1999/142/EC: Commission Decision of 25 February 1998 on development aid granted by Germany for the construction of a dredger sold to Indonesia (notified under document number C(1998) 583) (Only the German text is authentic) (Text with EEA relevance)
Date: 1998-02-25
Institutions: European Commission
Subjects: Germany, Indonesia, State aid, building subsidy, development aid, shipbuilding

L 46/52

EN

Official Journal of the European Communities

20. 2. 1999

II

(Acts whose publication is not obligatory)

COMMISSION

COMMISSION DECISION

of 25 February 1998

on development aid granted by Germany for the construction of a dredger sold to
Indonesia

(notified under document number C(1998) 583)

(Only the German text is authentic)

(Text with EEA relevance)

(1999/142/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European
Community, and in particular the first subparagraph of
Article 93(2) thereof,

Having regard to Council Directive 90/684/EEC of 21
December 1990 on aid to shipbuilding (1), as extended by
Council Regulation (EC) No 3094/95 of 22 December
1995 on aid to shipbuilding (2), as last amended by Regu-
lation (EC) No 2600/97 (3), and in particular Article 4(7)
thereof,

Having, in accordance with Article 93 of the EC Treaty,
given notice to the parties concerned to submit their
comments, and having regard to those comments,

Whereas:

I

the aid appeared to enable the supplier to charge a price
below the market price in Taiwan and Thailand where the
in
supplier
competition with other companies supplying dredging
services.

international

participated

tenders

in

By letter SG(94) D/6533 of 17 May 1994 to Germany, the
Commission had approved the granting of development
aid in connection with the sale of three dredgers by
Volkswerft Stralsund to the Indonesian public corporation
Pengerukan (‘Rukindo'). Rukindo is a State limited-liab-
ility corporation, 100 % of its shares being owned by the
Ministry of Finance. The development aid was granted in
the form of a loan from the Reconstruction Loan
Corporation (Kreditanstalt f(cid:129)r Wiederaufbau). The loan
covered 90 % of the contract value for a period of 11
years at an interest rate of 3,5 %. The OECD aid equi-
valent was 25,35 %. The borrower was the Republic of
Indonesia, represented by the Ministry of Finance.

By letter dated 3 January 1996, the European Dredging
Association lodged a complaint concerning the sale of
three dredgers by Germany to Indonesia. The Association
suspected that the aid granted in connection with the sale
was in breach of Council Directive 90/684/EEC (Seventh
Directive on aid to shipbuilding). According to the letter,

(1) OJ L 380, 31. 12. 1990, p. 27.
(2) OJ L 332, 30. 12. 1995, p. 1.
(3) OJ L 351, 23. 12. 1997, p. 18.

In the German notification of the proposed aid submitted
on 24 March 1994, it was stipulated in which locations in
Indonesia the dredgers were to be used. In its letter to
Germany approving the aid, the Commission stated that
the dredgers were to be used only in Indonesia (‘Die
neuen Bagger
sollen allein in Indonesien eingesetzt
werden,

. . .').

20. 2. 1999

EN

Official Journal of the European Communities

L 46/53

II

in
compatibility with the common market were still
evidence. The German Government was informed of this
by letter dated 15 April 1997.

Since the use of the dredgers appeared to differ from the
conditions under which the aid was approved and since
no amendments had been notified by Germany,
the
Commission sent a letter to the German Government on
31 July 1996 requesting information on the use made of
the vessels, the level of aid granted and the financial
situation of the Indonesian company.

Following an extension of the time limit, the German
Government provided the relevant information by letter
dated 6 November 1996. The letter confirmed that one
dredger had been used outside Indonesian territorial
waters, in Malaysia. The letter did not mention any opera-
tions in Taiwan or Thailand, as reported by European
Dredging Association.

The German Government claimed that the dredger could
not operate optimally in Indonesian waters due to delays
in a number of large harbour-building projects for which
the dredger had originally been acquired. Furthermore,
the use of the dredger in Malaysia formed part of a
subcontracting order for an Indonesian firm, and Rukindo
had not participated directly in international invitations
to tender. Furthermore, the German authorities undertook
that they would draw the Indonesian government’s atten-
tion to the fact that the use of the dredgers must be in
accordance with the purpose for which they had ori-
ginally been acquired.

The German Government could not provide information
on Rukindo’s financial situation since this subordinated
body did not draw up any certified and informative
annual reports and since no direct
loan relationships
existed with the company.

III

In the light of the answer given by the German Govern-
ment, the Commission took the view that the manner in
which the dredgers had been used did not comply with
the approval given by the Commission in its letter of 17
May 1994 and with the development aid conditions laid
down in Article 4(7) of the Seventh Directive on aid to
shipbuilding. At that stage it was not clear whether the
project had a development content.

Accordingly, the Commission decided to initiate Article
93(2) proceedings in order to allow it to examine whether
the aid had been granted and used in line with its
approval of 17 May 1994, and in particular whether the
development content of the aid project and its overall

IV

Following publication of a notice on the initiation of
proceedings (1), the Danish Government and European
Dredging Association submitted their comments. They
took the view that the use of the dredgers was not in
accordance with the conditions
laid down in the
Commission’s approval and was in breach of the Seventh
Directive on aid to shipbuilding.

The comments were transmitted to the German Govern-
ment by letter dated 25 August 1997 in order to give the
German Government the opportunity to submit a reply.

V

The German Government reacted to the initiation of
proceedings by letter dated 18 June 1997 and to the
comments of the Danish Government and the European
Dredging Association by letter dated 9 October 1997.
Germany’s comments can be summarised as follows:

The dredgers were purchased primarily for deepening the
harbours at Tanjung Priok, Batam, Bojonogara, Surabaya,
Belawan, Semarang, Panjang and Ujung Pandang. The
harbour-deepening projects were delayed because of
financing problems, with the result that dredging work
could be carried out only in the harbours of Belawan,
Tanjung Priok and Surabaya. Neither Rukindo nor the
Kreditanstalt f(cid:129)r Wiederaufbau could be held responsible
for the delays.

The dredger KK Aru II was employed in Malaysia for 173
days in 1995 and for 156 days in 1996, although the
actual operational time was considerably less than the
overall time spent in Malaysian waters on account of
damage to the dredging pumps and the sea valves. In
1996 KK Aru II was the only one of PT Rukindo’s fleet
of 32 dredgers employed abroad.

In initiating the proceedings, the Commission referred to
information that one vessel had been used in Thailand. In
the German Government’s view, the vessel involved was
none of the three dredgers in question, but rather the KK
Irian Jaya, which had been employed in Thailand for 31
days between 21 April and 29 May 1994.

The German Government stated that the dredgers were
designed specially for the work in Indonesia, which
required a deeper draught than the dredgers in service at
the time. To be able to work effectively, the dredgers need
a water depth of about eight metres. It was argued that the
greater draught of these dredgers restricted the possibili-
ties for alternative use in other Indonesian harbours and
waterways. In order to limit periods of inactivity as far as
possible and to recoup at least a portion of the fixed costs
(personnel costs, capital costs, etc.), Rukindo saw no
option but to tender the services of the dredgers to other

(1) OJ C 192, 24. 6. 1997, p. 9.

L 46/54

EN

Official Journal of the European Communities

20. 2. 1999

dredging firms which then used the vessels outside Indo-
nesia. This action did not run counter to the primary
objective of developing the Indonesian transport infra-
structure. Furthermore, the German Government stated
the completion of work on domestic projects
that
continued to have absolute priority. Periods of use abroad
were only during slack periods when harbour extension
projects were delayed. The leasing-out of the dredgers for
use abroad should rather be seen as an effort to make
efficient use of the development aid by generating addi-
tional capital
foreign
currency. It was also argued that the temporary deploy-
ment of the dredgers in foreign waters provided experi-
ence which could help to increase efficiency and improve
competitiveness in the domestic market.

in the form of

for the project

The German Government also emphasised that Rukindo
was not involved directly in any international tendering
procedures, so that it was never in direct competition with
other international dredging companies. Only twice had
Rukindo requested tender documents, but in neither case
had it participated in the tender. The vessels were hired
out on a subcontract basis and only during slack periods
when they would otherwise have been idle. Rukindo thus
had no direct influence on the pricing of services by the
main tendering contractor, especially since the usual prac-
tice was for the main contractor not to enter into nego-
tiations with the various dredging companies until after
being awarded the contract.

Finally, the German Government said it would take the
necessary steps to make clear to the Indonesian Govern-
ment the problems involved in using the vessels abroad.

VI

According to Article 4(7) of the Seventh Directive on aid
to shipbuilding, aid granted as development assistance to
a developing country is not subject to the ceiling set by
the Commission under Article 4(2). It may be deemed
compatible with the common market if it complies with
the terms laid down for that purpose by OECD Working
Party No 6 in its Agreement concerning the inter-
pretation of Articles 6 to 8 of the Understanding on
Export Credits for Ships or with any corrigendum to the
said Agreement (1). The Commission must be given prior

notification of any such individual aid proposal. It is
required to verify the particular development content of
the proposed aid and satisfy itself that it falls within the
scope of the Agreement.

The Court of Justice held in Case C-400/92 that ‘it is
precisely the examination of this particular content which
enables the Commission to ensure that aid based on
Article 4(7) and intended to reduce the cost of vessels for
certain developing countries pursues, in the light of the
specific conditions of its application, a genuine develop-
ment objective and does not, despite the fact
it
complies with the OECD criteria, constitute aid in favour
of a shipyard in a Member State which must be subject to
the ceiling . . .' (2).

that

At this stage the Commission is taking a decision only
regarding the vessel KK Aru II. The manner in which the
two other vessels CD Bantang Anai and FF Bali II were
used is still under investigation. The German Govern-
ment has confirmed that KK Aru II has not been
deployed exclusively in Indonesia, but has been used for
more than 300 days outside Indonesia since it was deliv-
ered. Consequently,
the vessel has not been used in
accordance with the Commission’s approval of the devel-
opment project (3) and the aid has therefore been misused.

The vessel has been employed commercially in Malaysia
under contracts put out to tender. It should be noted that
Malaysia is not on the list of countries eligible for devel-
opment aid.

Germany put forward a range of arguments to show that
the development content of the aid was intact and that
the aid had not been misused. The use outside Indonesia
did not run counter to the primary objective of devel-
oping Indonesia’s
infrastructure. The deeper draught
restricted the possibilities for alternative employment in
other
Indonesian harbours and waterways. The use
outside Indonesia served to limit periods of inactivity and
recoup a portion of the fixed costs. Such use occurred
only during slack periods when the vessel would other-
wise have been idle and was thus an effort to employ
development funds as efficiently as possible.

Such arguments could perhaps have been accepted if it
had been proven that the use outside Indonesia was abso-
lutely exceptional, both in terms of the period of time
covered and the commercial factors involved, and that it
was due to developments beyond the control of
the
government and unforeseeable at the time when the aid
was granted. However, KK Aru II has been employed
outside Indonesia for more than 300 days since 1994.
Such use cannot be considered to be exceptional. Further-
more, the vessel was utilised on a purely commercial basis

(1) Commission letters
SG(97) D/4341.

to Member States SG(89) D/311 and

[1994] ECR I-4701, at paragraph 21.

(2)
(3) Letter SG(94) D/6533.

20. 2. 1999

EN

Official Journal of the European Communities

L 46/55

in a country which is not eligible for development aid,
and there is no clear link between the employment
outside Indonesia and the use of the vessel for the devel-
opment of Indonesia. Furthermore, the substantial use of
the vessel outside Indonesia may have generated consider-
able financial returns which in themselves would make
the aid unnecessary. In addition, had the Commission
known at the time of the notification that the vessel
would be used on a commercial basis in Malaysia,
it
would not have approved the aid. For all these reasons,
the Commission considers that the development aid is
unnecessary.

involved directly in any international

The German authorities further argue that the vessels
were hired out on a subcontracting basis. Rukindo was
not
tendering
procedures and was never in direct competition with
other dredging companies. Rukindo had no direct influ-
ence on the pricing of services by the main tendering
contractor. The German Government would take the
necessary steps to make clear to Indonesia the problems
involved in using the vessels abroad.

the fact

The Commission considers that these arguments are irrel-
evant since the commercial use of the vessel in a country
which is not eligible for development aid is unacceptable
regardless of
that Rukindo was not directly
involved in such activity. Furthermore, it must be borne
in mind that the German Government does not contest
the fact that the vessels were provided at below market
price. The conclusion remains that the use of the vessel
does not justify development aid.

On these grounds, the Commission considers that the aid
granted in relation to the construction of the dredger KK
Aru II by Volkswerft Stralsund and its sale to Rukindo has
been misused. Furthermore, the aid cannot be considered
to be genuine development aid within the meaning of
Article 4(7) of the Seventh Directive. The aid distorts or
threatens to distort competition within the common
market and affects trade between Member States in rela-
tion to shipbuilding to an extent contrary to the common
interest within the meaning of Article 92(3) of the EC

Treaty and in particular to Article 4(7) of the Seventh
Directive,

HAS ADOPTED THIS DECISION:

Article 1

The aid granted by Germany for the construction of the
dredger KK Aru II by Volkswerft Stralsund and its sale to
Rukindo is incompatible with the common market since
it has been misused in breach of the approval given by
the Commission in its letter SG(94) D/6533. The aid
cannot be considered to be genuine development as-
sistance within the meaning of Article 4(7) of Directive
90/684/EEC.

Article 2

Germany shall revoke the aid referred to in Article 1 and
shall ensure that it is recovered. Recovery shall be made
in accordance with the procedures and provisions of
German law with interest, based on the interest rate used
as
regional aid
schemes, running from the date on which the aid was
granted until such time as it is actually recovered.

reference rate in the assessment of

Article 3

inform the Commission, within two
Germany shall
months of the date of notification of this Decision, of the
measures taken to comply therewith.

Article 4

This Decision is addressed to the Federal Republic of
Germany.

Done at Brussels, 25 February 1998.

For the Commission

Karel VAN MIERT

Member of the Commission