EN Official Journal of the European Union C 117/17

Invitation to submit comments pursuant to Article 1(2) in Part I of Protocol 3 to the Surveillance and Court Agreement on the sale of the State's shares in Sementsverksmiðjan (Case No 56694 — former Case No 47824)

(2005/C 117/07)

By means of Decision 421/04/COL of 20 December 2004, reproduced in the authentic language on the pages following this summary, the EFTA Surveillance Authority initiated proceedings pursuant to Article 1(2) in Part I of Protocol 3 of the Agreement between the EFTA States on the establishment of a Surveillance Authority and a Court of Justice (Surveillance and Court Agreement). The Icelandic Government has been informed by means of a copy of the decision.

The EFTA Surveillance Authority hereby gives the Contracting Parties to the EEA Agreement and interested parties notice to submit their comments on the measure in question within one month from the publication of this notice to:

EFTA Surveillance Authority 35, rue Belliard/Belliardstraat 35 B-1040 Brussels

The comments will be communicated to the Government of Iceland. Confidential treatment of the identity of the interested party submitting the comments may be requested in writing, stating the reasons for the request.

SUMMARY

Procedure

By letter from the Icelandic Mission to the European Union dated 19 August 2003, the Icelandic authorities notified the Authority pursuant to Article 1(3) in Part I of Protocol 3 to the Surveillance and Court Agreement of their intention to sell the State's shares in Sementsverksmiðjan (hereinafter: Iceland Cement). The Icelandic authorities signed the sale agreements on 2 October 2003, before the Authority had taken a decision on the notification.

Description of the aid measure

Until the entry, in 2000, into the Icelandic market of an importer of cement from Denmark, Iceland Cement had enjoyed a de facto monopoly in the market for cement. As a result of the new competitive situation, Iceland Cement experienced economic difficulties and started cumulating losses. The sale of the undertaking, wholly owned by the State, has to be seen against this background.

On 12 March 2003, the Government published an announcement in the newspaper Morgunblaðið calling for a tender to purchase 100 % of its shares in Iceland Cement. Five offers were submitted before the deadline expired on 28 March 2003. The offers were evaluated by an independent expert taking into account five criteria: purchase price, effect on competition on the Icelandic construction market, financial strength of bidder, future vision of the company and managerial experience and knowledge of the market. The Government initiated negotiations for the sale of the State's shares in Iceland Cement with the bidders that were considered to have put forward the best offer, a group of investors which created Íslenskt Sement ehf, on the condition that cement production should continue.

The same independent expert was also requested to assess the value of Iceland Cement. The assessment stated that for a company in a financial situation like Iceland Cement, establishment of the liquidation value would be the most generally accepted valuation method. The outcome was a negative equity estimated at ISK […] (compared to the book value of Iceland Cement's equity of ISK […] as of 31 March 2003). Furthermore, the costs associated with the demolition and cleaning of the factory plant at the site in Akranes were estimated to amount to approx. ISK […]. Including this sum as a liability, the negative equity amounted to ISK […].

On the basis of this assessment, the company was sold based on the following agreements:

Iceland Cement and the Township of Akranes concluded an agreement on 31 July 2003 according to which, title to all lots of Iceland Cement in Akranes were transferred, as of 1 August 2003, to the Township of Akranes. Following the privatisation of the company, on 2 October 2003, the Township of Akranes and Iceland Cement signed five 25-year rental agreements for different lots of land on which the cement production of the company is located. One of them contained a clause stating that, if cement production were to cease for a continuous period of 24 months, Iceland Cement would have to demolish the materials storage at its own expense.

On 2 October 2003, the Ministry of Industry on behalf of the Government of Iceland, signed a Share Purchase Agreement with Íslenskt Sement ehf. On the basis of this Agreement, the State, owner of 100 % of the shares in Iceland Cement Ltd. having a nominal value of ISK […], sold them to Íslenskt Sement ehf for a price of ISK […].

On the same date, 2 October 2003, Iceland Cement and the National Treasury of Iceland signed a Purchase Contract, on the basis of which, the Treasury purchased the properties and assets of the company in Reykjavík, the office building of the company in Akranes (with the exception of one and half floors) and the shares and bonds owned by Iceland Cement in other companies, for the price of ISK […]. According to the Contract, Iceland Cement may keep a part of the sold properties, use them for purposes of its own industrial operations and return them to the National Treasury no later than 31 December 2011. The company does not pay anything for this right of use. Until 31 December 2009, Iceland Cement has the right to re-purchase the abovementioned sold properties for a total price of ISK […] with a fixed annual interest of […] % as from 1 August 2003.

Although the Icelandic authorities were of the opinion that no State aid would be involved in the transaction because the sale was accomplished in accordance with the provisions of Chapter 18B of the State Aid Guidelines, they notified it to the Authority.

Assessment

The Authority has doubts regarding the non-State aid nature of the notified measures as alleged by the Icelandic authorities. The Authority questions the applicability of Chapter 18B to the case in question since the State is not merely selling land and buildings which it owns but its shares in a 100 % owned undertaking with the supplementary condition of continuing the operations of the company. Furthermore, at this stage, it cannot be ascertained whether the Icelandic authorities followed the market economy investor principle to carry out this privatisation.

Notwithstanding the above, the two procedures laid down under Chapter 18B of the Guidelines, on the basis of which it can be presumed that no State aid is involved in a sale, can, by analogy, give an indication to determine whether aid has been granted or not.

In accordance with the provisions of Chapter 18B.2.1 of the Guidelines, a sale of land and buildings is by definition at market value and consequently does not contain any State aid if it follows a sufficiently well-publicised, open and unconditional bidding procedure, comparable to an auction where the best, or only bid, is accepted. In the case in question, it cannot be maintained that the abovementioned conditions for the sale to be completed at market value, were fulfilled.

To the extent an open and unconditional bidding procedure is not applied, Chapter 18B.2.2 of the Guidelines establishes an alternative procedure that presumes that no State aid is involved: the value established by an independent asset valuer on the basis of generally accepted market indicators prior to the sale, constitutes the minimum purchase price that can be agreed upon without granting State aid.

In the case in question, an independent asset valuer estimated the value of Iceland Cement after a negotiation partner was selected by means of the tender procedure, but before the company was sold. Although the company was sold as a going concern, i.e. on the condition of continuation of the operations, the valuer estimated its liquidation value. In principle, the value of a company in operation, even if it currently makes losses, cannot be assumed to be equivalent to its liquidation value, which is based on the supposition that operations will cease. Furthermore, the valuation of some of the assets of Iceland Cement for the purpose of establishing the liquidation value of the company is questionable. For these reasons, it cannot be determined at this stage whether the liquidation value of the company corresponded to its market value.

Should the market value of 100 % of the State's shares in Iceland Cement be higher than the price paid by Íslenskt Sement ehf. for them, the State would have sold the company below its market price. State resources within the meaning of Article 61(1) of the EEA Agreement would have been involved because the State would have obtained lower revenue than a private operator acting on market terms would have got for the same assets. Should the National Treasury of Iceland have paid a higher price than their market value for the assets re-purchased from Iceland Cement, State resources would also be consumed. However, even though the State, on the same day although on different agreements, was both the seller and the purchaser of these concrete assets, no State aid would be involved if the price of the assets remained the same in both transactions.

Furthermore, the State is foregoing income when it abstains from being remunerated by Iceland Cement for the use of its assets in Reykjavik. This constitutes State resources within the meaning of Article 61(1) of the EEA Agreement.

The State will also forego income by losing revenue, if Iceland Cement makes use of its re-purchase price for the assets in Reykjavik for a price below their market price.

Should it be determined that these transactions were not carried out under market conditions and that, accordingly, State resources have been involved, Iceland Cement and/or Íslenskt Sement ehf. would have received an advantage within the meaning of Article 61(1) of the EEA Agreement. This would be so because either their costs were reduced or they were paid a price for assets higher than their market value.

Any advantage granted to Iceland Cement which reduces the costs it should normally incur, places this undertaking in a better competitive position vis à vis the other market player in the Icelandic cement market, which does not receive this advantage, and accordingly distorts competition. Any advantage granted to the consortium of investors Íslenskt Sement ehf, at least in competition with the other investment groups which participated in the tender procedure called upon by the Icelandic Government for the acquisition of shares, also has the effect of distorting competition.

Considering that the direct competitor of Iceland Cement in the Icelandic market is an undertaking, located in another State party to the EEA Agreement, which imports cement from other EEA countries into Iceland, and that there were investors established in other EEA countries interested in the acquisition of the State's shares in Iceland Cement Ltd., the measure affects trade between the Contracting Parties to the EEA Agreement within the meaning of Article 61(1) of the EEA Agreement.

Conclusion

The Authority has doubts as to the State aid nature of the notified sale of the State's shares in Iceland Cement Ltd. within the meaning of Article 61(1) of the EEA Agreement. Should the measures involved in the privatization process constitute State aid, the Authority would have to assess their compatibility with the functioning of the EEA Agreement. Consequently, the Authority is obliged to initiate the formal investigation procedure provided for in Article 1(2) in Part I of Protocol 3 of the Surveillance and Court Agreement.