CODE ON AID TO THE SYNTHETIC FIBRES INDUSTRY (96/C 94/07)

(Text with EEA relevance)

In 1977, in recognition of the low average rate of capacity utilization for the production of synthetic fibres and yarns, the consequent job losses and the risk that further aid would exacerbate the situation and distort competition, the Commission adopted certain measures pursuant to Article 93 (1) of the EC Treaty in order to impose further control on the freedom of Member States to award aid to producers of the fibres and yarns concerned. The measures became known as 'The Code on aid to the synthetic fibres industry`; the current Code will expire on 31 March 1996 (1).

In 1995, the Commission commissioned an independent firm of specialist consultants on the synthetic fibres industry to undertake two studies: the first on the efficacy of the Code on aid to the synthetic fibres industry and the arguments for and against continuing to control such aid; and the second on the future control of aid to this industry.

In the light of these reports and the views expressed by Member States and the EFTA Surveillance Authority (ESA) on the reports and on the operation of the Code generally, in particular during the discussion of this subject at the multilateral meeting on State aid, held in December 1995, the Commission has decided that it should continue to impose further controls on the freedom of Member States to award State aid to the synthetic fibres industry.

However, as the reports on the Code identified ways in which the control of State aid to the synthetic fibres industry could be refined, the Commission has decided that it should continue to exercise control through the introduction of new industry-specific measures rather than by a further extension of the period of validity of the current Code. This will ensure that there is no risk of disruption of competition in this industry, especially in sectors still characterized by structural overcapacity, ahead of the introduction of the planned horizontal framework on State aid in support of major investments.

The objective of these new measures is to prevent the distortion of competition in the internal market with regard to the synthetic fibres industry, in a manner consistent with the Community's other activities, as set out in the Treaty of Rome, and other Community instruments, the EEA Agreement and other international obligations entered into by the Community.

The scope of control

The measures apply, irrespective of the size of the prospective beneficiary, to all categories of aid, except aid for vocational training/retraining awarded under schemes that have been authorized by the Commission or aid awarded under schemes that have been authorized by the Commission and falling within the scope of either the Community guidelines on State aid for environmental protection (2) or the Community framework for State aid for research and development (3).

In terms of generic types of fibres and yarns, their polymeric basis and their end-uses, the measures apply to all generic types of staple fibre and filament yarn based on polyester, polyamide, acrylic or polypropylene, irrespective of the products' end-uses.

In terms of industrial processes, the measures apply to aid in direct support of extrusion, texturization or polymerization (including polycondensation) where it is integrated with extrusion in terms of the machinery used, or in direct support of any ancillary process that, in the specific business activity concerned, is normally integrated with extrusion/texturization capacity in terms of the machinery used.

The measures do not apply to aid in direct support of processes upstream of polymerization - for example, the production of monomer. Similarly, the measures do not apply to processes downstream of extrusion/texturization which, in the specific business activity concerned, are not normally integrated with extrusion/texturization capacity in terms of the machinery used. Finally, the measures do not apply to yarn extrusion processes where the extruded yarns would only have a transitory existence before being spunlaid and spunbonded in order to produce non-woven products. The non-woven sector is an area of continuing innovation and high growth, and the machinery concerned in the extrusion of yarns of this type could not easily or cheaply be adapted to produce staple fibre or filament yarn.

The notification requirement

Accordingly, under the measures Member States are required to notify pursuant to Article 93 (3) of the EC Treaty any proposal to award aid in whatever form, irrespective of whether or not the Commission has authorized the scheme concerned, where the aid would not satisfy the de minimis criterion (4) in direct support of:

- extrusion/texturization of all generic types of fibre and yarn based on polyester, polyamide, acrylic or polypropylene, irrespective of their end-uses, or

- polymerization (including polycondensation) where it is integrated with extrusion in terms of the machinery used, or

- any ancillary process linked to the contemporaneous installation of extrusion/texturization capacity by the prospective beneficiary or by another company in the group to which it belongs and which, in the specific business activity concerned, is normally integrated with such capacity in terms of the machinery used.

Member States are not required to notify certain categories of aid: aid for vocational training/retraining awarded under schemes that have been authorized by the Commission; and aid awarded under schemes that have been authorized by the Commission and which come within the scope of either the Community guidelines on State aid for environmental protection or the Community framework for State aid for research and development.

Any proposal to award aid outside the scope of an authorized aid scheme is, of course, subject to the obligation of notification pursuant to Article 93 (3) of the EC Treaty.

In addition to the information normally supplied when a proposal to award aid is notified to the Commission (5), Member States are asked to supply the following information:

- the full name of the prospective beneficiary, under which it is registered in the Member State concerned and, if it belongs to a group, the full name of that group and, if necessary, a description of the ownership structure,

- for the prospective beneficiary (and/or, if appropriate, the group to which it belongs) a statement of its current capacity, capacity in each of the previous three years and the capacity it would have after undertaking the investments that would be supported by the proposed aid (in tonnes per annum) to extrude and/or texturize the fibres and yarns coming within the scope of control, the volumes that have been, or are expected to be extruded and/or texturized in each of these years, breaking down the data by the specific generic/polymeric types of fibre or yarn concerned (identified using the combined nomenclature (6)) and, for yarn only, stating the average decitex on which the calculation of capacities has been made,

- a statement of the purpose of the investments that would be supported by the aid, and a description of them and the expected benefits to the prospective beneficiary (and, where the aid in question would support elements of a wider strategy within the group to which it belongs, to the group also),

- where the aid would support the installation, modernization or adaptation of extrusion and/or texturization machinery, a statement as to whether or not the machinery could be adapted to produce different generic types of products with the same polymeric basis, or products based on different polymers, and if so the cost of such adaptation and the ease with which it could be carried out,

- a description of the specific product and geographical markets that would be affected as a result of the proposed aid.

The assessment methodology and authorization criteria

In assessing the compatibility of aid coming within the scope of these measures, the fundamental consideration is the effect of that aid on the markets for the relevant products, namely the fibre/yarn whose production would be supported by the aid. Average capacity utilization rates in many sectors remain unsatisfactory and the effect of State aid in support of production will generally be negative in terms of competition in the internal market except where there is a structural shortage of supply of the relevant product.

In all cases and irrespective of the state of the market for the relevant products and the effect of the aid on that market, the new measures provide for the limitation of the intensity of aid. However, in line with the Community guidelines on State aid for small and medium-sized enterprises (SMEs), SMEs will be able to receive aid at a higher intensity than larger firms. The measures also provide for SMEs to receive aid at an even higher rate if it would support the production of an innovative product.

Under the measures, the Commission will assess the compatibility of an aid in up to three stages:

- the state of the markets for the relevant products,

- the effect that the aid would have on the relevant capacity, and

- depending on the outcome of the first two stages and the size of the company, the innovative character of the relevant products.

The relevant products are the fibres and/or yarns whose production would be supported by the proposed aid and which come within the scope of the measures. In the assessment, the Commission will define the markets for such products in terms of the generic type of the fibre or yarn (whether carpet filament yarn, industrial filament yarn, textile filament yarn or staple fibre) and its polymeric basis (whether polyamide, polyester, acrylic or polypropylene). The Commission will also determine whether or not the equipment concerned is switch capacity and could, with ease and at relatively low cost, be adapted to produce different fibres and yarns, in which case it could affect more than one market.

In determining the state of the market for each of the relevant products - that is the structural balance between supply and demand - the Commission will consider the evidence, which would have to be based on facts and not merely on allegations, conjecture or remote possibility. It might include:

- the average capacity utilization rate for production of the fibre or yarn, averaged on an annual basis over the previous two years, which would be expected to be & ge; 90 % if there were a structural shortage of supply,

- the level of imports of the fibre or yarn into the EEA, capacity and consumption volumes within the EEA, exports and prices and sales margins in the current year, in each of the previous three years and as they are forecast to develop in future,

- for the prospective beneficiary (and/or, if appropriate, the group to which it belongs) its share of the market for the fibre or yarn in the current year and in each of the previous three years.

However, this list is not exhaustive, nor would any one or more of these factors necessarily give decisive guidance.

The relevant capacity is the total viable capacity of the prospective beneficiary (and/or, if appropriate, the group to which it belongs) to extrude and/or texturize the relevant products. In all cases, viable capacity would include temporarily idle capacity (capacity that would be reactivated if sales improved) but would exclude obsolete capacity (capacity shut down before the application for aid was made and marked for scrapping or disposal outside the EEA).

In determining whether or not a product is innovative within the meaning of the measures, the Commission will again consider the factual evidence as to the nature and structure and forecast development of the market for the specific product, the ease with which the equipment concerned could be adapted to produce standard or less significantly innovative products and the cost of such adaptation, and whether the product was distinctly and significantly different from any other product or simply the result of product diversification through only marginal variation in the technical characteristics of an existing product.

The Commission will seek specialist advice and data where necessary, for example to help it to establish the structural balance between supply and demand for the relevant products, or to determine whether or not production equipment could, with ease and at relatively little cost, be adapted to produce different products, or to assess the level of innovation. Furthermore, the Commission will open Article 93 (2) proceedings where, after an initial assessment, it is either convinced that the proposal is incompatible with the common market or unable to overcome all the difficulties involved in determining whether or not the proposal is compatible.

Under the measures, investment aid will only be authorized:

- for larger firms - that is, firms that are not SMEs - at up to 50 % of the applicable aid ceiling:

- if the aid would result in a significant reduction in the relevant capacity, or

- if the market for the relevant products was characterized by a structural shortage of supply and the aid would not result in a significant increase in the relevant capacity,

- for SMEs, at up to 75 % of the applicable aid ceiling if the market for the relevant products was characterized by a structural shortage of supply and the aid would not result in a significant increase in the relevant capacity,

- for SMEs, at up to 100 % of the applicable aid ceiling:

- if the aid would result in a significant reduction in the relevant capacity, or

- if the market for the relevant products was characterized by a structural shortage of supply and the aid would not result in a significant increase in the relevant capacity and the relevant products were innovative.

For proposals to award regional investment aid under schemes authorized by the Commission, the applicable aid ceiling is that for the scheme in question. For proposals to award regional investment aid outside the scope of authorized schemes, and which do not come within the scope of the Community guidelines on State aid for rescuing and restructuring firms in difficulty (7), the applicable aid ceiling is that for the region concerned.

In determining whether or not a change in capacity would be significant in the context of the measures, the Commission will consider the factual evidence, which might include:

- for the prospective beneficiary (and, where the aid would support elements of a wider strategy within the group to which it belongs, for the group as well):

- its current capacity, capacity in each of the previous three years and the capacity it would have after undertaking the investments that would be supported by the proposed aid (in tonnes per annum) to extrude and/or texturize each of the relevant products and the actual volumes that have been or are expected to be extruded and/or texturized in these years,

- its share of the market for each of the relevant products in the current year, in each of the previous three years and as it is expected to develop in the future,

- its size - that is, whether it is an SME or a larger firm, and

- its viability,

- the average capacity utilization rate for production of each of the relevant products, averaged on an annual basis over the previous two years,

- the expected effect of the aid on the region concerned in terms of the structural handicaps of that region.

But, as with the analysis of the state of the market for the relevant products, this list is not exhaustive, nor would any one or more of the factors listed necessarily give decisive guidance.

The implementation of investments supported by authorized aid totalling & ge; ECU 50 million will be subject to ex-post monitoring to demonstrate that the conditions of authorization have been respected.

In the opinion of the Commission, the new notification requirement described above is an appropriate measure within the meaning of Article 93 (1) of the EC Treaty. It was considered by the Member States and the EFTA Surveillance Authority at a multilateral meeting in December 1995.

The measures will come into force on 1 April 1996 with a period of validity of three years. In principle, they will be abolished no later than six months after the date on which the planned horizontal framework on State aid in support of major investments comes into force.

(1) OJ No C 142, 8. 6. 1995, p. 4.

(2) OJ No C 72, 10. 3. 1994, p. 3.

(3) OJ No C 83, 11. 4. 1986, p. 2.

(4) Currently incorporated in the Community Guidelines on State aid for small and medium-sized enterprises (OJ No C 213, 19. 8. 1992, p. 2).

(5) See Section II of Annex II to the Director-General of the Competition Directorate's letter dated 2 August 1995 (D/20506) on the joint procedure for reporting and notification under the Treaty of Rome and under the World Trade Organization's Agreement on subsidies and countervailing measures.

(6) OJ No L 241, 27. 9. 1993, p. 1.

(7) OJ No C 368, 23. 12. 1994, p. 12.