Proposal for a COUNCIL REGULATION (EC) on aid to certain shipyards under restructuring and amending Council Regulation 3094/95
Date: 1997-03-19
Institutions: European Commission
Subjects: State aid, aid for restructuring, control of State aid, industrial restructuring, shipbuilding

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels,  19.03.1997 
COM(97) 132  final 

97/0113 (ACQ 

Proposal for a 

COUNCIL REGULATION (EC) 

on aid to certain shipyards  under restructuring 

and amending Council Regulation 3094/95 

(presented by the Commission) 

PROPOSAL FOR A COUNCIL REGULATION AMENDING 
REGULATION (EC) N° 3094/95 ON AID TO SHIPBUILDING 

EXPLANATORY MEMORANDUM 

Introduction 

As stated in Council Regulation (EC) No.  1904/96 the relevant  rules of the  Seventh Council 
Directive on aid to shipbuilding (90/684/EEC, further called "the  Directive") remain applicable 
pending  the  entry  into  force  of the  OECD  Shipbuilding  Agreement  and  until  31  December 
1997 at the latest. 

Under the Directive operating aid granted to shipyards, including contract-related  production 
aid (whether direct or indirectes subject to a common maximum aid ceiling. The only operating 
aid  exempted  from  this  ceiling  are  credit  facilities  complying  with  the  1981  OECD 
Understanding  on  Export  Credits  for  Ships  (Article  4.6)  and  aid  granted  as  development 
assistance to developing countries (Article 4.7). 

As regards investment  aids the Directive requires that these must be linked to a restructuring 
plan which does not involve any increase in the yard's shipbuilding capacity or which must be 
directly  linked  to  a  corresponding  irreversible  reduction  incapacity  of  other  yards  in  the 
Member  State  concerned.  The prime condition  for  closure  aid  is that  the  resulting  capacity 
reduction is of a genuine and irreversible nature. 

Apart  from  these  general  rules  the  Directive  provided  also  for  a  number  of  time-  limited 
derogations for certain Member States which are now expired. However, in a number of cases 
the targets of the underlying restructuring programmes could not be achieved  in the expected 
time frame or new developments on the markets require further  measures. It is for this reason 
that a number of Member States have notified the Commission of plans to grant aid in support 
of  necessary  further  restructurings  of  a  number  of  shipyards.  The  aid  programmes  include 
various  measures  that  are  not  compatible  with  the  existing  Community  rules.  They  could 
therefore  only be approved by the Commission if the Council were to adopt an amendment of 
the Regulation which would in essence update previous derogations. 

The background  and  the technical  details of the cases concerned  are  described  in annexes 1 
(Germany), 2 (Greece) and 3 (Spain) of this document. 

Proposal 

Accordingly and in the light of the information  provided  in the annexes  1 to  3 it is proposed 
that the Council adopts, after  consultation of the European Parliament  and the Economic and 
Social  Committee,  the  attached  "Council  Regulation  on  aid  to  certain  shipyards  under 
restructuring and amending Council Regulation 3094/95. 

/ftf. 

Proposal  for  a Council  Regulation 

on  aid  to  certain  shipyards  under  restructuring 

and  amending  Council  Regulation  3094/95 

THE COUNCIL OF THE EUROPEAN UNION 

Having regard to the Treaty establishing the European Community, and in particular Articles  92(3)(e) 

and  113 thereof, 

Having regard to the proposal from the Commission, 

Having regard to the opinion of the European  Parliament, 

Having regard to the opinion of the Economic and Social Committee, 

Whereas  by  virtue  of  Council  Regulation  (EC) No.  3 094/95',  as  last  amended  by  Council  Regulation 
(EC)  No.  1904/962  the  provisions  of  Council  Directive  90/684/EEC3,  amended  by  Council  Directive 
92/68/EEC4 are applicable to aid to  shipbuilding until  either the OECD  "Agreement  respecting  normal 
competitive  conditions  in the commercial  shipbuilding  and  repair  industry"5enters  into  force,  or  at  the 
latest until 31 December  1997, 

Whereas the shipbuilding industry is important for the mitigation of structural  problems  in a number  of 

regions of the Community, 

Whereas the direct application of the common maximum ceiling does not allow for the comprehensive 
restructuring measures necessary in a number of shipyards in these regions and a special transitional 
arrangement should therefore be introduced, 

Whereas  it  was  acknowledged  in  Council  Directive  92/68/EEC  that  the  shipbuilding  industry  in  the 
territories of the former  German Democratic  Republic required urgent  and comprehensive  restructuring 
in  order  to  become  competitive,  a  target  which  has not  been  fully  achieved  for  two  shipyards  in  the 
envisaged restructuring period due to unforeseeable  circumstances beyond control of these shipyards, 

Whereas  in the  case  of the two  shiyards  located  in the  former  German  Democratic  Republic  a  further 
transitional  arrangement  is needed,  in order  to  enable  a  completion  of their  restructurings,  which  shall 
allow them to comply subsequently with the aid rules applicable to the Community as a whole, 

1 OJ L332/1 of 30 December 1995 
2 OJ L 251/5 of 3 October 1996 
3 OJ L 380/27 of 31 December 1990 
4 OJ L 219/54 of 4 August 1992 
5  COM (94) 460 final, of 3 November 1994 

Whereas  the  shipbuilding  capacity  in  the  territories  of  the  former  German  Democratic  Republic  was 
reduced  to  327  000  cgt  by  31  December  1995  and  whereas  the  German  Government  made  the 
commitment to ensure that this capacity limitation  is fully  respected at least until end of the year 2000, 
and to extend this limitation until end of 2005  unless the Commission  authorizes  an earlier  termination 
of the capacity limitations;. 

Whereas  a  further  reduction  of  shipbuilding  capacity in  Germany  will  arrive  from  the  closure  of  the 
Bremer Vulkan Werft  in Bremen-Vegesack for newbuilding before end of 1997, 

Whereas,  in  spite  of  the  efforts  made  by  the  Greek  Government  to  privatise  all  its  public  yards  by 
March  1993, the Hellenic shipyard was only sold in September  1995,  to a co-operative of its workers, 
the State having kept a majority holding of 51% for defence interests; 

Whereas for the financial  viability of the restructuring of  Hellenic shipyard necessitates the provision of 
aid which allows the company to write off the debts accumulated before its delayed privatization; 

Whereas a further  restructuring of the publicly owned yards in Spain is necessary so that each of these 
yards, being established as individual profit  centers at full  cost basis, will achieve financial  viability by 
31 December  1998, 

Whereas under this restructuring plan there will be a capacity reduction in these yards from 240,000 
cgrt to 210,000 cgrt, complemented by the non-reopening to shipbuilding of the public yard at Astano 
(135,000 cgrt capacity) and by additional capacity reductions elsewhere in Spain amounting to a  further 
17,500 cgrt, 

Whereas no further  aid for restructuring purposes (including loss compensations, loss guarantees and 
rescue aid) will be made available to the shipyards covered by this Regulation, 

AL 

HAS ADOPTED THIS  REGULATION 

Article 1 

1.  Notwithstanding  the  provisions  of  Council  Regulation  No.  3094/95,  for  the  yards  under 

restructuring  specified  in  paragraphs  (2)  ,  (3)  and  (4)  the  Commission  may  declare 

additional  operating  aid  compatible  for  the  specific  purposes  and  up  to  the  amounts  there 

specified. 

2.  In  the  Territory  of the  former  German  Democratic  Republic,  operating  aid  for  the  period 

from  01  March  1996  until  31  December  1998  in  favour  of  MTW-Schiffswerft  and 

Volkswerft  Stralsund  may be considered  compatible with the common  market  up to  a total 

amount  of  333 mio DM and 395 mio DM respectively.  The said amounts comprise the aid 

to  facilitate  the  further  operation  of  the  yards,  social  aid,  contract-related  aid  under  the 

"Wettbewerbshilfe"  scheme  and  the  aid  equivalent  of  guarantees.  For  these  yards  the 

provisions  of  Chapter  II  of  Directive  90/684/EEC  shall  not  be  applicable  during  the 

restructuring  period  with  the  exception  of  Article  4  paragraphs  6  and  7,  and  no  other 

operating  aid  may  be  paid  for  works  on  contracts  or  losses  in  the  relevant  period.  For 

contracts signed during the restructuring period but carried out after  it, the community  rules 

on contract-related  aid as valid on the day of contract  signature shall apply. 

3.  Aid in the the form  of a waiver-of debts of "Hellenic shipyards", up to the amount  of GDR 

54.525  billion,  corresponding  to  debts  related  to  civil  work  of the  yard,  as  existing  on  31 

December  1991  and  accrued  by  interest  rates  and  penalties  until  31  January  1996  may  be 

regarded  as  compatible  with  the  Treaty.  Apart  from  Article  5,  all  provisions  of  directive 

90/684/EEC  shall apply to this yard. 

4.  Aid  for  the  restructuring  of  the  publicly-owned  yards  in  Spain  may  be  considered 

compatible  with  the  common  market  up  to  an  amount  of  135.028  billion  pesetas  in  the 

following  forms: 

• 

Interest  payments  of  up  to  62.028  billion  pesetas  in  1988-1994  on  loans  taken  on  to 
cover unpaid  previously approved aid 

•  Tax credits in the period  1995-1999 of up to 58 billion pesetas 

•  Capital injection  in  1997 of up to  15 billion pesetas 

All other provisions of  directive 90/684/EEC  shall" apply to these yards. 

/>l 

Article 2 

For  the  restructuring  programmes  benefitting  from  aid  as  provided  for  in. Article  1,  the 

notification  shall be complemented by a programme  for the monitoring of the actual use of 

the investment  and  operating aid, compliance with the restructuring  plan and enforcement  of 

capacity limitations which is acceptable to the Commission. 

This Regulation shall enter into force on the day following that of its publication in the  Official 

Article 3 

Journal of the European Communities. 

It shall apply until 31 December 1998. 

This Regulation shall be binding in its entirety and directly applicable in all Member States. 

AJL 

ANNEX 1 

Derogation for Germany to grant aid towards the completion of the 
restructuring of two east German shipyards 

I. 

Background 

1.  On  20  July  1992  the  Council  adopted  Directive  92/68/EEC  amending  Directive 
90/684/EEC  (Seventh  Directive  on  aid  to  shipbuilding)  by  the  addition  of  Article  10(a), 
which  provided  for  a  derogation  for  the  shipyards  on  the  territory  of  the  former  German 
Democratic Republic. The new Article  10(a) allowed the shipyards in the new Lander to  be 
exempted  from  the  provisions  applying  to  Community  shipyards  so  as  to  allow  them  to 
carry out  an urgent  and comprehensive restructuring to become competitive.  In parallel  the 
German Government  had to make  sure that  a genuine  and irreversible  reduction  of 40%  of 
shipbuilding  capacity  is carried  out  by  31 December  1995. Consequently  as  from  1996  the 
shipbuilding capacity in the said territory is limited to 327.000 cgt. 

2.  At the time, there were still seven  shipyards active in the said region,  of which one, Neptun 
Werft  in Rostock)  had  been  already  closed  for  newbuildings  and  operates  now  as  a  repair 
and  conversion  yard  with  an  annual  capacity  limitation  of  300  000  h/a.  Another  yard, 
Rofllauer  Schiffswerft  was  closed  in  the  meantime.  Consequently,  five  shipyards  remain 
active  in  the  newbuilding  of  seagoing  vessels  in  the  region.  In  order  to  comply  with  the 
requirement  set  out  in Article  10(a)  of a 40% capacity  reduction,  the  German  Government 
allocated  a specific  capacity  limitation to  each  of the yards which  entered  into  force  on  31 
December  1995. The capacity limits of the various yards are as follows: 

Table 1: Shipbuilding capacity in Mecklenburg-Vorpommern 

Elbewerft  Boizenburg 
Kvaerner Warnow Werft 
MTW-Schiffswerft 
Peene-Werft 
Volkswerft  Stralsund 
TcrtdMecldenburg~Yi^^ 

22.000 cgt 
85.000 cgt 
100.000 cgt 
35.000 cgt 
85.000 cgt 
327,000 off 

_ _ \ _ _ _ _ _„ 

3.  The  restructurings  of  Elbewerft  Boizenburg,  Kvaerner  Warnow  Werft  and  Peene-Werft 
were  completed  as  envisaged  in  1995.  These  shipyards  operate  now  under  the  common 
Community  rules.  The  two  others,  MTW-Schiffswerft  (MTW)  and  Volkswerft  Stralsund 
(VW$) had  been  acquired  by Bremer  Vulkan  Verbund  ( B W ).  Their  restructurings  started 
with  some  delay:  In the  case  of MTW,  it  was  temporarily  planned  to  move  the  yard  to  a 
new  location.  This was given up  in  spring  1994  and  the  actual  restructuring  began  only  in 
autumn  1994. VWS was privatised  only  in  1993, therefore  the first restructuring  measures 
started only at the end of that year. The two yards were therefore right in the middle of very 
major  construction  works  when  BVV  entered  into  severe  financial  difficulties  in  autumn 
1995, which progressed  to  a failed  debt composition procedure in February  1996, and  a  full 
bankruptcy in May  1996. 

4.  Following their privatisation both yards received for their restructurings  state aid which was 
authorized  by the  Commission  in tranches.  A total  of  597.2  mio  DM  in  operating  aid  was 
authorized  for MTW under aid N  692/B/91 of 20 December  1992 and  aid N  692/1/91 of 11 

\ 

May  1994. A» total of 288.8 mio.DM of the planned 382.2 mio DM in investment  aid and 
18.0 mio. DM in closure aid were authorized  on 20 December  1992 (N 692/B/91) and 20 
September  1995 (N 572/95). In the case of VWS, an amount of 680.5 mio DM in operating 
aid was authorized on 21 December  1993 under aid N 692/F/91. A total of 309.6 mio. DM 
of the planned 398.7 investment aid and 8.1 of the 8.5 mio. DM closure aid were authorized 
on 21 December  1993 (N 692/F/91), 21 June  1995 (N 84/95) and  14 November  1995 (N 
801/95). 
According  to  the  provisions  of  Article  10(a)  of  the  Directive  and  the  Commission's 
decisions to authorize the aid, the aid payments had to be strictly limited to the activities of 
these yards. Reports of independent  auditors were required to ensure that this "spill-over" 
prohibition  was  fully  respected.  As  described  in  full  detail  in  the  "Commission  notice 
pursuant to Article 93(2) of the EC Treaty to other Member States and interested parties on 
the  spill-over  of restructuring  aid for  MTW-Schiffswerft  and Volkswerft  to  other Bremer 
Vulkan  Verbund  AG undertakings"1 a substantial  part  of the aid  was,  however,  misused. 
According to  the  report  of an auditing firm engaged  by the  German  privatisation  agency 
BvS for an investigation on the origin and the fate of the funds of the two yards, which had 
been placed in the central cash management  system of the BW  group, the situation is as 
following (all amounts in mio DM): 

Table 2: Spill-over of restructuring aid form MTW and VWS (all amounts in mio DM) 

I 

Total outstanding placed in 
the cash-concentration (per 
21.2.1996) 

of which: 

Investment aid 
operating aid 
closure aid 
subtotal authorised aid 
unauthorised aid 
• accrued interest and non 
aid related transfers 

MTW I 
577.2 

55.3 
26S.1 
L5 
324.9 
120.82 
131.7 

Volkswerft 
268.9 

36.8 
60.7 
0.0 
97.5 
76.73 
94.7 

Hence, the two yards had placed 846.1 mio DM in the cash concentration system at the time 
when  BW  had  to  apply  for  a  debt  composition  procedure.  Participation  in  the  cash 
concentration  system  had  been  imposed  by BW  on  the  yards.  The  management  of  the 
shipyards  had  virtually  no  influence  on  these  placements.  Claims  for  a  recovery  of  the 
money have been filed under the bankruptcy procedure. In addition, members of the former 
management of BW  are sued under criminal and civil law, and parliamentary investigations 
have been launched to obtain a full clarification  about these massive financial irregularities. 
The Commission has extended the current investigation procedure in order to find out if a 
decision  should  be  taken  on  a  recovery  of  part  of  the  misused  funds  from  the  effective 
beneficiaries,  either daughter companies or firms linked otherwise to the BW  group.4 

1 OJ No. C 150 of 24 May 1996, for extension of procedure compare OJ No.C 65 of 1 March 1997. 
2 includes investment loan of 112.4 mio DM which was foreseen under original aid programme but disbursed without 
approval from the Commission. 
3 includes 70.4 mio DM investment aid foreseen under the original aid programme but disbursed on a loan basis prior to 
the authorisation of the Commission 
4 For reference  compare footnote  1 

H. The development of MTW-Schiffswerft  and Volkswerft  Stralsund since February 

1996 

6.  When the Bremer Vulkan group  collapsed  end of February  1996 the two yards were left  in 
the  middle  of  the  restructuring  with  hardly  any  liquidity.  For  technical  and  commercial 
reasons  neither  the  large  scale  construction  works  nor  construction  of  ships  could  be 
stopped in this phase, if the yards should retain a chance for survival. Construction financing 
for the ships could be secured to  a large extent through loans from commercial banks which 
were  secured  by mortgages  on the  ships and  in part  by construction financing guarantees. 
The  extension  of the Mecklenburg-Vorpommern guarantee scheme to  provide this  type  of 
guarantees  was  authorised  by the  Commission  end  of February  1996  (state  aid  case no.  N 
107/96)5 
Funds  for  a  continuation  of  the  physical  restructuring  and  for  the  covering  of  operative 
losses  could  in  the  first  phase  only  be  secured  by  the  advanced  sale  of  land  no  longer 
needed.  In the  case  of MTW  part  of the investments  could  be financed by the release  of a 
last tranche  of 48.4  mio DM restructuring  aid for  MTW from a blocked  account  (state  aid 
no. N 207/96)6. 

7.  To secure progress of works on the yards BvS provided  a number of short-term  loans  since 
May  1996. The German government  took  the line that these loans could  not be  considered 
as new state aid. First they were meant to replace approved  state aid for the restructuring  of 
the yards which had not become effective  on the market because it was misused, and  second 
as  the  loans  had  been  given  on  market  terms.  The  Commission  did  not  follow  these 
arguments: In its decision of  10 December  1996 to open the Art. 93(2) procedure7 it  argued 
that  the  investigations  on  the  misuse  of  aid  evidenced  that  the  original  payments  were 
received  by the  yards  and  were  clearly  state  aid,  even  if they  were  subsequently  misused. 
Nor  could  it  be  accepted  that  the  loans  were  given  on  market  conditions  when  it  was 
evident  that  no  commercial  bank  would  have  provided  such  loans  whose  repayment  is 
unsecured. 

8.  The Land  Mecklenburg-Vorpommern  and  BvS  managed  finally  to  separate  the yards  from 
BW  after  a politically and legally complicated procedure in spring and summer  1996. Since 
then,  the two  yards  are  owned  by the  Land8  and  BvS  in  expectation  of  a  subsequent  new 
privatisation.  A consulting company was commissioned  by BvS to undertake a  fundamental 
review  of  the  current  restructuring  concepts.  In  essence,  the  consultants  came  to  the 
conclusion  that  in order  to  secure viability  of the yards  major  organisational  changes  and 
implementation  of various  cost-cutting  measures was  needed.  The  employment  guarantees 
until  1996/97 under the original privatisation  agreements were no longer tenable, but  a new 
drastic  reduction  of  personnel  was  unavoidable.  In  view  of  the  advanced  stage  of  the 
construction  works, however,  only minor modifications  of the investment  programme  were 
possible. 

9.  The notification  of the state aid for the continuation of the restructuring was delayed due  to 
difficulties  to  reach  an  agreement  on  the  financing  between  the  new  owners.  A  first 
notification  was  received  by  the  Commission  on  3  September  1996.  It  was  however 

5 OJ No. C 150/96 of 24 May 96 
6 OJ No.C 215/96 of 25 July 96. 
7 State aid cases nos. NN 102/103/96, OJ No 

(publication in preparation) In total loans amounting to 105 mio DM 

were committed for MTW and 195 mio DM to VWS 

8 In the case of VWS, the city of Stralsund continues to hold 11% of equity. However, the city is not involved in the further 

financing of the restructuring. 

3 

incomplete, in particular  as some key information  concerning the planned  operating  aid  and 
the  foreseen  arrangements  for  a  new  privatisation  were  missing.  Apart  from  that  the 
that  some  assumptions  determining  the  expected  viability  of  the 
Commission  felt 
restructuring  concepts  could  be  questioned.  With  letter  of  16  September  1996  the 
Commission asked therefore for further  information  and announced  that it would  have  some 
aspects of the restructuring firms reviewed by an independent consultant. 

-•  -

lO.The  consultant  visited  the  two  yards  end  of  October  1996.  In  his  report  he  came  to  the 
conclusion  that  the investments undertaken  were in line with the investment  plan  approved 
by the Commission under the original restructuring.  The investments  should,  once they  are 
completed,  allow  to  achieve  the  productivity  levels  envisaged  provided  that  the  planned 
organisational  changes  are  fully  implemented.  The  consultant  cautioned,  however,  that 
commercial  viability  especially  of Volkswerft  will depend  very  much  on  whether  the  yards 
are  successful  in  building  more  sophisticated  ships than  the  container  ships  on  which  they 
have  to  focus  during  the  restructuring  period.  Success  in  this  new  product  mix  required 
however  sufficient  marketing  and design capacity.  This can either be provided  from  outside 
in the case of a take-over by an experienced  shipbuilder.  Otherwise it has to be provided  in-
house  by  the  yards.  The  Commission  communicated  these  findings  to  the  German 
government  and requested  that this, same as a number of other issues, was to  be" addressed 
in the revised  notification. 

In response to the questions and observations from the Commission the German government 
provided revised notifications  in mid January  1997 upon which the further  text is based. 

i n.  The new restructuring  plans and  the envisaged  aid  programme 

11.BvS  commissioned  specialised  consultants  and  an  international  merchant  bank  with  the 
preparation of a new privatisation of the yards. In order to contact  potential investors world 
wide, detailed  documents were prepared  These were  sent  ^ut to  a wide  range  of  potential 
investors,  which  are  considered  qualified.  A  number  of  these  showed  interest  and 
preliminaiy  discussions  have  been  started.  The  German  government  feels  that  there  are 
good  prospects  to find one ore  several buyers which are willing to  take  over the yards  and 
to  operate them  successfully.  In the worst  case, however,  a temporary  stand-alone  solution 
is  also  considered  as viable,  notwithstanding  the  sincere  intention  to  reach  a  privatisation. 
For the time being the German government  sees, however, no chance to indicate a  definitive 
timetable  for  the  conclusion  of  the  privatisations  and  their  outcomes,  the  more  so,  as  this 
depends to a large degree on the decisions of the Council and finally  the Commission  on the 
various state aiJ aspects. 

12.Obviously, the definitive  production  programme of the two yards will depend  largely on the 
results of a future  privatisation  as well. Especially  if the buyer  is an established  shipbuilder, 
he  will  allocate  contracts  to  the  yards  in  consideration  of  the  combined  production 
capacities  of his group.  The orderbooks  for  1997/8 with their  strong  dominance  of  smaller 
container  ships reflect  the technical  limitations  of the  yards  during  the  restructuring  as  the 
dock  of MTW and the shiplift  in the case of VWS are still under construction1. To  a certain 
extent, the orderbook  particularly  of VWS, is a heritage from the BW  period  as a  number 
of  contracts  were  concluded  in  1995  on  fairly  unfavourable  terms.  Both  yards  take  active 
steps  to  diversify  their  production  programme,  the  more  so  as  the  container  ship  market 
seems to be weakening. MTW obtained  a contract  on a medium  size cruise vessel  and  two 
ice-breaking tankers  and  is in negotiation  about  further  orders  of this type.  The  efforts  for 
diversification  are less advanced in VWS, but first results have been as well by contracts  for 
two  combi-freighters  and  a  dredger  and  several  projects  under  negotiation.  The  yards 
expect therefore  for  the coming years a better market  position and a decreased  dependency 
from  the  container  ship  market.  Notwithstanding  to  this, the  two  yards  with  their  modern 
facilities  expect  to  be  able  to  produce  container  vessels  at  market  prices  after  full 
completion of the restructuring. 

13.The  financial  scope  and  the  principal  technical  elements  of  the  investment  programmes 
remain almost unchanged.  While the consultants  of BvS reviewed  the programmes in depth 
in view of potential  cost  savings, they came to the conclusion that  it was too  late for  major 
modifications.  The vast  majority  of the  contracts  had  already  been  placed  and  works  have 
started  on all major  investments.  Apart  from  that,  it was found  that  commercial  viability  of 
the  yards  could  not  be  achieved  without  the  investments.  This  argument  is  particularly 
important for  VWS which needed to be changed from  a yard equipped for  fishing vessels to 
a  modern  multi-purpose  yard  for  larger  ships.  According  to  the  revised  estimates,  total 
investment  costs  will  increase  by  about  7%  in  comparison  to  the  plans  in  1992/3. In  both 
yards part  of the  cost  increase  is caused  by claims of contractors  related  to  the  collapse  of 
BVV(eg  claims for  interruptions  of works  and  for  late payments).  In the  case  of MTW  the 
remainder  was  caused  by  difficult  subsoil  conditions,  while  in  the  case  of  VWS  the 
investment  programme  was  slightly  modified  to  increase  the  flexibility  of  the  yard.  The 
following  table gives an overview of the old and new investment  budget. 

Table 3:Investments  of MTW and VWS 

I 

MTW 

VWS 

Total investments foreseen under the 
original restructuring  programme 
(1992/93) 
cost increases and modifications 
Total  investments  foreseen  under  the 
revised  restructuring  programme  (1997) 
w/o contingencies 
of which 
paid until  end  1995 
paid in  1996 (provisional) 
to be paid in 1997 
to be paid  1998 
to be paid  1999/00 

. 

562.2 

637.0 

36.0 
598.2 

[ 

42.0 
679.0 

233.5 
148.1 
169.6 
47J) 
O0 

286.4 
158.7 
V75A 
47JS 
19JS 

contingencies 

20.0 

8.7 

The above table shows that the investments are already very advanced  and that the 
programmes will be virtually completed by end of 1998. 

14. While the changes in the investment  programmes  are relatively  minor,  the  financing  of the 
costs changes fundamentally:  First, the own contribution  which was expected  from  BW 
has now  to  be  met by the  state  as new  owner.  Second,  the  shortfall  due  to  the  misuse  of 
some  of the  investment  aid  has to  be met from  the  state  as well.  In  an overview  the  total 
financing  situation is therefore  as following: 

Table 4: Financing of the investments of MTW and VWS 

Total investments foreseen 
(with contingencies) 
total (cash) investment aid released under 
the original programme until end  1995 

of which misused 

investment aid actually received and used 
under the original  restructuring 
programmes until end  1995 
financed from  own sources (1995/6) 
residual funds  of original programme 
released in April  1996 
(state aid case no. N 207/96) 
new funding  envisaged 

MTW 

618.2 

288.8 

-55.3 
233.5 

10.9 
48.4 

325.4 

VWS 

___! 

687.7 

380.0 

-107.2 
272.8 

13.6 

. 

401.4 

of which 

Loans from BvS/Land MV 
(on concessional conditions)10 

_Grant aid_ (Inv.-Zusch\isse) 
Contingencies (potential, aid) 

129.4 

176.011 

|  20.0 

147.0 

245.7 

15.  The  revised  restructuring  plans  envisage  a  drastic  reduction  of  labour  costs  to  gain 
competitiveness.  To  this  end  an  agreement  was  reached  with  the  staff  on  a  substantial 
reduction  of wages. In addition,  staff will be reduced  in steps until end of  1999 from 2029 
to  1128 in VWS and from  1859 to  1184 in MTW. It is argued that this reduction  is caused 
by the strict limitation  of capacity and therefore  production  of the yards. At the  same time 
the increased  competitive pressure  forces the yards to limit staff to the absolute minimum. 
The new and  additional  lay-off  of personnel  is very  painful  in the  present  situation  of  the 
labour  market.  It  is therefore  to  be  assisted  by  a  social  package  of  50.2  mio.  DM  in  the 
case  of VWS  and  26.5  mio.  DM  in the  case  of MTW.  Payments  under  this  package  are 
strictly limited to  severance  payments  (the amount varies according to  social  criteria)  and 
costs  for  temporary  employment  in  the  communal  sector  and  retraining  to  find 
employment 
"ABS-
Gesellschaften"(employment  firms)  have been created,  same as in comparable  cases in the 
region. 

shipbuilding.  For 

so-called 

purpose 

outside 

this 

of 

16.  The  operating  aid  given  to  the  yards  under  the  original  restructuring  programme  had 
basically  three  purposes:  (a)  to  cover  losses  under  contracts  concluded  under  the  old 
regime  (before  1.7.1990),  (b)  to  cover  losses  on  contracts  to  be  handled  during  the 
restructuring  period  (when  productivity  gains from  the  restructuring  are  not  yet  achieved 
and  production  is impeded  by the  reconstruction  works)  and  (c)  to  provide  a  reasonable 
working  capital  base  for  the  yards.  The  first  reason  is  no  longer  relevant.  However,  the 
second and the third are still relevant. 

9 includes 70.4 mio DM investment aid which was paid as loan prior to release of aid by Commission (comp. C7/96) 
10 The concessional elements consist of an interest free grace period of about 2 years and soft  repayment  terms 
(7% interest +  1% repayment  as from  the year 2000) 
"  includes "Abgrenzung MwSt" DM 3.8 Mio 

The notifications  show that both yards face considerable additional production costs until 
end of 1998 as key components (mainly the dock and the shiplifts)  of the installations are 
not yet completed. 
In  addition, the two yards were  stripped  of all free liquidity and liquidable assets in the 
course of the financial breakdown of BW  and due to the misuse of funds. Hence they lost 
all their working  capital  and  all there  reserves which should  have been  served  to  cover 
pending losses under existing contracts. 
On  top  of  that  they  lost  also  some  advance  payments  from  clients  through  the  cash 
concentration system. As the yards have no working capital left  and no securities to  offer, 
they  have  no  access  to  bank financing unless  an  external  guarantee  is  provided.  State 
guarantees  are  also  needed  to  secure  advance  payment  and  performance  bonds  as  no 
commercial bank is presently willing to provide such guarantees without a cash deposit or 
a  counter  guarantee  from  the  owners.  According  to  the  notification,  it  is  planned  to 
address  this  problem first by  the  provision  of  state  guarantees  not  only  for  the  usual 
construction financing but also for a working capital credit line and advance payment and 
performance bonds. In case this proves to be not sufficient  the notification  foresees that an 
increase of equity by an amount of 50 mio DM in MTW and 60 mio DM in  Volkswerft 
will be provided. These amounts have therefore the character of contingencies. 

Same as all other yards in Germany MTW and VWS are to receive contract related aid in the 
form of grants under the "Wettbewerbshilfe"scheme. 
In an overview the amounts of operating aid, including the social aid package described above, 
are given in the following tables: 

Table 5: Total operating aid foreseen for MTW 

1996 
(act.) 

1997 

1998 

1999 

2000 

96/00 

A. Operating  aid linked  to 
the  restructuring 
A. 1 Aid to compensate excess 
production  cost 

A.2 Social aid 
Subtotal A 
B. Operating  aid  equivalent 
of  guarantees 
B.l  construction financing12 
B.2 advance payment bonds 
B.3 performance  bonds 
B.4 working capital credit line 
Subtotal B 
C  Wettbewerbshilfe 

Total operating aid 
(without  contingency) 
For ease of reference: 
turnover13 
total  aid / turnover (%} 
total aid/turnover in period 
1996/98 

D.  Contingency 
potential Increase of working 
capital through increase of 
equity 
Total operating  aid including 
contingency 

65.783 

38.233 

24.051 

2.817 
68.600 

5.520 
43.753 

10.920 
34.971 

1.061 
0.0 
0.0 
0.0 
1.061 
25.445 
95.106 

2.393 
3.439 
1.669 
1.500 
9.001 
41.513 
94.267 

6.918 
1.187 
1.689 
1.500 
11.294 
29.227 
75.492 

o.o-

4.500 
4.500 

10.861 
0.0 
1.176 
1.500 
13.537 
17.842 
35.879 

-

•

-

-

-

.

.. 

-2.790 

125.277 

2.790 
0.0 

26.547 
151.824 

10.482 
0.0 
0.502 
1.500 
12.484 
7.244 
19.728 

31.715 
4.626 
5.036 
6.000 
47.377 
121.271 
320.472 

544.322 

562.493 

485.992 

493.479 

474.796 

2.561.082 

17 

ill 
n 

M 

2 

4 

12 

50.000 

370.472 

12 contract related aid, aid equivalent 10% p.a. of guaranteed amount, in accordance of the "10% rule" applicable in the 
shipbuilding sector 
13 Gross turnover +/- works in progress, minus "Wettbewerbshilfe" 

Table 6: Total operating asd foreseen for VWS 

W 

A. Operating aid linked to 
the restructuring 
A. 1  Aid to compensate excess 
production cost 
A. 2 Social aid 
A. 3 Claims against BvS 
Subtotal A 
B. Operating aid  equivalent 
of guarantees 
B.l  construction financing 
B.2 advance payment bonds 
B.3 performance  bonds 
B.4 working capital credit line 
SubtotalB 
C  Wettbewerbshilfe 
Total operating aid 
For ease of reference: 
turnover16 

total aid / turnover (%) in 
period  1996/98 
D.  Contingency 
potential increase of working 
capital through increase of 
equity 
Total operating aid including 
contingency 

1996 
(act.) 

1997 

1998 

1999 

2000 

96/00 

65.042 

57.631 

5.365 

-0.09 

0.0 

128.029 

5.233 
0.0 
70.275 

35.772 
0.0 
93.403 

9.091 
38.407 
52.863 

0.09 
0.0 
0.0 

0.0 
0.0 

50.186 
38.407 
216.541 

TT 

1.500 

0.0 
0.0 
0.0 
1.500 
8.653 
80.428 
399.512 

13.200 
2.589 
2.800 
1.500 
20.089 
31.018 
144.510 
418.617 

13.540 
1.224 
2.800 
1.500 
19.064 
23854 
95.781 
400.049 

10.950 
0.0 
2.800 
1.500 
15.250 
15.144 
30.394 
361.581 

8.510 
0.0 
1.400 
1.500 
11.410 
6.648 
18.058 
338.654 

46.200 
3.813 
9.800 
6.000 
67.313 
85.317 
369.171 
1.918.413 

26 

60.000 

429.171 

In the case of MTW the total new operating aid linked to the restructuring17  amounts to  167.5 
mio. DM  and  is considerably  less than  the  amount  of operating  aid under  the  old  programme 
which  got  misused.  In  the  case  of  VWS  the  amount  of  new  operating  aid  linked  to  the 
restructuring  is  236.2  mio.  DM,  against  60.7  mio.  DM  misused.  The  tables  above  show 
further  that  due to  the new operating  aid the ceiling is exceeded  in the  period  1996/98  while 
the  current  ceiling would  be respected  in  1999 and  2000  unless the  contingency  amounts  will 
be paid in one of these years. 

17.  According 

to 

the  new  restructuring  concept,  BvS  and 

the  Land  Mecklenburg-
Vorpommern  finance  as  new  owners  the  completion  of  the  restructuring.  Insofar  they 
adopt  the  role  of  Bremer  Vulkan  Verburid  (BW).  In  parallel  all  claims  of  the  yards 

14 The nature and the justification of these claims is still under  examination by BvS,  according to the notification the 
claims are related to social aid for 1995 and unrecoverables from  Schiffscommerz 
15 preliminary estimate 
16 for definition cp. footnote 10 
17 I.e. total aid (before contingency) minus WettbewerbshHfe and construction financing guarantees. These two items are to 
be deducted as these forms of aid are available for all German yards up to the aid intensity of the ceiling. 

10 

against BVV which were filed under the bankruptcy procedure (846.1 mio DM see point 4 
above)  are  ceded  to  BvS,  and  BvS waives  all claims against  the yards.  Such  claims  exist 
concerning: 

-•  an  investment  loan  of  112.4  mio  DM  given  by  Treuhandanstalt  (now  BvS)  to  MTW 

- 

- 

which was not used for investments but was transferred  to BW 
investment  aid  on  an  amount  of  70.4  mio DM  and  0.4  mio.DM  closure  aid  foreseen 
under the  original  aid budget  of Volkswerft  but  disbursed  as a loan from BvS  prior  to 
the release by the Commission and misused in the cash-concentration  system 
regional  development  aid  provided  under  the  "Gemeinschaftsaufgabe"  scheme  on  an 
amount  of  8.15  mio  DM  (MTW)  and  6.3  mio.  DM  (VWS)  which  should  have  been 
retransferred  to BvS but were placed in the cash-concentration  system of B W1 8. 

-

By this arrangement  it  is avoided  that  the financial  situation  of the  yards is influenced  by 
any  repayments  potentially  made  at  the  end  of the  bankruptcy  procedure  of BW  which 
will now be made in favour  of BvS and not to the yards. At the same time it is avoided  that 
the budget  is inflated  by provisions for  repayments of the above claims which would  have 
to be financed  by the recipient BvS, what obviously would make little sense. 

18. 

The  German  government  gave  the  undertaking  that  no  further  restructuring  aid,  rescue 
aid, loss compensation  or aid for  privatization  on top  of the  amounts  notified  now will be 
provided  for  the  yards.  If  one  compares  finally  the  amounts  of the  yards  lost  in the  cash 
concentration  system  and  the  total  amounts  now  needed  for  the  completion  for  the 
restructuring the situation is as following: 

Table 7: Comparison  of misused  funds  and  new aid  required  (mio DM) 

MTW 

VWS 

Total MTW+VWS 

amounts  lost in the  cash 
concentration  system 
of which 
authorised  aid 
total  new aid  notified19 
of which 
investment aid 
new social aid 
operating aid 
potential increase of equity 
(contingency operating aid) 

577.2 

324.9 

449.3 

231.8 
26.5 
141.0 
50.0 

268.9 

97.5 

590.3 

294.1 
50.2 
186.0 
60.0 

846.1 

422.4 

1039.6 

525.9 
76.7 
327.0 
110.0 

18 additional  amounts of 5.65  mio DM (MTW) and 6.0 mio. DM (VWS) were used  for investment  financing  in early  1996; 

these are contained  in the investment  budget 
Aid intensities and aid equivalents as calculated  by the Commission (compare Tables  4/5/6) 

11 

IV. The  Commission  Proposal 

19.1n the  explanatory  memorandum  to  the  proposal  of  the  Commission  for  the  later  Council 
Directive 92/68/EEC which provided  the special rules for the restructuring  of the  shipyards 
located  in  the  former  GDR,20  the  commission  set  out  that  a  balance  had  to  be  found 
between  the  regional  development  and  employment  interests,  for  which  the  modernisation 
of 
east  German  shipbuilding  is  desired  and  the  possible  negative  influence  on  the 
conpetition  situation  of  other  Community  yards  resulting  from  the  aid  given  for  the 
modernisation.  This  general  principle  applied  by  the  Commission  and  the  Council  in  all 
major  restructuring  cases, in particular when a derogation under the respective Directive  on 
aid  to  shipbuilding  is  required,  has  to  be  applied  concerning  the  new  restructuring 
programmes for MTW and VWS as well. An application of Article 92,2  (c) of the Treaty is 
considered  as not  appropriate by the Commission.  This legal provision was not  invoked  for 
the original programme.  It  is not  appropriate to  apply this provision  in the  new  case  as the 
need  for  continued  aid  does  not  result  from  the  partition  of  Germany  but  the  particular 
mishaps  described  above.  The  Commission  can  accept  that  many  of  the  arguments  of  the 
original  derogation  are  still  valid.  Nevertheless,  a  review  is  called  for  in  the  light  of  the 
developments in the past few years. 

20.The structural  problems  in Mecklenburg-Vorpommern persist.  All east  German Lander  are 
now  classified  as  regions  to  be  considered  under  Article  92,  3  (a)  as  areas  where  the 
standard  of  living  is  abnormally  low  and  where  there  is  serious  unemployment.  In  fact, 
Mecklenburg-Vorpommern  is the  poorest  Land  in the  east  of  Germany.  As the  number  of 
jobs  in  agriculture  and  industry  decreased  further  since  1992,  the  unemployment  rate  of 
18.0 %  is far  higher  than  on  average  in Germany  and  the  Community,  and  that,  although 
the  region  faced  a  high  level  of  emigration  in  the  past  few  years.  According  to  recent 
forecasts  economic  growth  will  be  very  limited  in  the  next  years.  This  general  picture 
applies  also  to  Wismar  the  location  of MTW  and  Stralsund  the  location  of  VWS.  In  both 
regions  the  shipyards  are the  principal  employers  and  large  parts  of the  local  economy  are 
linked  to  them.  A  closure  of  the  shipyards  would  be  for  both  cities  a  disaster  as  the 
perspectives to  create new local employment  are bleak in general,  and  even more  so for  the 
specialized  staff of the shipyards. 

21.The perspectives  for  Community  shipbuilding for  the next few  years look  less positive  than 
in  1991/92.  The  sector  is  plagued  by  persisting  overcapacities  as  new  capacities  come  up 
mainly  in Korea  and  China,  and  the  price  level  for  new  ships  remains  depressed.  This  has 
created  severe  difficulties  for  a number  of Community yards in the recent  past  and  in quite 
a few cases these difficulties  continue. 

SEC (92) 991 final, dated 25 May  1992. 

12 

22. On the other hand,  it would  appear  at this stage that  the new aid for  the  completion  of the 
restructuring of MTW and VWS will have no new impacts on competition  in comparison  to 
the  originally  approved  programme.  The capacity  limitations  of  100000  cgt  for  MTW  and 
85000 cgt remain unchanged.  They are in force  since  1 January  1996 and will be applicable 
for  the  same period  as stipulated  under  Article  7 of the  Seventh Directive (i.e.  minimum  5 
years, maximum  10 years). The actual production  in the years  1995 and  1996 was  less than 
10% below this capacity limitation,  as the yards tried to compensate their reduced  technical 
production  capacities  during  the  restructuring  by  a  higher  staff  input  than  which  will  be 
realised  later.  It  seems therefore  reasonable  to  assume  that  the  impact  of  the  continuation 
and completion of the restructurings on the market will be very limited. 

23.In this context,  it  may be also considered  that the  German government  announced  that  the 
Bremer  Vulkan  Werft  in  Bremen-Vegesack  will  be  closed  totally  for  newbuilding  of 
merchant  ships  as  from  summer  1997. Before  the  start  of the financial crisis  of the  group, 
this yard employed  almost 2000 staff.  It is equipped with two dry docks and three slipways. 
The first dry dock  has a dimension  of 337m by  57m for  construction  of vessels of of up  to 
300  000  dwt.  The  second  dry  dock  is  covered  and  has  a  dimension  of  170m  by  25m  for 
ships up  to  25  000  dwt.  Two  of the three  slipways  are taken  out  of  active use  since  1988. 
The  third  one  can  accommodate  ships  up  to  250m  length  and  32m  width.  According  to 
information  from  the yard,  its total  capacity amounts to 225 000 cgt. While this figure may 
represent the maximum attainable capacity rather than the active capacity, it is clear that  the 
closure  of  the  Bremer  Vulkan  Werft  will  result  in  a  substantial  reduction  of  German 
shipbuilding  capacity..  In addition,  German  shipbuilding capacity will be reduced  further  by 
a partial closure of Schichau  Seebeckworft  in Bremerhaven.  The court  administrator  and the 
Land Bremen have, however,  not yet taken a definitive  position on the future  of this yard in 
bankrupcy. 

24. A major  part of the aid to be given for a completion of the restructurings replaces aid which 
was  originally  already  approved  but  was  not  used  for  the  intended  purpose  as  it  was 
misused.  In  fact,  from  the  investigations  on  the  spill-over  and  misuse  of  aid21  it  became 
evident that the misuse occurred  beyond the control  of the yards but through  actions of the 
former  management  of their former  mother company  B W.  In addition, the yards lost  own 
funds  due to  these  imposed  tranfers.  BvS  has filed claims  for  repayment  of  the  withdrawn 
funds  (not  only  the  aid  part)  under  the  bankruptcy  procedure  of  B W.  The  Commission 
investigates the recovery of the aid , seeking for the recovery of the misused aid from  B W, 
and,  if  appropriate  against  companies  formerly  linked  to  the  group  who  actually  benefited 
from  a major  part  of  the  misused  amounts.  It  would  be  difficult  to  reject  consideration  of 
any further  restructuring  aid, given that the yards were not responsible for the misuse of aid 
and  that  they  and  their  staff  faced  already  a  substantial  consequential  damage,  going 
considerably  beyond  the  scope  of  the  misuse.  Notwithstanding  to  this,  the  Commission 
takes, however, the view that the aid foreseen  for the completion of the restructurings  needs 
to be considered  as new aid requiring a new authorisation. 

25. As set out  in Chapter III of the  Seventh Directive, the prime condition for  restructuring  aid 
to  shipyards  is  the  existence  of  a  restructuring  plan  which  does  not  involve  an  increase  in 
the  shipbuilding  capacity.  It  is  shown  above,  that  the  capacity  of  the  yards  will  remain 
unchanged.  However,  the  more  advanced  understanding  of  the  capacity  concept  for 
in  the  industry,  such  as  extended  outsourcing  and 
shipyards  and  new  practices 
subcontracting,  leads to the conclusion  that  the capacity  of a shipyard  depends  not  only  on 

21 state aid case no. C7/96  , for reference  see footnote  no  1 above 

13 

the dimension of the key installations but  also on the actual  production  programme  and  the 
organisation of production.  The Commission and the German government  agreed  therefore, 
that  the respect  of  the  capacity  limit  of the east  German  yards  will  be  enforced  by  a  strict 
control of production.  The Commission will seek technical assistance to check the results of 
the established monitoring system. 

26.1n contrast  to  the  situation  in  1992, very  detailed  restructuring  plans  are  available  now  as 
the works are half completed. The financial calculations should therefore  have a high degree 
of  accuracy.  Remaining  risks  as  regards  the  restructuring  costs  were  addressed  by  the 
provision  of  contingencies  which  will  only  be  used  if  necessary.  After  completion  of  the 
investments, both yards will have modern and  flexible  facilities  which  allow  a high  level  of 
productivity.  The principal risks concerning the viability of the yards after  restructuring  are, 
however,  less  linked  to  the  investments  but  to  the  development  of  the  market  and, 
particularly  in the  case of VWS, the  successful  implementation  of the reorganisation  of the 
yard,  which  is  absolutely  necessary  for  the  achievement  of  competitive  production  costs. 
Obviously  the  important  market  risks  typical  for  shipbuilding  cannot  be  eliminated.  Both 
yards have taken  measures to  reduce their dependency from container  ships which  is partly 
a heritage of the BW  period. 
Diversification  and  reorganisation  measures  are  more  advanced  in  MTW.  In  this  case  the 
information  provided  shows convinvingly that the enormous loss of 577 mio. DM placed in 
the  cash concentration  system is the reason why further  aid  is needed.  Apart  from  that  the 
yard is reasonably well positioned  on the market. 
In the case of VWS the  situation is more complicated.  It needs to be recalled  that  this yard 
had a difficult  starting position as it was specialised on fishing vessels for the former  Eastern 
Block.  It was only privatised  in  1993 and needs a complete reorientation.  It was clear  from 
the  beginning  that  considerable  time  would  be  needed  for  this  process.  In  fact,  the 
privatisation  agreement  envisaged  that  the  first  phase  of  the  restructuring  to  be  financed 
mainly  from  state  aid  would  run  until  end  1997,  while  the  second  phase  to  be  entirely 
financed  from  BW  would  run  until  2005.  From  hindsight,  some  aspects  of  this  phased 
restructuring  can be  questioned.  It  is also clear that  not  only  money but  also valuable  time 
was  lost  due  to  the  disturbances  caused  by the  collapse  of  B W.  In  areas  like  marketing 
VWS was much closer linked to BW  than MTW.  Important  changes in management  took 
place  only  some  months  age.  As  set  out  in  the  notification  and  in  the  reports  of  the 
management  consultants  the  steps taken  in management  and for  rigorous  cost  control  have 
improved the yard's  perspectives. Diversification  has however  also its risks, mainly  in  form 
of  cost-overruns,  but  also  as  VWS  is  not  yet  fully  established  on  the  envisaged  markets. 
Notwithstanding 
these  risks,  the  Commission  can  accept  the  revised  restructuring 
programme  as realistic and viable.The advanced  status of construction  needs to  be taken  in 
consideration  as  well.  In  view  of  the  risks  the  Commission  considers,  however,  the 
continuation  of the  intensive  monitoring,  meanwhile  established  by  BvS,  for  both  yards  as 
indispensable. In addition, the Commission will take measures including visits of the  sites to 
monitor that the conditions of the aid and the capacity limitation are respected  in  agreement 
with the Member  State. 

27.The Commission  takes the view that  the entire envisaged  operating  aid  should  be  assessed 
under  Chapter  II  of the  Seventh  Directive,  even  if the  social  aid  part  is normally  assessed 
under Article 7, and it could be argued that  some of the aid foreseen  to cover  excess cost  of 
production  during  the  restructuring  is from  a technical  point  of view  directly  linked  to  the 
investments  and  should  therefore  considered  as  restructuring  aid  under  Chapter  III.  The 
reasons  for  that  are,  that  for  an  application  of  Article  7  (Closure  Aid)  a  partial  or  total 
closure  of the  same yards  is necessary.  This condition  is not  met here.  The  excess  costs  of 

14 

production  during the restructuring  are rather consequential  costs than  costs  directly  linked 
to the investment as required in Article 6(3). 
The total envisaged operating aid needed for the completion of the restructurings exceeds in 
the period  1996/98 the current  ceiling of 9% of contract  value before  aid  (Article 4)22 and 
of turnover (Article 5) as set under the Seventh Directive. Therefore,  a derogation from the 
provisions  of  chapter  II  of  the  Directive  is necessary  for  this  period.  For  reasons  of  legal 
clarity,  the  Commission  proposes  further  to  stipulate  the  maximum  amounts  of  aid  to  be 
permissable for the completion of each restructuring in the text of the derogation and not  to 
work with a ceiling expressed  as a percentage  of future  turnover.  While a certain  flexibility 
for  reallocation  of  amounts  under  the  individual  items  is  necessary  due  to  changes  in 
contracts,  no  reallocation  of  the  social  aid  or  investment  aid  for  other  purposes  shall  be 
possible.In its evaluation of the notifications  the Commission will assess the justifcation  and 
necessity«of the actual amounts of operating aid to be disbursed,  and in particular the use  of 
the contingencies. 

28.The investment aid foreseen  for the completion of the restructurings will be evaluated  under 
Article 6 of the Seventh Directive. As discussed above, this provision requires that the aid is 
linked  to  a  restructuring  plan  which  does  not  involve  any  increase  in  the  capacity  of  the 
yards. In addition Article 6(3) requires that the  aid intensity is justified  by the extent  of the 
restructuring  involved  and  that  the  aid  is limited  to  supporting  expenditure  directly  related 
to the investment.  At this stage it can be said that the investment  aid and the loans  foreseen 
cover the direct  costs for  the physical modernisation  of the yards. The investment  plans  are 
fully  specified  and  the  vast  majority  of  the  contracts  for 
the  works  are  under 
implementation.  It appears that uncertainties about the final costs are therefore  very limited. 
As  part  of  its  evaluation,  the  Commission  will 
require  evidence  about  the  nature  and 
amounts of the expenditure as a condition for release of the investment  aid. 
The  aid  intensity  which  was  already  exceptionally  high  under  the  original  restructuring 
concepts  increases  further,  due to  the  fact  that  the  originally  envisaged  contribution  of the 
private investor  has now to be taken  over by the state. As the yards have hardly  any  equity 
left,  and  as  the  financial  returns  of  the  investments  are  limited  and  volatile  due  to  high 
sectoral  risks, a financing  of the investments  on a loan basis is only partly possible. For  this 
loan part the yards will pay interest from the year 2000. 
In  view  of  the  particular  history  of  the  projects,  the  Commission  is  at  this  stage  of  the 
opinion  that  it  could  can  approve  the  investment  aid  under  Article  6  of  the  Seventh 
Directive  once  the  derogation  has  been  approved  by  the  Council  for  the  operating  aid 
foreseen. 

29.The  Commission  takes  note  of  the  waiver  of  all  claims  from  earlier  loans  to  MTW  and 
VWS  and  out  of  misused  funds  under  the  "Gemeinschaftsaufgabe"  scheme,  and  of  the 
ceding  of  all  claims  on  deposits  of the  yards  in tiie  cash-concentration  system  of  B W 
to 
BvS. 

14.3.97 

22 The ceiling of 4.5% for  smaller vessels and  for conversions can be disregarded  here, as the yards will be hardly  involved 

in such contracts. 

15 

ANNEX2 

Derogation for Greece  to grant aid towards  the  restructuring  and 
privatization  of the Hellenic  shipyard 

I. 

Background 

Article 5 of the Council Directive 90/684/EEC provides for operating aid to be granted 
for  shipbuilding  yards  up  to  the  ceiling  for  contract-related  production  aid  which  is 
annually set by the Commission. This ceiling has remained unchanged  at 4.5% and 9% 
of the contract value respectively for ship conversion and newbuiiding up to  10 MECU 
and for newbuildings equal or above  10 MECU. 

Article  10 of the Directive excluded Greece from this ceiling and allowed operating aid 
to be paid by Greece to public yards, if linked to their privatisation until 31.12.1991. 

II. 

The Privatisation  of Public shipyards in Greece - Article 10 of the 
Directive 90/684/EEC. 

On the basis  of the undertakings  given by the Greek  Government  that  its public  yards 
would  be  privatised  by  31  March  1993, the  Commission  accepted,  on  23  December 
19921, that the write-off  of the  debts of the four yards  concerned  by  Article  10 of the 
Directive - in the amounts notified  to it - was compatible with the provisions of Article 
10. 

The Elefsis  Shipyard  was  sold in July  19922 and the Nafsi  Shipyard  in  19933.  Failing 
the Greek Government to meet its commitments  on time and after  considerable  delays, 
the  Commission  refused  to prolong  the  deadline  and  initiated,  on  16 February  19944, 
proceedings  pursuant  to  art  93(2)  EC  in  respect  of  the  aid  granted  by  Greece  to  the 
remaining two yards, because Hellenic and Neorion were, at that time, still under  State 
ownership. 

In  summer  1994  the  Greek  Government  succeeded  to  sell  the  Neorion  Shipyard  and 
informed  the  Commission  with  a letter  dated  19 October  1994. The  Commission  tried 
to show flexibility  with respect of the repeated efforts  of the Greek Government to find 
a  solution  with  the  privatisation  of  the  Hellenic  but  at  the  same  time  continued  to 
contemplate  all  legal possibilities  to  ensure  the  enforcement  of the  Directive.  For  this 
reason,  on  26  July  1995,  the  Commission  decided5,  to  close  the  procedure  under 
Article  93(2)  EC,  with  a  positive  decision  for  the  aid  to  Neorion  and  a  negative 
decision concerning the aid to the Hellenic. 

However,  at  the  request  of  the  Greek  Government  claiming  that  the  sale  of  the  yard 
was imminent,  the Commission decided to suspend the notification  of that decision. In 

1  .OJ No C 88, 30.3.93. 
2 sale already acknowledged  in the Commission decision of 23.12.1992. 
3 as informed  by the Greek Government by letter dated 2/6/93. 
4O J N oC  138,20.5.94. 
5 PV(95)  1258, 26.7.1995, SEC(95)  1322/2, 24.7.95. 

At} 

its  September  meetings  the  Commission  put  off  twice  the  execution  of  the  July  1995 
decision. 

In September  1995, the Greek Government notified  to the Commission the sale of 49% 
of the Hellenic  Shipyard's  shares to a co-operative  of the yard's workers. By  doing  so 
Greece  made  use  of  paragraph  3  of  Article  10  of  the  Directive  which  allows  it  to 
maintain  a  51%  majority  holding in  one  of the yards  if justified  by  defence  interests. 
The  process  of  privatisation  was  completed  on  31  January  1996,  when  the  court  of 
Appeal  in Athens  ratified  an  agreement  concluded  between  the  creditors  of  the  yards 
and set the amounts and conditions for the write-off  of the yard's debts. 

Following  the  sale  of  the yard,  a  business  plan  providing  for  the  restructuring  of  the 
yard and its modernisation has been put into place. The number of employees  is going 
to be reduced from 2966 to 2000 and, after  a planned investment for  its modernisation, 
the yard  is expected  to return to profitability  in  1998. As part  of the privatisation  and 
restructuring  process,  in  September  1996, following  an  open  bid,  the  management  of 
the  yard  was  awarded  to  a  private  independent  company.  This  private  company  has 
been nmning the yard since then, with its main task to implement the business plan. 

The  conditions  for  the  Commission  to  approve  the  aid  for  debts'  write-off  for  the 
Hellenic  yard  seemed  to be met.  However,  the amount  of debts to be written-off  has, 
as  informed  by  the  Greek  Government,  increased  due  to  interests  produced  by  the 
existing  debts  on the  31.12.91 (GDR 44 billion)  and  accumulated  until  31.01.96.  The 
current  debts  of  the  yard  amount  to  GDR  112.6  billion.  Out  of  this  amount,  GDR 
11.765  billion  concern  current  business  of  the  yard  and  will  remain  in  its  accounts. 
GDR 46.355 billion  correspond  to  credits for  the building  of military vessels,  activity 
which is outside the  scope of the EC Treaty.  This leaves GDR  54.525 billion,  that  the 
Greek  Government  cannot  write-off  without  the  prior  Commission's  approval.  This 
amount exceeds by GDR  10.525 billion the aid approved by the Commission in 1992. 

The  new  accrued  debts  (GDR  10.525  billion)  are  part  of  the  liabilities  of  the  yard. 
Although related  to the initial  approved  amount,  the  Commission  considers  that  aid to 
cover interests  on an approved  aid, but which was not paid, constitute new  aid as long 
as the potential  aid beneficiary  has not been released from his liabilities for  the  initial 
debts.  The  Commission  considers  that  the  payment  of  the  new  amount  would 
correspond  to  operating  aid.  The  Directive  does  not  provide  for  a  legal  basis  to 
approve such type of aid and Article  10 provided for  such possibility only until the end 
of  1991.  On  the  other  hand  the  new  aid  cannot  be  approved,  under  Article  5  of  the 
Directive, because the aid amount exceeds the applicable ceiling. 

The  Greek  Government  maintains  that the  aid is  essential  for  the  survival  of  the  yard 
and to  sustain the  effort  made to complete  the  restructuring  of the  Greek  shipbuilding 
sector.  They  stress  the importance  of  securing  the  operation  of reliable  ship  repairing 
units  in  the  eastern  Mediterranean  basin  which  constitutes  a  substantial  market  not 
covered  sufficiently  in this sector. 

The  business  plan  prepared  to  allow  the  company  to  reach  its  viability,  is  already  in 
place  but  its  success  depends  upon  the  effective  and  on  time  implementation  of  all 
measures. It is based  on the assumption that the debts of the yard will be written  off  as 

p 

approved by the decision of the Greek Court of Appeal. An important investment plan 
is foreseen to be shortly implemented in order to modernise the yard. 

It must also be noted that the uncertainty regarding the clearance  of the yard's  debts 
makes the banking institutions reluctant to grant any further  credit to the yard putting 
thus in risk the whole restructuring process. 

i n.  Assessment by the Commission 

The shipbuilding industry is of strategic importance for Greece due to the high number 
of  workers  involved  (almost  9  000)  and  the  geography  of  the  country  where  most 
communications between the many islands depend on maritime transport. 

The Commission acknowledges the important effort  Greece has made by trying to find 
a solution for the privatisation  of all its yards within the framework of the Directive. 
For this reason, the Commission has accepted the delay in the disposal of the yards by 
sale but considers that the Directive does not provide a legal basis for it to approve aid 
above  the  amounts  approved  in  1992  which  correspond  to  the  debts, existing  on 
31.12.1991. 

Considering, however, that the conditions for the yard to become viable have been met 
and in view of the social and strategic importance of that yard for  the region  and the 
whole country, the Commission takes the view that it is reasonable to provide a basis 
for  declaring compatible aid for  debts' write-off  to cover the debts existing when the 
privatisation took place and in the amounts as ratified by the Greek Court. 

* 

Annex 3 

Derogation for Spain to grant aid towards the restructuring of the publicly-

owned yards 

1. 

Background 

1.1  During the closing stages of the negotiation of the OECD agreement  respecting normal 
competitive  conditions  in  the  commercial  shipbuilding  and  shiprepair  industry,  Spain 
outlined  plans for  additional  restructuring  of its shipbuilding  industry,  entailing  further 
substantial  workforce  reductions  and  a  capacity  reduction  of  30,000  cgrt  (from 
400,000 cgrt to 370,000 cgrt). 

1.2 

Accompanying  note  1 to  Annex  II  of the  agreement1,  which  has  not  yet  entered  into 
force,  provides  for  a  derogation  for  certain  Member  States,  including  Spain.  The 
derogation  provides  that  in  Spain's  case  restructuring  aids  up  to  180  billion  pesetas 
may be paid up until 31 December  1998, made up as follows: 

(a) 

assistance for  social measures; 

assistance  for  restructuring  costs  incurred  before  the  date  of  the  agreement, 
(b) 
committed  by the  Spanish  Government,  and  approved  by the  Commission  before  that 
date, but have not been paid due to budgetary problems; 

other  assistance  committed  and  paid  on  the  basis  of  costs  incurred  before  1 
(c) 
January  1996 or investment  assistance paid  after  1 January  1996 (up  to  a maximum  of 
10 billion pesetas). 

1.3 

In November  1995 the  Spanish  authorities  notified  the  Commission  of  its  plans  under 
the derogation to grant  aids in support of the restructuring  of the publicly-owned  yards 
within  the  Division  de  Construcciôn Naval  (DCN),  up  until  31  July  1995  part  of  the 
Instituto Nacional de Industria (INI), but now part of the State owned holding Agencia 
Industrial del Estado (AIE). 

1.4 

The aid notified was made up as follows: 

billion pesetas 

Outstanding previously approved loss 
compensation aid, but not paid due to 
budgetary constraints, as at 31 December  1994 
(capital + interest) 
Social aids 
Investment 

89.104 

80 
10 

1.5 

In December  1995 the Commission decided2: 

to  approve  the  89.104 billion pesetas loss  compensation  aid  as being  in  accordance 
with  Article  5A  of  the  shipbuilding  aid  directive  (90/684/EEC,  as  amended  by 
Directive 94/73/EC)3; 

OJ C375 of 30 December  1994, p3 
OJ C 75 of 15 March 1996, p.  2 

-n 

to open the Article 93.2 procedure in respect of proposed future tax credits amounting 
to approximately 48 billion pesetas in the period 1995-1998, which could constitute an 
additional aid; and 

to  continue its preliminary  examination  of the  remaining  aspects  of the case  (the  80 
billion  pesetas  social  aid  and  10  billion  pesetas  investment  aid,  plus  additional 
payments totalling a further  62 billion pesetas apparently already made in the  period 
1988  to  1994 to  cover  interest  charges  on unpaid  loss compensation  aid,  contract-
related production aid and restructuring aid). 

1.6 

1.7 

1.8 

On  8 January  1997 the  Commission  decided  to  extend  the  Article  93.2  procedure4  in 
order formally  to  investigate the remaining aspects above; plus extraordinary  payments 
of 7.355  billion pesetas  in  1991 and  1993, possible  aids  since the  plan was  notified  to 
enable the yards to  continue to  operate  despite  mounting  losses,  and the  compatibility 
of the Astano yard's activities with the condition  attached  to  a  1991 aid  authorisation5 
that the yard should be closed to shipbuilding. 

Against  this  background,  during  the  course  of  February  and  early  March,  Spanish 
Government  has submitted  supplementary  information  including a revised  restructuring 
plan  together  with  further  and  updated  details  of  the  public  financial  assistance 
measures involved. 

Since these  measures  include  aid  elements  that  are  inccmpatible with  the  shipbuilding 
aid  directive,  a derogation from the uirective is necessary before  these measures  could 
be approved by the Commission. 

1.9 

This communication outlines the Commission's proposals as regards such a derogation, 
including the conditions that would be attached thereto. 

2. 

The  Spanish  public  yards 

2.1 

According to information  provided by the Spanish authorities at the time of the request  for 
the OECD derogation, the public yards had a total capacity of 240,000 cgrt and comprised 
three  large yards  (Puerto  Real,  Sevilla and  Sestao) with  a  combined  capacity  of  195,000 
cgrt  and three medium sized yards (Juliana and Barreras, plus Astander) with  a combined 
capacity of 45,000 cgrt. The balance of Spain's 400,000 cgrt total shipbuilding capacity was 
in the private sector yards (21 yards), with a combined capacity of 160,000 cgrt. 

OJL351 of 31 December 1994,pl0 
OJ C 53 of 22 February  1997, p. 3 
Case C 26/89, OJ C 66 of 14 March  1991, p. 10 

ZO 

2.2 

As at 31 December 1994 the public yards and their activities were as follows: 

AES A Puerto Real 
AES A Cadiz 
AESA Sevilla 
AESA Sestao 
Astander 
Juliana 
Astano 
Barreras 

Newbuilding 
Repair and conversions 
Newbuilding 
Newbuilding 
Repair and conversions 
Newbuilding 
Offshore and repair 
Newbuilding 

2.3 

2.4 
* 

2.5 

Astano, which had a capacity of 135,000 cgrt, is supposed to be closed to newbuilding until 
March } 997 as a condition of the 1991 loss compensation aid authorisation. 

Since just  prior  to  Spain's  accession  to  the  Community  there  has  been  a  number  of 
efforts  to  restructure  the  Spanish  shipbuilding  industry.  Since  1984  there  has  been  a 
reduction  in  capacity  from  1  million  tons  to  cgrt  to  400,000  cgrt  as  referred  to 
paragraph  2.1  above.  During  the  same period  there  was  a reduction  in the  workforce 
from 40,000 to  14,750 (as at 31 December  1993). 

To  facilitate  this  restructuring  process,  under  the  Sbcth  and  Seventh  shipbuilding  aid 
directives up until 1  January  1992 Spain was exempted from the general operating aid rules 
laid down under the directive, provided that the restructuring  effort  continued  and the aid 
level  was  progressively  reduced.  In  addition  to  these  aids, the  Commission  authorised  in 
1991 (case C 26/89) loss compensation aid to the public yards covering the years  1987 to 
1992 amounting to 126.779 billion pesetas. 

Despite the various  measures taken,  the publicly-owned  yards  continued  to  experience 
serious financial problems  due  to  a  number  of  factors  such  as  the  prevailing  difficult 
market  situation (characterised  by a high level of under-activity  at the yards) as well as 
delays in the receipt of aid payments due to budgetary constraints. 

The public yards have therefore  continued  to  make  substantial  losses,  as  shown  in  the 
following  table 

1990 

1991 

1992 

1993 

1994 

Turnover 
Net loss after tax 

91,478 
9,179 

98,283 
6,654 

106,137 
15,843 

95,593 
32,525 

85,983 
27,221 

2\6 

During  this  period  the  after  tax  losses  were  approximately  28%  lower  than  losses 
before  tax  since  INI  was  able  to  use  DCN's  losses  to  offset  profits  elsewhere  in  the 
group,  with  DCN  benefiting  from  the  resulting  tax  credits.  (The  turnover  figures 
include aids received in the form of contract-related  operating aid and restructuring  aid, 
but not loss compensation aid). 

2.7 

Operating losses in  1995 and  1996 were of the order of 40 billion pesetas and 37 billion 
pesetas respectively. 

LI. 

2.8 

2.9 

Against this background, during the course of  1995 a further restructuring plan for the 
public  yards  was  drawn  up.  Parts  of  this  plan,  particularly  as  regards  workforce 
reductions, have already been implemented as from 1 January  1996.  Other elements  of 
the original plan have been reinforced through additional measures. 

The objective of the restructuring plan is a return to break even results by 1998, both at 
the level of individual yards and at the level  of DCN  as a whole.  The key elements  of 
the plan can be summarized as follows: 

restructuring of the corporate structure so that each yard is treated as a separate 
entity 

a reduction in costs of material supplies of 8% 

a reduction in the workforce from 10,017 at the end of 1994 (compared with 
over 25,000 in 1984) to 6100 at the end of 1998 (of which only 3789 will be 
engaged in newbuildings) 

a wage freeze in 1997 and 1998 

greater flexibility in working practices and increased employee mobility between 
yards 

based on the current orderbook and further contracts signed and under 
negotiation, to make optimum use of available capacity 

investments in improved technology 

a 35% increase in newbuilding productivity (currently around 36 cgt per man 
year, compared with  16 cgt per man year in 1988) 

a reduction in financial charges to 4% of turnover 

3. 

Proposed Financial  Assistance 

3.1 

It is proposed that these further restructuring measures would be underpinned by public 
financial  assistance totalling  179.104 billion pesetas, made up as follows: 

(i)  Social aids 
(ii)  Investment aids 
(iii)  Loss compensation from the past 

billion pesetas 

80 
10 
89.104 

11 

Social Aids 

3.2 

The social aids are broken down as follows: 

Costs of workforce  reductions prior 
to 31 December  1995 
Costs of subsequent workforce  reductions 
Contingencies 

billion pesetas 

5.229 
65.777 
8.994 

3.3 

A  large  number  of  the  workforce  reductions  have  already  been  made,  the  current 
workforce being around 7000. As at 31 December  1996, 66.816 billion pesetas of total 
aid  had  already  been  paid,  the balance  of  13.184 billion pesetas  forecast  to  be  paid  in 
1997. 

3.4 

The breakdown by yard of the workforce  reductions will be as follows: 

Yard 

Workforce 
Workforce 
end  1994 

Workforce 
Workforce 
end  1998 

Reduction 

Puerto Real 
Sestao 
Sevilla 
Juliana 
Barreras 
Astano 
Cadiz 
Astander 
Corporate  services etc. 

2031 
2458 
679 
720 
454 
1971 
615 
433 
656 

Total 

10017 

1390 
1230 
364 
450 
355 
1180 
390 
292 
449 

6100 

641 
1228 
315 
270 
99 
791 
225 
141 
207 

3917 

Investment  Aids 

3.5 

The investment  aids totalling  10 billion pesetas  are  due to  be paid  by the  end  of  1997 
and cover  a range of investments in &-Î yards covering inter alia, integrated  engineering 
systems,  improved  production  processes  and  product  flows  (including  CAD/CAM), 
establishment  of  research  and  development  centre  environmental  measures  etc.  The 
breakdown is as follows: 

Technical  information 
Plant modifications  linked to improved product  flows 
Improvement  of the workshop installations and flows 
Adaptations for new products 
Improvements of slipways and docks 
Implementation of new technologies 
Soldering  equipment 
Improvements in environmental impact 
Improvements of auxiliary  services 
Improvement  of plant's  services 
Adaptation of stores 

million pesetas 
476 
2511 
1327 
900 
1034 
660 
120 
1080 
116 
516 
77 

^> 

Maintenance and replacement 
Safety improvements 
Quality control 
Improvements in information systems 
Improvements in workshops and machines for repairs 
Improvements in engine workshop 
Engine tooling 
Various 

TOTAL 

277 
237 
26 
36 
170 
227 
85 
125 

10000 

Zh 

3.6 

The breakdown by yard of these investments will be as follows: 

Yard 
Puerto Real 
Sestao 
Sevilla 
Juliana 
Barreras 
Astano 
Cadiz 
Astander 
Corporate services etc. 

TOTAL 

bnPTAs 
1.75 
3.3 
0.35 
0.35 
0.3 
1.85 
0.35 
0.25 
1.5 

10.0 

Loss compensation 

3.7 

The  loss  compensation  aid  of  89.104  billion  pesetas  is  made  up  of  64.196  billion 
pesetas  covering  the  unpaid  balance  as  at  31  December  1994  of  the  126.779  billion 
pesetas loss compensation aid approved in 1991 for the years  1987 to  1992 but delayed 
due to  budgetary  constraints,  plus 24.908 billion pesetas  covering  the  interest  accrued 
due  to  the  delays  in  payment.  This  part  of  the  aid  package  was  approved  by  the 
Commission  in  December  1995.  The  breakdown  by  yard  for  these  outstanding 
payments was due to be as follows: 

Billion pesetas 

AESA 

Barreras 

Astano 

Juliana 

Astander 

Total 

1995 
1996 
1997 
1998 

Total 

24.706 
30.194 
12.244 
3.476 

0.381 
0.104 
0.210 
0 

5.924 
1.579 
3.025 
1.180 

2.045 
1.580 
0.719 
0.153 

70.610 

0.695 

11.708 

4.497 

0.59 
0.468 
0.461 
0.075 

1,594 

33.646 
33.925 
16.659 
4.884 

89.104 

3.8 

According  to  the  Spanish  authorities,  as  at  31  December  1996  only  39.376  billion 
pesetas  had  been  paid.  47.047  billion pesetas  is now  scheduled  for  payment  this  year, 
with the remaining balance (2.681 billion pesetas) to be paid in 1998. 

Other measures 

3.9 

In  addition  to  the  above  measures,  the  Spanish  authorities  have  informed 
the 
Commission that in the light of forecast  losses in 1997 higher than those assumed  under 
the  plan,  an  additional  capital  injection  of  15  billion  pesetas  will  be  necessary. 
Furthermore,  the yards will also  receive benefits  from  tax  credits  now  estimated  at  58 
billion pesetas in the period up to end  1998 (up from  the 48 bn pesetas figure subject  to 
the Article 93.2 procedure). 

is 

(As  noted  above  in  paragraph  2.6,  in  the  past  DCN's  after  tax  losses  were  reduced 
through  the  State  shareholder  INI,  in  accordance  with  normal  Spanish  practice  in 
relation to holdings, offsetting  before tax losses against  profits  elsewhere  in the group. 
DCN obtained a share of the resulting tax credits. The DCN restructuring plan assumes 
such  credits  will  continue  to  be  available  in  the  future  despite  the  fact  that  since  1 
August  1995 DCN has formed  part of the loss making state holding company ATE). 

3.10 

In addition to these measures it appears that  during the period  1988 to  1994 the yards 
received  additional payments totalling  62.068 bilhon pesetas to  cover  interest  on  loans 
taken  on  to  cover  delays  in  the  payment  of  previously  approved  aids.  This  sum 
comprises  24.325  billion  pesetas  relating  to  unpaid  contract-related  and  restructuring 
aid;  and  37.703  billion pesetas  to  cover unpaid  loss compensation  aid.  The  yards «also 
received  extraordinary  payments  from  INI  totalling  7.355  billion  pesetas  in  1991  and 
1993  to  cover  the  costs  of  workforce  reductions  in  those  years  [amounting  to  3.980 
billion  pesetas  (300  workers)];  and  the  costs  of  indemnities  arising  from  the  Amoco 
Cadiz acident in  1978, amounting to 3.375 billion pesetas. 

4. 

Capacity  reductions 

4.1 

Under the restructuring plan it is proposed  that a 30,000 cgrt  capacity reduction  in the 
public yards would be achieved with immediate effect  through: 

• 

• 
• 
• 
• 

the  cessation  of  newbuilding  at  Astander  (last  vessel  completed  1990),  with  the  yard 
focussing  exclusively on conversion and repair. 
the closure of a dry dock ( 146.6 m x 21.8 m) at  Sestao 
the non-utilisation of a dry dock (148.7 m x 22.5 m) at Sevilla 
the closure of a slipway (60 m x  15 m) at Sevilla 
the closure of a slipway (67 m x  14 m) at Barreras. 

4.2 

This  would  result  in total  capacity  in the  public  yards  reducing  from  240,000  cgrt  to 
210,000 cgrt; this being broken down by yard as follows: 

Puerto Real 
Sestao 
Sevilla 
Barreras 
Juliana 
Astander 

Current 

80,000 
85,000 
30,000 
18,500 
18,500 
8.000 
240,000 

cgrt 
Proposed 

75,000 
75,000 
23,000 
18,500 
18,500 
0 

210,000* 

Reduction 

5,000 
10,000 
7,000 
0 
0 
8.000 
30,000 

(*  this  overall  capacity  level  would  be  respected,  although  variations  at  individual 
yards could be possible within the overall level). 

4.3 

The  Spanish  authorities  have  also given  an undertaking  that  the  Astano  yard  (capacity 
135,000  cgrt),  which  in  accordance  with  the  1991  aid  authorisation  referred  to  at 
paragrah 2.2  above could be reopened for  shipbuilding as from the end of March  1997, 
will remain closed for  such activities. 

if 

4.4 

In addition there would be a capacity reduction of 17,500 cgrt reduction in the private 
sector yards through closures and/or changes of activity. 

4.5 

The private sector contribution would be as follows: 

Yard 

Capacity 
reduction (cgrt) 

Year  of  closure  New activities (if any) 
(newbuilding) 

Atlantico 

10,000 

Ardeag 

Luzuriaga 

2,000 

2,5006 

1990 

1993 

1995 

Mallorca 

3,000 

1995 

5. 

The Commission's position 

Total  closure  (dismantling 
of installations) 
Total  closure  (dismantling 
of installations) 
Change  of  owner;  now 
mainly  conversion/repair, 
plus building small vessels 
Repair 

5.1 

5.2 

The  need  for  a  further  restructuring  of  the  publicly  owned  yards  in  Spain  was 
foreshadowed  in the OECD agreement. 

Council Regulation 3094/95 is intended to give effect  to the state aid provisions of the 
agreement.  However  in  the  absence  of  entry  into  force  of  the  OECD  agreement, 
Council  Regulation  1904/96  states that  the  rules  of  the  Seventh  directive  on  aid  to 
shipbuilding  (90/684/EEC,  as  most  recently  amended  by  directive  94/73/EC)  shall 
continue to apply until the agreement enters into force and until 31 December  1997 at 
the latest. 

5.3 

It follows that in assessing this case the Commission, while being mindful of the history 
of the provisions of the OECD agreement, should take the rules of the directive as its 
point of departure. In particular in its approach the Commission needs to establish 

whether and to what extent the public financial measures involved constitute state 
aids and if so whether these are compatible with the shipbuilding directive 

whether the nature and extent of the capacity reductions are sufficient  counterpart 
to the aid to minimise distortions to competition in general and to fulfill the 
requirements of the directive (having regard also to the history of the OECD 
derogation) in particular; and 

whether measures envisaged in the plan will lead to a return to viability for the 
yards (to obviate the need for further aids in future). 

Viability 

5.4  According  to  the  Spanish  authorities,  if  all  the  measures  under  the  plan  are 
implemented in full, the yards should achieve viability very quickly, by the end of 1998. 
In any event, if any individual yard does not return to viability by that date the yard(s) 
concerned  will  not  be paid  any more aid  except  closure  aid  and  contract-related  aid 

Reduced from 5,000 cgrt 

2> 

linked to  future  contracts  in accordance  with  then  prevailing  rules  for  the  shipbuilding 
sector.  The  Commission  considers  at  this  stage  that  this  provides  a  sufficient  test  of 
viability  and  will  ensure  that  this  is  achieved  by  making  it  a  condition  of  the  aid 
approval.  This  approval  would  also  be  contingent  on  close  monitoring  by  the 
Commission,  if necessary assisted by independent  experts, to  ensure that  the  necessary 
level of viability (ie break even) is achieved. 

Capacity reductions 

5.5 

5.6 

5.7 

5.8 

5.9 

As regards capacity reductions, according to the Spanish authorities last year the public 
yards  were  operating  at  almost  100%  capacity,  producing  some  230,000  tons.  The 
reductions proposed  can therefore be regarded as a genuine reduction in real capacity. 

The  Spanish  authorities  have  also  undertaken  that  production  at  the  yards  will  not 
exceed  the  reduced  capacity  of  210,000  cgrt.  The  Commission  will,  assisted  by 
independent experts, undertake a close monitoring of actual production levels to  ensure 
that  this  level  of  production  is  not  exceeded.  In  accordance  with  the  principles  of 
Article 7.1 of the directive this would be for a period of  10 years starting from the  date 
of the Commission's eventual approval of the aid package. 

The Commission also notes the undertaking of the Spanish authorities that the available 
135,000  cgrt  capacity  of  Astano  will  not  reopen  to  shipbuilding.  This  will  make  a 
further  significant  contribution  since otherwise, notwithstanding the capacity  reductions 
proposed, there would be a large net increase in DCN's overall capacity. 

There  remains  however  a  question  over  Astano's  activities  in  respect  of  floating 
production  storage and offloading  vessels (FPSO's), which have included  newbuildings 
and conversions. 

The Spanish authorities consider that FPSOs are not vessels falling within the  definition 
of  shipbuilding  under  the  directive.  They  maintain  that  such  vessels  only  have  power 
and  steering  capability  to  maintain  position  and  to  move  around  the  production  area 
and  require  tugs  to  move  greater  distances.  However,  the  Commission  at  this  stage 
continues to  have doubts.  In  its view,  FPSOs  are metal-hulled  seagoing  vessels  falling 
within  the  directive  unless  the  completed  vessel  is  incapable  of  directed  movement 
except by external assistance or methods such as windlass and anchors. 

5.10  The Commission therefore  at this stage intends to seek independent  technical  advice so 
that  the  issue  of FPSOs  can  be  examined  further  within  the  context  of  discussion  this 
Autumn on future  aid policy for the shipbuilding sector. 

Public financial  assistance 

5.11  As  noted  in  paragraph  3.1  above,  apart  from  the  89.104  billion  pesetas  loss 
compensation  aid  already  approved  by  the  Commission  under  Article  5A  of  the 
directive,  the  notified  aid  measures  comprised  social  aids  of  80  billion  pesetas  and 
investment aids of  10 billion pesetas. 

5.12 

So  far  as the  social  aids  are  concerned,  Article  7 of the  directive  states  inter  alia  that 
social  aids  to  defray  the  normal  costs  resulting  from  the  partial  or  total  closure  of 
shipbuilding  or  ship  repair  yards  may  be  considered  compatible  with  the  common 

10 

1* 

market provided that the capacity reductions  resulting from such aid are of  a genuine 
and irreversible nature.  This condition appears at this stage to  be fulfilled  in this case. 
Similarly the unnotified  3.980 billion pesetas social aid paid in  1991  and  1993  could at 
this stage be regarded as falling within the overall restructuring of the yards and thus be 
compatible with Article 7 of the directive. 

5.13  As  regards  the  investment  aids  of  10  billion  pesetas,  according  to  Article  6  of  the 
directive,  investment  aid  may not  be  granted  for  shipbuilding  unless  it  is  linked  tô  a 
restructuring  plan which does  not  involve  any increase in the  shipbuilding  capacity  of 
the yard or unless it is directly  linked to  a corresponding  irreversible  reduction  in the 
capacity of other yards in the same Member State over the same period.  Such aid may 
not be granted to ship repair yards unless linked to a restructuring plan which results in 
a reduction in the overall ship repair capacity in the Member State concerned. 

5.14  Since no increase is proposed in shipbuilding capacity in the yards concerned and there 
is a decrease in shiprepair capacity (based on workforce  reductions),  the conditions  of 
Article 6 appear at this stage to be respected. 

5.15  The  Commission  therefore  concludes  that  it  is  likely  that  all  the  outstanding  aids 
notified  pursuant to  the  OECD  derogation  can be approved  as being  compatible  with 
the directive, as can the social aids from the past. 

£  16  There remains however the various other measures linked to the restructuring. 

5.17  As regards the additional payments totalling 62.028 billion pesetas to cover interest on 
unpaid  aids  during the  period  1988-94,  according  to  the  information  available  to  the 
Commission this sum comprises 24.325  billion pesetas to  cover interest  due on unpaid 
previously  approved  contract-related  production  aid and restructuring  aid; and 37.703 
billion pesetas to cover interest on unpaid previously approved loss compensation aid. 

5.18  The  Spanish  authorities  maintain that the payments constitute  a measure  of  a general 
nature applicable to any firm in such circumstances and that the  State, through INI, as 
then  shareholder  of DCN,  was  legally  obliged  to  make  such  payments.  However,  the 
Commission  continues  to  have  doubts  whether  there  was  such  an  obligation.  The 
decision  to  make  the  payments  appears  to  have  been  a  unilateral  and  discretionary 
action. 

5.19  Although  the  Commission  recognises  that  the  payments  probably  did  not  ccnfer  any 
economic  benefit  on the yards  since  the  extra  money  was  intended  only  to  cover  the 
financial  charges incurred by DCN in obtaining loans to cover the shortfall in aid due to 
delays  in  payment,  it  must  be  concluded  at  this  stage  that  the  interest  payments 
represent' a new  aid.  This  is  consistent  with  the  approach  followed  in  relation  to  the 
89.104  billion  loss  compensation  aid  provided  for  in  the  OECD  derogation  and 
approved under Article 5 A of the directive, which similarly includes interest payments. 

5.20  The directive does not provide a legal basis for approving such aids, which represent an 

additional operating aid in excess of the aid ceiling. 

11 

Zf 

5.21 

So far as the tax credits of 58 billion pesetas are concerned, it appears that in the past, 
after tax losses were reduced through INI, in accordance with normal  Spanish practice 
in  relation  to  holdings,  offsetting  before  tax  losses  against  profits  elsewhere  in  the 
group.  The financial projections  under  the  plan  assume  that  such  tax  credits  will 
continue to be available up until the end of 1998. 

5.22  The  Spanish  authorities  have  introduced  a general  law  applicable  to  all  companies in 
such  a  position  allowing  them to  receive from the  state  equivalent  amounts  to  what 
they  would  have  been  entitled  under  a tax  consolidation  system.  It  is  proposed  that 
such  arrangements  would  apply  until  31  December  1999.  According  to  the  Spanish 
authorities  such  a general  measure  would  not  constitute  a state  aid.  However,  in the 
absence  of  any  evidence  as  to  who  apart  from  the  yards  would  be  the  potential 
beneficiaries,  the  Commission  considers  at  this  stage  that  the  measure  is  a  specific 
measure  in  favour  of  DCN  which  constitutes  a  state  aid  incompatible  with  the 
shipbuilding directive. 

5.23  The  proposed  capital  injection  of  15  billion  pesetas  in  1997  to  cover  greater  than 
expected  losses is also at this stage considered to be a state aid incompatible with the 
directive. 

5.24  Finally as  regards the  extraordinary  payment by INI  of  3.375  billion  pesetas  to  cover 
liabilities  arising from the  Amoco  Cadiz accident,  the  Commission  acknowledges  that 
these date back to  1978, prior to  Spain's accession to the Community,  and it therefore 
considers at this stage that the payments should not be regarded as state aid within the 
meaning of the Treaty. 

5.25 

It  follows  from  the  above  that  of  the  various  aids  involved,  amounting  to  a total  of 
318.112 billion pesetas,  183.084 billion pesetas have been or could be approved under 
the  shipbuilding  aid directive,  leaving  a balance of  135.028  billion pesetas  requiring a 
derogation, made up as follows: 

Interest payments  1988-94 
Tax credits 1995-1999 
1997 capital injection 

bn ptas 
62.028 
58.00 
15.00 
135.028 

12 

ISSN 0254-1475 

COM(97)  132 final 

DOCUMENTS 

EN 

07 

Catalogue  number  :  CB-CO-97-119-EN-C 

ISBN  92-78-17481-5 

Office  for  Official  Publications of the European  Communities 

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