personnel costs, energy costs, service costs, repair and maintenance costs, marketing, and other costs. The model assumes that already from the second year of operation, the Arena is profit making.”
“(35) The funding gap is the difference between the net present value of the eligible investment costs and the net present value of the operating profit. The funding gap was calculated to be CZK 4 808 million (EUR 204.5 million) (discounted at a rate of 12.43%).”
“(36) The Czech authorities submitted that the aid will be lower than the funding gap and will be limited to what is strictly necessary for the implementation of the project. The notified measure is estimated at CZK 9 875 million (EUR 420.0 million) (nominal). Discounted at a rate of 12.43%, this amounts to CZK 4 798 million (EUR 204.1 million). It consists of several elements:
(a) Initial capital contribution by the City of Brno of CZK 3 346 million (EUR 142.3 million) (nominal). Discounted at a rate of 12.43%, this amounts to CZK 2 757 million (EUR 117.3 million). This covers a contribution to the capital expenditure and an operational expenditure of CZK 33 million (EUR 1.4 million) (nominal) during the construction period.
(b) Direct grants of CZK 500 million (EUR 21.3 million) (nominal). Discounted at a rate of 12.43%, this amounts to CZK 396 million (EUR 16.8 million). The direct grants will be provided by the South Moravian Region in the amount of CZK 200 million (EUR 8.5 million) (nominal) and by the National Sports Agency in the amount of CZK 300 million (EUR 12.8 million) (nominal).
(c) Soft loans by the National Development Bank and Česká Spořitelna with a principal amount of CZK 1 950 million (EUR 82.9 million). This refers to the tripartite loans […] The loans are planned to be provided by the National Development Bank (CZK 950 million, EUR 40.4 million) and the Česká Spořitelna (CZK 1 000 million, EUR 42.5 million). The loans will be provided to SPV Arena Brno and will have a payback period of 25 years from the last drawdown of the loans. The Czech authorities submitted that, since the loan agreements will be tripartite and the City of Brno undertakes to increase capital of the SPV Arena Brno ex-ante for the purpose of repaying a certain part of the instalments, and since therefore the loan will be granted at more advantageous terms than SPV Arena Brno alone would obtain on the market, there is an aid element associated with the loans. The Czech authorities submitted that it was not possible to obtain a binding offer directly for a loan to SPV Arena Brno without obligations of the City of Brno (i.e. on the principle of isolated project funding). Thus it was impossible to determine the value of the soft loan by comparison. Therefore, to determine the value of the soft loan, the Czech authorities calculated the grant equivalent based on the Reference rate communication. The grant equivalent consists of the difference between the expected price of the loan (at 5.7%) and the price of the hypothetical loan (12.43 %) and is estimated at CZK 2 316 million (EUR 98.5 million) (nominal). Discounted at a rate of 12.43 %, this amounts to CZK 726 million (EUR 30.9 million).
(d) Annual capital injections by the City of Brno, estimated at CZK 3 714 million (EUR 158.0 million) (nominal) over the 25 year operational period to cover loan instalments and interest payments. Discounted at a rate of 12.43 %, this amounts to CZK 919 million (EUR 39.1 million).”
“(37) In conclusion, the notified measure results in an estimated aid amount of CZK 4 798 million (EUR 204.1 million) (discounted), which does not exceed the estimated funding gap of CZK 4 808 million (EUR 204.5 million) (discounted).”
“(38) The financial set up is such that the operating profit of the SPV Arena Brno will be used to the maximum extent for the repayment of the loans. Therefore, if the operating profit is higher than expected or the actual interest rate would be lower than 5.7%, the annual contribution of the City of Brno will decrease. If the actual operating profit is lower than expected or the actual interest rate higher than 5.7%, the annual contribution by the City of Brno would be higher than currently estimated. However, the contribution of the City of Brno can never go beyond what is necessary to cover the debt service and cannot be higher than the funding gap. This is ensured by the claw-back mechanism”.
Presence of State aid
The Czech Republic notified the measure as constituting State aid. Therefore, the Commission dealt quickly with the issue of whether the public funding fell within the scope of Article 107(1) TFEU. It found that SPV Arena Brno, as the owner and operator of the arena, would indeed receive State aid.
The Commission also addressed the question whether the users of the arena would also receive State aid indirectly. However, it concluded, as is its normal practice, that no indirect aid would be granted to them.
“(56) Access to the Arena will be open to several users and be granted on a transparent and non-discriminatory basis […] The pricing conditions for the use by professional sport clubs will be made publicly available […] Moreover, the Czech authorities committed that the Arena will be operated on market terms […] This commitment applies as well for the pricing for the professional sport clubs. The Commission therefore concludes that the advantage granted to SPV Arena Brno as the owner, developer and operator of the Arena is not going to be passed on to the end-users of the infrastructure, as far as those would be undertakings.”
Compatibility with the internal market
With respect to the incentive effect of the aid, the Commission, first, noted that “(66) given that SPV Arena Brno (or any other undertaking) would not have undertaken the project without the aid since it would not have obtained a satisfactory return on the investment, the incentive effect of the measure is already present because the aid enables the beneficiary to implement the project whereas, in the absence of the public support, neither the beneficiary nor any other financial institution would have financed the project […] In this context, the Czech authorities provided the Commission with the funding gap analysis of the project which was calculated to be CZK 4 808 million (EUR 204.5 million) […] The estimated aid amount of CZK 4 798 million (EUR 204.1 million) […] is necessary to close the funding gap and therefore establishes an incentive effect. The Commission agrees that, in the absence of the notified measure, the project would not have taken place, and thus the development of the economic areas/activities would not have been facilitated. Therefore, the notified measure has incentive effect.”
With respect to the proportionality of the aid, the Commission explained that “(79) the Czech authorities calculated the funding gap of the project […] The funding gap calculation includes all expected revenues from operating the Arena and all expected construction and operational costs of the Arena. The Commission considers that the funding gap calculation is based upon reliable parameters and notes in in particular the assessment methodology as outlined in recital (30). The construction costs, in particular, were determined on the basis of a tender procedure, in line with public procurement rules […], thus minimising the use of public resources. The funding gap is calculated over a period of 25 years. The Commission considers this duration as reasonable and in line with earlier case practice, also considering the likely need of serious reinvestments after this period […] the operating profit will be used to cover the debt service up to the maximum extent and it is only the remaining gap that will be financed by contributions by the City of Brno. This is ensured by the claw-back mechanism which accommodates any risk of overcompensation of SPV Arena Brno […] The notified measure remains below the funding gap and the combination of the four measures […] is limited to what is necessary to trigger this investment. Therefore, the Commission considers that the aid for the construction of the Arena is proportionate.”
Given that the negative effects of the aid were insignificant, the Commission concluded that the aid was compatible with the internal market.
The full text of the Commission decision can be accessed at: