State aid - United Kingdom

Aid C 7/2002 (ex N 577/01) - Ford Bridgend

Invitation to submit comments pursuant to Article 88(2) of the EC Treaty

(2002/C 79/04)

(Text with EEA relevance)

By means of the letter dated 13 February 2002, reproduced in the authentic language on the pages following this summary, the Commission notified the United Kingdom of its decision to initiate the procedure laid down in Article 88(2) of the EC Treaty concerning the abovementioned aid.

Interested parties may submit their comments on the aid in respect of which the Commission is initiating the procedure within one month of the date of publication of this summary and the following letter, to: European Commission Directorate-General for Competition

State Aid Registry

B - 1049 Brussels Fax (32-2) 296 12 42.

These comments will be communicated to the United Kingdom. Confidential treatment of the identity of the interested party submitting the comments may be requested in writing, stating the reasons for the request.

SUMMARY

By letter dated 26 July 2001 the UK authorities notified a plan to grant regional aid to Ford Motor Company Ltd ("Ford" in the following), a wholly owned subsidiary of the Ford Motor Company, USA ("the Ford group" in the following).

The notified project concerns the installation of a flexible engine manufacturing line at Bridgend (South Wales), an Article 87(3)(a) area, whose regional ceiling is 35 % for the 2000-2006 period. The project, which started in August 2001 and will be completed by mid 2004, involves the installation of completely new lines for the production of V6 and V8 engines mainly destined to cars produced under the Ford group's Ford, Jaguar, and Land Rover brands. At the end of the project production capacity for the engines will be of around 325000 engines/year. Ford intends to invest a nominal amount GBP 243 million, of which GBP 213 million were considered eligible by the UK authorities.

According to the UK authorities, the project is mobile. Indeed, the Ford group considered the alternative option of continuing the current practice of producing in Cleveland (USA) the V6 engines for the car manufactured in Europe (Jaguar and Ford Mondeo). As for the V8 engines, the production for Jaguar models could be accommodate by an existing Bridgend line, while additional volumes for Land Rover models could be sourced from another manufacturer (at the moment, BMW engines are used to power Land Rover vehicles).

Two distinct measures, relating to training aid and regional aid, are planned in favour of Ford. No other Community aid or financing has been allocated to the project.

The training aid is granted under the approved schemes provided for by section 25 of the 1988 employment act, and sections 11(1) and 12(1) of the 1982 Industrial Development Act and the 1998 Government of Wales act. The planned training aid in nominal values amounts to GBP 1,4 million gross grant equivalent, with an actual value of GBP 1,17 (base year 2000, discount rate 7,64 %). The proposed aid takes the form of a direct grant, and would be paid over the 2002-2003 period.

The regional aid is granted under the approved schemes provided for by: section 7 of Industrial Development Act of 1982, and section 40 of the Government of Wales Act 1998. The planned regional aid in nominal values amounts to GBP 16 million gross grant equivalent, with an actual value of GBP 12,38. The aid intensity notified by the UK authorities is 5,37 % gross grant equivalent. The proposed aid takes the form of a direct grant, and would be paid over the 2002-2006 period. The aid in question falls within the scope of Article 87(1) of the EC Treaty, and the aid granted to it shall be assessed according to the Community framework for State aid to the motor vehicle industry(1) (hereinafter "the car framework").

Both the training aid measure and the regional aid measure must be notified in compliance with the requirements of Article 88(3) of the Treaty.

The training aid element of the project must be assessed under Commission Regulation (EC) No 68/2001 of 12 January 2001 on the application of Articles 87 and 88 of the EC Treaty to training aid(2) (hereinafter, "the Regulation"). Since the amount of aid granted exceeds EUR 1 million (approximately GBP 0,62 million); since it is to be paid to one enterprise; and since the training project is a single project, the notification requirement laid out in the Regulation applies to the proposed aid and the aid falls to be assessed under the provisions of the Regulation.

The Commission notes that the necessary information to assess the measure has not been provided. As a consequence, the Commission is not able at this stage to establish whether the training aid measure is compatible with the common market.

Turning to the regional aid measure, the Commission shall ensure that the aid granted is both necessary for the realisation of the project and proportional to the gravity of the problems it intended to solve. Both tests, necessity and proportionality, must be satisfied if the Commission is to authorise State aid in the motor vehicle industry.

Regarding necessity, the UK authorities have notified that the alternative location for part of the project (production of V6 engines) would be the existing engine plant in Cleveland (USA), outside the European Economic Area (EEA) and central and east European countries (CEECs). The production of the V8 engines would continue to be sourced from another engine manufacturer. The Commission needs more information that will allow it to establish that Cleveland was considered an alternative location under point 3(2)(a) of the car framework.

Regarding proportionality, according to point 3(2)(c) of the car, a cost-benefit analysis method (hereinafter referred to as CBA) is used. A CBA compares, with regard to the mobile elements, the costs which an investor would bear in order to carry out the project in the region in question with those it would bear for an identical project in a different location. The UK authorities have submitted a CBA that compares the cost of Bridgend with those of executing the project in Cleveland. However, the Commission has doubts that the Cleveland site qualifies as a comparator site under the car framework.

First and foremost, in accordance with of section 3(2) of Annex I to the car framework, if the alternative site is outside Europe, the CBA has to be performed with a hypothetical alternative site, unless the company can demonstrate that more than half of the production is to be sold outside Europe. At this stage, the Commission considers that the relevant production refers to the goods that will be produced as a result of the investment in the new line Bridgend, that is, the V6 and V8 engines. From the information received, it appears that more than half of the engine production will be sold within Europe. As a consequence, the Cleveland site cannot be used as a comparator site for the CBA.

Secondly, the CBA presented between Bridgend and Cleveland, identical projects in a different location, as requested in section 2(3)(c) of the car framework. According to the information submitted in the CBA, investment in the Cleveland alternative would be limited to adaptation of the lines for the production of the V6 engine, amounting to GBP 72,2 million, while no investment related to the production of the V8 engine would be undertaken. Conversely, investment in Bridgend would amount to GBP 271,6 million and involve new production lines for both the V6 and V8 engine specifications.

The Commission considers that in the present case, the cost benefit analysis should be carried out comparing the chosen site of Bridgend with an hypothetical alternative site within the EEA of CEECs. According to Article 3(2)(c) of the car framework, such cost benefit analysis is not required by the Commission if the intensity of the planned regional aid is 10 % or less of the regional ceiling.

TEXT OF THE LETTER

"The Commission wishes to inform the United Kingdom that, having examined the information supplied by your authorities on the aid/measure referred to above, it has decided to initiate the procedure laid down in Article 88(2) of the EC Treaty.

1. PROCEDURE

1. By letter dated 26 July 2001 the UK authorities notified a plan to grant regional aid to Ford Motor Company Ltd ('Ford' in the following). The Commission requested further information on 18 September, and carried out an on site visit to the Bridgend premises on 26 October. The UK authorities replied to the request of information by letter dated 4 December 2001.

2. DESCRIPTION OF THE MEASURE AND ITS RECIPIENT

2. The planned aid would be granted to Ford, a wholly owned subsidiary of the Ford Motor Company, USA ('the Ford group' in the following). The Ford group has manufacturing facilities in more than 30 countries, employing around 360000 people. In the UK the Ford group owned businesses ('blue oval' Ford, Jaguar, Aston Martin, and Land Rover) employ around 40000 people.

The project

3. The notified project concerns the installation of a flexible engine manufacturing line at Bridgend, South Wales, for the production of an upgraded version of the existing AJ-V6 engine, currently manufactured in Cleveland (USA) for Jaguar car lines. The new line will also produce a V8 version of the engine on a flexible basis. AJ-V8 engines are already being produced at Bridgend, on an older manufacturing line that will remain in use after the end of project. Additionally, smaller engines of the Zetec family are manufactured at the Bridgend plant.

4. The project started in August 2001, and will be completed by mid 2004. According to the UK authorities the project involves the installation of completely new lines for the production of the engines. Capacity for the production of the V6/V8 engines at the end of the project will be of 325000 engines/year, while total production capacity at the Bridgend plant will be of 1079000 engines/year.

5. According to the UK authorities, the project is mobile. Indeed, the Ford group considered the alternative option of continuing production of the V6 engines in Cleveland, also for the car manufactured in Europe (Jaguar and Ford Mondeo). As for the V8 engines, the production for Jaguar models could be accommodated by the existing Bridgend line, while additional volumes for Land Rover products could be sourced from another manufacturer (at the moment, BMW engines are used to power Land Rover vehicles).

6. According to the notification, the choice of building a new line at Bridgend for the production of the V6/V8 engines is more costly than the alternative described above. However, following the decision by the Board of the National Assembly of Wales to grant assistance in December 2000, the Ford group have expressed a preference to proceed with the project in Bridgend.

7. Ford intends to invest a nominal amount GBP 243 million, of which GBP 213 million were considered eligible by the UK authorities.

8. The UK authorities underline the importance of the project for the South Wales region, that still lags behind the UK average in terms of GDP per head. The Ford plant is one of the largest employers in the area. As a direct consequence of the projects, 640 new jobs will be created, and further 450 will be safeguarded. The indirect impact of the project on the Welsh economy will also be considerable.

Legal basis and aid amounts

9. The project takes place at the existing Ford plant in Bridgend, in South Wales. Bridgend is an Article 87(3)(a) area, whose regional ceiling is 35 % for the 2000-2006 period.

10. Two distinct measures, relating to training aid and regional aid, are planned in favour of Ford. The training aid measure is granted under the approved schemes provided for by section 25 of the 1988 employment act, and sections 11(1) and 12(1) of the 1982 Industrial Development Act and the 1998 Government of Wales act.

11. The planned training aid in nominal values amounts to GBP 1,4 million gross grant equivalent, with an actual value of GBP 1,17 (base year 2000, discount rate 7,64 %). The proposed aid takes the form of a direct grant, and would be paid over the 2002-2003 period.

12. The regional aid measure is granted under the approved schemes provided for by: section 7 of Industrial Development Act of 1982, and section 40 of the Government of Wales Act 1998.

13. The planned regional aid in nominal values amounts to GBP 16 million gross grant equivalent, with an actual value of GBP 12,38. The aid intensity notified by the UK authorities is 5,37 % gross grant equivalent. The proposed aid takes the form of a direct grant, and would be paid over the 2002-2006 period.

14. According to the notification, no other Community aid or financing has been allocated to the project.

3. ASSESSMENT OF THE AID

15. In accordance with Article 6(1) of Council Regulation No 659/1999 of 22 March 1999, the decision to initiate proceedings shall summarise the relevant issues of fact and law, shall include a preliminary assessment from the Commission as to the aid character of the proposed measure, and shall set out the doubts as to its compatibility with the common market.

16. The Commission considers, at this stage of the procedure, that the measure constitutes State aid within the meaning of Article 87(1) of the EC Treaty. It would be financed by the State or through State resources; moreover, given that it represents a significant proportion of the project funding, it is likely to distort competition within the Community, giving an advantage to Ford over other companies not receiving aid. Finally, the market for motor vehicles is characterised by extensive trade between Member States.

17. Article 87(2) of the EC Treaty lists certain types of aid that are compatible with the EC Treaty. In view of the nature and purpose of the aid, and the geographical location of the firm, subparagraphs (a), (b) and (c) are not applicable to the plan in question. Article 87(3) specifies other forms of aid, which may be regarded as compatible with the common market. The Commission notes than the project is located in the area of Bridgend, which qualifies for assistance under Article 87(3)(a), with a maximum regional ceiling of 35 %.

18. The aid in question is intended for Ford, which manufactures and assembles engines and cars. The firm is therefore part of the motor vehicle industry within the meaning of the Community framework on State aid to the motor vehicle industry (hereinafter 'the car framework')(3).

19. The car framework specifies that all aid which the public authorities plan to grant to an individual project under authorised aid schemes for a firm operating in the motor vehicle industry must, in accordance with Article 88(3) of the Treaty, be notified before being granted if either of the following thresholds is reached: (i) total cost of the project equalling EUR 50 million (approximately GBP 31 million), (ii) total gross aid for the project, whether State aid or aid from Community instruments equalling EUR 5 million (approximately GBP 3,1 million).

20. Both the total cost of the project and the amount of aid exceed the notification thresholds. Thus, both the training aid and the regional aid that the UK authorities plan to grant to Ford must be notified in compliance with the requirements of Article 88(3) of the Treaty.

21. According to point 3(6) of the car framework, training aid to companies in the motor vehicle sector must be assessed under Commission Regulation (EC) No 68/2001 of 12 January 2001 on the application of Articles 87 and 88 of the EC Treaty to training aid(4) (hereinafter, 'the Regulation'). According to Article 5 of the Regulation, training aid fulfilling the conditions of this Regulation is not automatically exempted if the amount of aid granted to one enterprise for a single training project exceeds EUR 1 million (approximately GBP 0,62 million). As a consequence, such aid must be notified and assessed under the provisions of the Regulation. The Commission notes that the proposed aid in this case amounts to GBP 1,4 million; that it is to be paid to one enterprise; and that the training project is a single project. The Commission therefore considers that the notification requirement applies to the proposed aid. The aid falls to be assessed under the provisions of the Regulation.

22. Regarding the assessment of the training aid, the Commission notes that it is not clear what the total amount of the training costs will be. From the notification of 26 July 2001 it appears that training costs will amount to GBP 2,8 million in nominal terms, while the letter of 4 December 2001 mentions total costs of GBP 4 million.

23. Furthermore, in its letter 18 September 2001, the Commission asked the UK authorities to notify the training aid measure according to the provisions laid down in the Regulation, in order to allow the assessment of the measure to be made according to the relevant provisions. The Commission notes that the necessary information has not been provided. As a consequence, the Commission is not able at this stage to establish whether the training aid measure is compatible with the common market.

24. Turning to the regional aid measure, according to the car framework, the Commission shall ensure that the aid granted is both necessary for the realisation of the project and proportional to the gravity of the problems it intended to solve. Both tests, necessity and proportionality, must be satisfied if the Commission is to authorise State aid in the motor vehicle industry.

25. According to point 3(2)(a) of the car framework, in order to demonstrate the necessity for regional aid, the aid recipient must clearly prove that it has an economically viable alternative location for its project. If there were no other industrial site, whether new or in existence, capable of receiving the investment in question within the group, the undertaking would be compelled to carry out its project in the sole plant available, even in the absence of aid. As a consequence, no regional aid may be authorised for a project which is not geographically mobile.

26. The UK authorities have notified that the alternative location for part of the project (production of V6 engines) would be the existing engine plant in Cleveland (USA), outside the European Economic Area (EEA) and central and east European countries (CEECs). The production of the V8 engines would continue to be sourced from another engine manufacturer.

27. The Commission needs more information that will allow it to establish that Cleveland was considered an alternative location under point 3(2)(a) of the car framework, in particular for what regards the production of the engines that are currently purchased from a different manufacturer. While it is true that outsourcing constitutes a commercial alternative for the Ford group (this is the option currently adopted for the engines destined to Land Rover models), it is doubtful at this stage that it can be considered as an investment alternative as required by the car framework.

28. When the alternative location of a project is not in the EEA or CEECs, point 3(2)(a) of the car framework requires as a further element that the investor prove, notably by means of a location study, that a viable alternative to the location chosen has been considered in the EEA or CEECs. Otherwise, the location chosen will be considered the best one, and only regional aid may be authorised whose intensity does not exceed the threshold below which it is not necessary to carry out a cost benefit analysis.

29. The UK authorities have submitted evidence documenting that the investment in question could have been carried out in the Cologne (Germany) plant, owned by the Ford group. The scaling down of production of the Zetec engine at the Cologne plant has freed the necessary space (approximately 32000 square meters) to accommodate the V6/V8 engine production line. Therefore, no incremental building work would be required at the site. The Commission needs to verify the elements provided by the UK authorities regarding the possibility of location the project at the Cologne plant.

30. Regional aid intended for modernisation and rationalisation, which is generally not mobile, is not authorised in the motor vehicle sector. However, an expansion or transformation, involving a radical change in production structures on the existing site could be eligible for regional aid. During the on-site visit to the Bridgend plant carried out by the Commission could verify that old lines had been dismantled, and that new lines were going to be set up in an overall production structure that is clearly different from the previous one. As a consequence, the Commission considers that the project in question can be regarded as a transformation.

31. According to point 3(2)(c) of the car framework the Commission needs to ensure that the planned aid is in proportion to the regional problems it is intended to resolve. For that, a cost-benefit analysis method (hereinafter referred to as CBA) is used. A CBA compares, with regard to the mobile elements, the costs which an investor would bear in order to carry out the project in the region in question with those it would bear for an identical project in a different location, which makes it possible to determine the specific handicaps of the assisted region concerned. The Commission authorises regional aid within the limit of the regional handicaps resulting from the investment in the comparator plant.

32. The UK authorities have submitted a CBA that compares the cost of Bridgend with those of executing the project in Cleveland. However, the Commission has doubts that the Cleveland site qualifies as a comparator site under the car framework.

33. First and foremost, in accordance with of section 3(2) of Annex I to the car framework, if a company is comparing one European (in the EEA or CEECs) site with a site outside Europe from which it would import the vehicles, the CBA may have to be performed with a hypothetical alternative site, unless the company can demonstrate that more than half of the production is to be sold outside Europe.

34. The UK authorities have submitted information indicating that more than half of the cars powered by the engines that will be produced by the new line will be exported outside Europe. The UK authorities noted that, according to section 2(3) of Annex I to the car framework, dealing with the market impact analysis, the Commission has considered that the relevant market for engine production by a vehicle manufacturer is the vehicle market for which the engines are built. For these reasons, the UK authorities consider Cleveland the appropriate comparator site for the CBA.

35. The Commission cannot accept these arguments. The Commission maintains that the relevant provisions in order to determine the comparator site in the context of the CBA are to be found in the chapter of the car framework that specifically deals with the CBA (section 3(2) of Annex I to the car framework), and not in the chapter that deals with the market impact analysis (to section 2.3 of Annex I to the car framework). Indeed, the latter chapter does not deal with the CBA, but with the adjustment to the 'regional handicap ratio' that results from the CBA, in the light of the impact that the aid may have on the competitors of the beneficiary.

36. The Commission doubts that the relevant production according to section 3(2) of Annex I the car framework is given by the cars that will be fitted with the engines produced at the Bridgend plant. At this stage, the Commission considers that the relevant production refers to the goods that will be produced as a result of the investment in the new line Bridgend, that is, the V6 and V8 engines.

37. The fact that the relevant production is constituted by the engines is supported by the fact that, from the information available, a market for engines exists in Europe. In particular:

- it is not uncommon for car manufacturers to purchase engines from other producers,

- the engines produces at Bridgend will substitute for engines currently outsourced by the Ford group,

- the Ford group uses an internal pricing system to account for intergroup transactions. This internal pricing system will be employed to establish the price of the engines produced at the Bridgend plant and sold to the various brands of the Ford group (mainly Jaguar and Land Rover).

These elements indicate that the engines are the relevant product, that such product has a market, and that the destination of the engine product has to be considered in determining the location of the comparator site for the CBA.

38. From the information received, it appears that more than half of the engine production will be sold within Europe. As a consequence, the Cleveland site cannot be used as a comparator site for the CBA.

39. Secondly, and without prejudice to the considerations above, the CBA presented between Bridgend and Cleveland, does not compare the costs which the investor would bear in order to carry out its project in the region in question with those it would bear for an identical project in a different location, as requested in section 2(3)(c) of the car framework.

40. According to the information submitted in the CBA, investment in the Cleveland alternative would be limited to adaptation of the lines for the production of the V6 engine, amounting to GBP 72,2 million, while no investment related to the production of the V8 engine would be undertaken. Conversely, investment in Bridgend would amount to GBP 271,6 million, and involve new production lines for both the V6 and V8 engine specifications.

41. The CBA presented, therefore, does not allow the Commission to compare the costs for identical projects in different locations. The Commission cannot therefore determine the specific handicaps of the assisted region concerned.

42. The Commission considers that, according to Article 3(2)(c) of the car framework, the cost benefit analysis should in the present case be carried out comparing the chosen site of Bridgend with a hypothetical alternative site within the EEA of CEECs. Such cost benefit analysis is required by the Commission if the intensity of the planned regional aid is higher than 10 % of the regional ceiling.

43. The Commission also notes that the amount considered as eligible investment differs in the notification letter, where GBP 213 million eligible investment is reported, and in the CBA, where reported eligible investment amounts to GBP 271,6 million. The Commission doubts that only eligible costs were included in the CBA and for the calculation of the aid intensity, and therefore that the reported aid intensity of 5,37 % is correct. In order to clarify this point, the Commission needs further clarification on the exact amount and timing of eligible costs. The Commission would also ask the UK authorities to use the year 2000 for the calculation of the net present value of the investment and aid streams.

4. DECISION

44. In the light of the foregoing considerations, the Commission, acting under the procedure laid down in Article 88(2) of the EC Treaty, requests the United Kingdom to submit its comments and to provide all such information as may help to assess the aid, within one month of the date of receipt of this letter. Among other information, the Commission requests:

- the necessary information in order to assess the training aid measure under the training aid Regulation,

- a CBA analysis comparing the costs of carrying out the project in the chosen site of Bridgend with the costs of carrying out an identical project in a hypothetical site in the EEA of CEECs,

- a detailed account of the investment amount considered as eligible by the UK authorities, and of the calculation of the net grant equivalent of the regional aid measure.

45. The Commission requests your authorities to forward a copy of this letter to the potential recipient of the aid immediately.

46. The Commission wishes to remind the United Kingdom that Article 88(3) of the EC Treaty has suspensory effect, and would draw your attention to Article 14 of Council Regulation (EC) No 659/1999, which provides that all unlawful aid may be recovered from the recipient."

(1) OJ C 279, 15.9.1997, p. 1.

(2) OJ L 10, 13.1.2001, p. 20.

(3) OJ C 279, 15.9.1997.

(4) OJ L 10, 13.1.2001, p. 20.