Public loan guarantees

Finnish businesses with debts backed by a public authority should consider whether the guarantee holds up to state aid rules and the guidelines given in a recent Helsinki Administrative Court decision. The risk of non-compliance could mean that your public loan guarantee is removed, your company is fined and you risk investigation by the European Commission.

It is not uncommon for a private company in Finland to have a loan that is guaranteed by a local, regional or national public authority. When this happens, an important issue to consider is whether the guarantee meets the European Union’s state aid rules.

Documentation is vital

In spring 2012, the Helsinki Administrative Court issued a decision on the application of state aid rules to a loan guarantee given to Vantaan Energia Oy (Vantaa Energy Ltd), an energy operator in Finland’s fourth largest city of Vantaa. 

The facts of the dispute date back to March 2011, when the Vantaa City Council granted Vantaa Energy a surety for a maximum amount of EUR 250 million to guarantee loans for the construction of the Långmossebergen waste-fired power plant, located along Ring Road III, in Vantaa. 

Three residents of Vantaa appealed the City Council’s decision to the Helsinki Administrative Court. They charged that the guarantee violated state aid rules. The court ruled in the plaintiffs’ favour. It held that the City of Vantaa failed to establish the market price for the guarantee limited and that this was a violation of state-aid rules. The court also annulled the City Council’s decision to establish the guarantee. 

Vantaan Energia is currently building the waste-to-energy plant (it is set for completion in 2014), but what it no longer has are the public loan guarantees in the form given by the Vantaa City Council in March 2011.

Details of the guarantee

The guarantee limit granted by the City of Vantaa covered the financial institution loans and interest. According to the City Council decision, a counter guarantee amounting to 1.5 times the amount of the loan was required from Vantaa Energy. In addition, a guarantee commission was set and Vantaa Energy was required to take a negative pledge. The estimated total cost for the waste-fired power plant was approximately EUR 270 million at the time of the City Council’s decision, out of which EUR 250 million were funded with long-term loans.

In its ruling, the Helsinki Administrative Court said that a municipality has to take into account the effect of the EU state aid rules when it gives a guarantee. If the general provisions on state aid are ignored by the municipality, an administrative court can hear the case through a municipal appeal. Therefore, the Helsinki Administrative Court confirmed that national courts have jurisdiction to supervise compliance with state aid legislation.

As for the market price of the guarantee limit, the Administrative Court stated that the documents of the City Council failed to describe the terms of the limit, the means for the amortisation of the loans, the amount of interest charged and certain other substantive loan terms. The documentation could not have enabled an adequate evaluation of the market price of the guarantee limit. Since the City Council had not evaluated the applicability of state aid rules or whether the guarantee limit was determined on market terms, the Helsinki Administrative Court declared the decision of the Vantaa City Council void.

Implications for businesses

In its decision, the Helsinki Administrative Court did not assess whether the guarantee actually involved state aid or not. The Administrative Court merely stated that it was a possibility that could not be ruled out. This was sufficient basis for annulling the City Council decision. The Vantaa City Executive Board decided, in May 2012, not to appeal to the Supreme Administrative Court.

What this means for businesses is they should ensure that their loan practices meet state aid rule requirements. While the case law in Finland on this issue is scarce, non-compliance with the rules could have unfortunate consequences.