Unlawful state aid concern as ministers drop claim for any of £50m owed by Prestwick Airport

Ministers had aimed to comply with European Union state aid rules, which remains active, by charging interest at 2.2% over the European Reference Rate for state aid for the UK.

The intent of state aid rules is to avoid financial assistance given by a government that favours a certain company or commercial group and has the potential to distort market competition.

Under the rules, a public body can provide a loan to a company at an interest rate that would be acceptable to a commercial lender. The European Commission presumes there is no state aid if the interest rate of the loan is above the reference rate.

But the Herald on Sunday can reveal ministers have sanctioned what some believe is a breach of the rules by failing to even collect the interest payments from the loan for the benefit of the taxpayer - just to keep the airport afloat.

Public spending watchdog Audit Scotland said the £6.3m interest on the £43.3m loans was "impaired to nil" meaning it is probable that ministers will be unable to collect amounts due. The Scottish Government has already been found to have given £50m in "illegal state aid" to Sumburgh Airport on Shetland and Inverness Airport after both received taxpayer support that had not been approved by the European Commission.

If a state aid investigation was launched and found proven, the commission can ultimately demand the recovery of money pumped in.

According to financial papers of the Scottish Government-controlled TS Prestwick Holdco Ltd, which runs the airport, the board say they have an assurance that no repayment of the loan or the interest will be made till March of next year "although support is expected to be continue beyond this date for the foreseeable future".

"As with any group placing reliance on other entities for financial support, the directors acknowledge that there can be no certainty that this support will continue; however, at the date of approval of these financial statements, he has no reason to believe that they will not do so," the board stated.

"Transport Scotland and Scottish ministers continue to strongly support the recently updated board and consider the airport as a long-term strategic asset. Based on this the board is confident that Transport Scotland will continue to defer repayment of the outstanding loans and accrued interest thereon for the foreseeable future and until a suitable financial restructure can be agreed by both parties or alternatively on a future sale of the business.

"The directors consider that this enables the group to continue in operational existence for at least the next 12 months, meeting its liabilities as they fall due..."

The airport was taken into public ownership in November 2013 after being purchased by the Scottish Government for £1.

The facility, which was put up for sale the previous year by New Zealand firm Infratil, had incurred annual losses of £2m.

Then deputy first minister Nicola Sturgeon said the deal would help protect the airport and the 1,400 jobs it supported and that work would begin for "turning Prestwick around and making it a viable enterprise".

The Scottish Government has been trying to sell the airport but a preferred bidder pulled out of negotiations in May 2021.

the Scottish Government then re-engaged with the second-placed bidder, but “various concerns” were identified and it was not pursued further.

It is believed the latest doomed bid came from Train Alliance UK and was scuppered when it emerged that major repairs are required to the runway.

The finance secretary Kate Forbes last month said that ministers had decided not to go ahead with selling the airport late last year and that it was in a financially strong position.

However she said it is still the Government’s intention to return it to the private sector in the future.

The airport made an operating profit in 2020/21 of of £500,000 down from £5.5m in 2019/20 in what the board has described as a year of "unprecedented challenges" headed by the travel restrictions brought about by the Covid pandemic that saw passenger numbers plummet from 621,000 to 47,000.

Businessman and MSP Edward Mountain, the Scottish Conservatives' deputy chief whip said that while the SNP government had talked up Prestwick Airport as profitable the finanical actually told a different story.

“The business is nowhere closer to repaying the £43m loan and the £6m accrued interest because Transport Scotland has agreed to defer payments," he said.

“This deferral will last until March 2023, and possibly much longer. That raises big questions about how long this arrangement will last, what it will cost the taxpayer and whether it meets State Aid rules too.

“As we’ve seen already with Ferguson Marine and BiFab, this SNP government has a dismal record when it comes to turning around the fortunes of struggling businesses.

“It’s clear that Prestwick Airport requires fresh impetus, however the SNP continue to fail at securing a bidder which would secure the long-term future of the business. This is clearly isn’t a company that is attractive to private purchase."

Gordon Dewar, the chief executive of Edinburgh Airport has told MPs that the state intervention puts their business at a disadvantage and that the financial support given to Prestwick Airport “fundamentally skews what should be a competitive and fair playing field”.

Brian McClean, director of communications and sustainability, AGS Airports Limited, which owns Glasgow and Aberdeen airports said that Prestwick "distorts the market completely".

He said: "We have consistently said that there needs to be an endgame. It does distort the market and it has a huge competitive disadvantage for Glasgow."

The European Commission has previously found that Scottish Government support to Sumburgh Airport on Shetland and Inverness Airport was illegal aid through the Highland and Islands Airports Limited (HIAL) company that it owns.

Ministers had told the commission it considered Inverness, which carried over 600,000 passengers a year, and Sumburgh, which carries over 300,000, would close to scheduled passenger services without public funding.

But the European Commission found that more than £20m provided to Inverness between 2012 and 2017, and £35.4m to Sumburgh were "illegal state aid" in breach of the Treaty on the Functioning of the European Union (TFEU), which states that aid measures must not be put into effect before it had authorised it.

The commission also found that HIAL, the state operator of both airports, was "not selected by a public procurement procedure for the public service obligations it was entrusted with" and did not comply with its so-called Altmark Criterion which aims to ensure competition and transparency.

In separate rulings about the Scottish airports in 2017 and 2018, the directorate general for competition "regretted" that the UK had allowed the aid to be put into effect before the commission had made any decision authorising it. But it decided not to raise objections to financial support going forward.

The Scottish Government has previously faced state aid questions about failing to notify the EU about nationalising the shipyard at the centre of a ferry building fiasco Ferguson Marine Engineering Limited (FMEL) at the end of 2019.

The EU has confirmed it was not notified of the state takeover or the issuing of two commercial loans to FMEL in Port Glasgow totalling £45m before the yard fell into administration and then public ownership.

A matter of days before FMEL fell into administration, its counsel, in an analysis forwarded to ministers warned that nationalisation would "still be subject to state aid law".

The Scottish Government began the process of taking control of the last civilian shipyard on the Clyde as it went under because of the soaring costs of a contract for two lifeline ferries with Caledonian Maritime Assets Ltd (CMAL), the state-controlled company which owns ferries and other infrastructure used by publicly owned operator CalMac.

A Transport Scotland spokesperson said: “Our investment in the airport, to help save jobs and key infrastructure, was on a commercial basis in the form of loan funding with a market rate of interest in line with subsidy control rules.

“The airport will not require any additional funding this financial year and the budget makes no provision for additional loan funding as we do not envisage any being required in 2022-23”.