1999/338/EC: Commission Decision of 16 September 1998 authorising subject to conditions, aid granted by Italy to Società Italiana per Condotte d'Acqua SpA (notified under document number C(1998) 2858) (Text with EEA relevance)
Date: 1998-09-16
Institutions: European Commission
Subjects: Italy, State aid, aid for restructuring, aid to undertakings, capital increase, public works

L 129/30

EN

Official Journal of the European Communities

22. 5. 1999

II

(Acts whose publication is not obligatory)

COMMISSION

COMMISSION DECISION

of 16 September 1998

authorising subject to conditions, aid granted by Italy to Societ(cid:133) Italiana per
Condotte d’Acqua SpA

(notified under document number C(1998) 2858)

(Only the Italian text is authentic)

(Text with EEA relevance)

(1999/338/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

(cid:190) to set up a subholding company, Fintecna (Fintecna),
which was to privatise Iritecna’s profitable businesses.

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

Having regard to the Agreement on the European
Economic Area, and in particular Article 62(1)(a) thereof,

Having given notice to the parties concerned to submit
in accordance with the aforemen-
their comments (1),
tioned provisions,

Whereas:

I

Societ(cid:133) Italiana per Condotte d’Acqua SpA (Condotte) is a
company operating in engineering and civil infrastructure
construction (roads, railways, etc.); it was previously the
property of
Iritecna SpA (Iritecna), a wholly owned
subsidiary of IRI SpA (IRI), which was in its turn wholly
owned by the Italian Treasury. In 1993 IRI, which wished
to restructure its engineering and construction activities,
decided:

(cid:190) to put Iritecna into liquidation, at a total cost of ITL

4 490 billion (ECU 2,3 billion), and

(1) OJ C 327, 29.10.1997, p. 4.

Condotte recorded losses totalling ITL 152 billion over
the period from 1991 to 1994. Its gross profit margin fell
from 11 % of turnover in 1991 to 4,5 % in 1994, with a
low point of 2 % in 1993. The shareholders repeatedly
had to make up the company’s losses, at a total cost of
more than ITL 118 billion (ECU 61 billion).

Despite its losses, Condotte was considered to be poten-
tially attractive to private investors, largely because of the
size of its order-book; the main items in the order-book
derived from Condotte’s membership of the Iricav 1 and
Iricav 2 consortia, the contractors for the Rome-Naples
and Verona-Venice stretches of the projected Italian high-
speed rail network.
in
Iritecna’s
Condone, which amounted at that time to 91,7 %, was
accordingly transferred to Fintecna, with a view to privati-
sation.

controlling stake

The restructuring measures which Condotte now under-
took, reducing its workforce from 1 500 to less than
1 000, writing down the value of work in hand, etc.,
together with the prospects generated by the resumption
of work on the high-speed rail network, led Fintecna to

22. 5. 1999

EN

Official Journal of the European Communities

L 129/31

believe that Condotte could be privatised as early as 1995;
and this was expressly provided for in the plan for the
restructuring of Iritecna which was submitted to the
Commission. At
the end of 1994 an adviser was
appointed to select potential buyers for Condotte.

By Decision 95/524/EC (2)
(the Decision) the Commis-
sion declared that the aid granted to Iritecna and Fintecna
in connection with the Iritecna liquidation was compat-
ible with the common market. The Decision also author-
ised Iritecna to cover Condotte’s
losses up to 31
December 1994, which amounted to ITL 110 billion, or
ECU 56,4 million.

Article 1 of the Decision required compliance with the
restructuring plan approved by the Commission, which
among other things called for the privatisation of Fintec-
na’s subsidiaries, including Condotte, within a reasonable
time limit and without further State aid.

After the Decision was adopted, however,
the Italian
Government informed the Commission that the sale of
Condotte had been suspended in order to allow time for
an assessment of
implications of guarantees
given by IRI in connection with the high-speed rail
network project.

the legal

When that assessment was completed in November 1995,
the procedure for the sale of Condotte was set in motion
once again, the objective now being to sell off a minority
holding: the whole of the capital was to be sold only
when IRI had discharged the guarantees for the work on
the high-speed rail network.

In the mean time Condotte continued to record substan-
tial losses: these reached ITL 71 billion (ECU 36 million)
in 1995, falling to ITL 21 billion (ECU 11 million) in
1996.

In order to replenish Condotte’s share capital, which had
been eroded by its losses, Fintecna was obliged to provide
fresh funding of ITL 65 billion in March 1996 (ECU 33
million) and a further ITL 7 billion (ECU 4 million) in
December 1996. As a result of these transactions Fintec-
na’s holding in Condotte increased to 95,8 % of the
capital.

(atto dovuto) within the meaning of the Civil Code, as
Condotte would otherwise have had to be put
into
liquidation.

in March 1997, Fintecna sold 45,7 % of

Finally,
the
capital in Condotte to a private investor, Ferrocemento
SpA (Ferrocemento); the contract of sale includes the
following clauses:

(a) Fintecna gives Ferrocemento an option to buy the
remaining shares at a predetermined price, and Ferro-
cemento gives Fintecna an option to sell them at the
same price; these options are valid until six months
after the expiry of IRI’s guarantees on the work on the
high-speed rail network or,
in the event of early
discharge by IRI itself, until 30 June 1999;

(b) the sale price is based on a valuation of ITL 100

billion (ECU 51 million) for Condotte;

(c) Fintecna must replenish Condotte’s share capital to
bring it up to ITL 40 billion at the time of the
transfer;

(d) Fintecna is to have no further interest in Condotte’s
trading results from the time of the transfer of 45,7 %
of
this being achieved by means of a
compensation mechanism which adjusts the selling
price for the remaining 50,1 % of the capital.

the shares,

in order

to comply with the clause
In June 1997,
requiring it
capital,
to replenish Condotte’s
Fintecna provided further funding of ITL 33 billion (ECU
17 million).

share

The Commission now decided to initiate proceedings
under Article 93(2) of the Treaty in respect of the fresh
capital contributed in the years from 1995 to 1997, the
unsatisfactory restructuring measures taken, and the terms
of the privatisation of the company, which appeared to
conflict with the conditions laid down in the Decision.
The Commission informed the Italian Government of its
decision to initiate proceedings by letter of
l August
1997 (3).

The Italian Government submitted formal observations
by letter of 20 October 1997.

On 24 June 1997, in response to a request from the
Commission, the Italian authorities informed it of the
measures taken to replenish Condotte’s share capital and
reported that negotiations for the sale of the company had
took the view that
resumed. The Italian authorities
Fintecna’s funding of Condotte must be considered a duty

No other Member State or interested party submitted
observations within the time allowed. By letter of 1
December 1997 the Commission requested more in-
formation from the Italian authorities. That information
was supplied in a letter of 22 January 1998, and at a
meeting which took place in Rome on 20 January 1998.

(2) OJ L 300, 13.12.1995, p. 23.

(3) See footnote 1.

L 129/32

EN

Official Journal of the European Communities

22. 5. 1999

The Italian authorities provided further particulars by
letters of 10 and 12 February. Lastly, on 5 May the
Commission received a copy of the company’s balance
sheet as at 31 December 1997 and its industrial plan for
the period 1998 to 2000.

The information furnished by the Italian authorities
showed that on 17 December 1997 Fintecna had provided
Condotte with a further capital injection amounting to
ITL 58 billion (ECU 30 million) as an adjustment for the
purchaser,
value of
Condotte’s assets. With this injection, the total funding
provided by Fintecna to Condotte after 1994 was brought
up to ITL 163 billion (ECU 84 million).

following further

in the

falls

II

In its observations the Italian Government argues:

(i) that the Decision makes provision for injections of

fresh capital into Condotte;

(ii) that Fintecna provided the fresh capital out of its own
resources and acted as a private investor would have
done, so that the money does not constitute State aid,

(iii) that there has been no infringement of the condi-

tions imposed by the Decision.

The Italian Government further argues that, if the meas-
ures referred to are to be considered State aid, they should
in any event be declared compatible with the common
market under Article 92(3) of the Treaty.

As regards point (i), the Italian Government contends that
at the time of the Decision the Commission was already
aware of the need for further funding of the company in
order to allow privatisation to take place and that the
Commission was informed in good time of each of the
recapitalisation operations
the
progress of the sale of the company.

at Condotte

and of

The restructuring plan approved in the Decision provided
that sound businesses, and those that could be returned to
a sound footing, were to be transferred to Fintecna with a
view to privatisation. The Italian Government argues,
therefore,
the Decision allowed for the need to
finance a measure of restructuring, particularly in the
construction industry, which is the industry in which
Condotte operates.

that

After the Decision,
the Italian Government contends,
both Fintecna and its parent IRI kept the Commission
regularly informed of the progress of the privatisation
process. At a meeting in Rome in June 1997, for example,
IRI and Fintecna supplied all the information needed for

an assessment of the facts which now form the basis of
the Article 93(2) proceedings.

As regards point (ii), the Italian Government argues that
Fintecna helped Condotte using resources generated by
Fintecna’s own activities, without any contribution on the
part of the State, and that Fintecna acted in accordance
its action
with the private investor principle, so that
cannot be considered State aid.

The Italian Government states that Fintecna compared
the cost of putting Condotte into liquidation with the cost
of recapitalising and privatising it. Where the foreseeable
cost of a liquidation exceeds that of recapitalisation and
sale of the company, the Italian Government argues, there
is no State aid caught by Article 92(1).

The Italian Government states in particular that Fintecna
estimated the cost of putting Condotte into liquidation at
ITL 600 billion, if the company were wound up in an
orderly fashion, and at ITL 2 700 billion, if it were wound
up in free fall. Fintecna concluded that it would be prefer-
able to recapitalise Condotte and to keep it in operation
pending privatisation. With that end in view, Fintecna
behaved as a private investor would have done, and the
funds it injected into Condotte do not constitute State aid.

As regards point (iii), the Italian Government maintains
that it has complied with all the conditions imposed by
the Decision, with particular reference to the total cost of
restructuring, the commitment to restructure the group,
and the privatisation of Condotte.

On the total cost of the plan approved by the Commis-
sion, the Italian Government points out that the Decision
authorised a total of ITL 4 490 billion in aid, ITL 1 090
billion being money already given to subsidiaries,
including Condotte, in the period 1991 to 1993, and ITL
3 400 billion being the estimated cost of putting Iritecna
into liquidation, after deduction of ITL 1 653 billion in
proceeds from sales by Fintecna.

As things stand at present, the Italian authorities expect
that the final cost will be less than the maximum just
mentioned, despite the lower returns on the sale of
Condotte: the Decision has thus been complied with.

Turning to the restructuring operations provided for in
the Decision, the Italian Government argues that the
action taken does
in reality comply with the plan
approved by the Commission. As regards the reduction in
the workforce (and thus indirectly in production capacity),
the forecast figures which the Commission cites in the
letter initiating proceedings refer to the active workforce

22. 5. 1999

EN

Official Journal of the European Communities

L 129/33

engaged on open-ended contracts, while the figures taken
from the annual reports include other staff, such as those
on fixed-term contracts and those laid off under the
‘Cassa integrazione guadagni' wage compensation scheme.

According to the Italian Government, that clause could be
cancelled by agreement between the Iricav consortium
for the sale of
and TAV. In that event
Condotte would already entitle Fintecna to sell
the
remainder of its holding.

the contract

that

The Italian Government argues
the decline in
Condotte’s performance as compared with the forecasts in
the plan, which called for net profits of ITL 19 billion in
1995 and ITL 40 billion in 1996, was due to worsening
market conditions, and not to a failure to restructure the
company.

that

The Italian Government contends
the results
obtained by Condotte in 1995 and 1996 cannot be
compared directly with the restructuring plan which the
Commission approved in the Decision. The failure to
achieve the turnover called for in the plan caused a reduc-
tion of ITL 130 billion in Condotte’s gross margin over
the two years. A number of non-operational
items
amounting to ITL 46 billion have to be added to that
negative effect (cid:190) items which were not foreseeable at the
time the plan was drawn up; once this has been done, it
can be seen that the restructuring effort provided for has
actually been exceeded.

On the obligation to privatise laid down in the Decision,
the Italian Government points out:

(cid:190) that the same question is currently before the Court of

First Instance of the European Communities,

(cid:190) that in any event Fintecna complied with the condi-
tion, having sold Condotte within a ‘reasonable time
limit' as required by the Decision.

initiated the proceedings,

When it
the Commission
argued that on the basis of the information at its disposal
the sale of Condotte could not be considered a genuine
privatisation: out of the shares in its possession Fintecna
had sold only 45,7 % and had kept 50,1 % (the
remaining 4,2 % is quoted on the Milan Stock Exchange).

In support of its claim that the sale of Condotte has to be
considered definitive, the Italian Government cites two
other points:

(cid:190) the fact that the Italian competition authority, the
‘Autorit(cid:133) garante della concorrenza e del mercato',
found in the course of its own inquiry that, although
the sale related to only 45,7 % of the capital, it never-
theless directly transferred managerial responsibility
to the purchaser,

(cid:190) the fact

that

the auditors certifying Condotte’s
accounts intended to exclude the company’s 1997
results from Fintecna’s consolidated accounts on the
grounds that there was no effective control.

The Decision also required that
the privatisation of
Condotte be carried out without further aid. The Italian
Government maintains that the financing that Fintecna
gave to Condotte after 1994, amounting to some ITL 163
billion (about ECU 84 million), should not be considered
State aid within the scope of Article 92, on the grounds
explained with reference to point (ii). Alternatively, any
aid should be considered compatible with the common
market because:

(cid:190) the financing was provided in connection with a
restructuring plan aimed at restoring the company to
profitability, something which is confirmed by its
privatisation,

(cid:190) the funds were limited to what was strictly necessary
to ensure that Condotte returned to market viability.

III

The Italian Government argues that the privatisation of
Condotte must be considered genuine and definitive. The
sale of 45,7 % is linked to specific contractual clauses
which make the sale of the remaining 50,1 % inevitable.
The decision to sell the company in two instalments is
due to the presence of a contractual clause in the agree-
ment between the high-speed rail company TAV and the
Iricav consortium, of which Condone is a member. The
consortium has won the contracts awarded by TAV for
the building of the Rome-Naples stretch of the high-
speed network. The clause requires IRI to preserve its
‘majority participation' in the consortium until the work
is completed.

In the light of what has been said, it will first have to be
the measures described
determined whether or not
infringe the conditions laid down in the Decision. If they
do, the question of the compatibility of the aid given to
Condotte up to 1994, which was approved in that
Decision, will have to be reconsidered. In order to deter-
mine whether the conditions laid down in Article 1(4)
and (5) of the Decision have been complied with, it will
also have to be established whether the funds given to
Condotte after 1994 constitute State aid caught by Article
92 of the Treaty, and, if more State aid has in fact been
granted, it will then have to be considered whether the
aid measures for Condotte, taken as a whole, are compat-
ible with the common market.

L 129/34

EN

Official Journal of the European Communities

22. 5. 1999

As has been explained, the Decision found that the aid
granted to Condotte up to 1994 (ITL 110 billion or ECU
56 million) was compatible with the common market
subject to a series of conditions, including the following:

(i) Condotte was to carry out the measures called for in
the restructuring plan approved by the Commission;

(ii) Fintecna and its subsidiaries,

including Condotte,
were to be privatised in accordance with the time-
scale submitted to the Commission, and in any case
within a reasonable time limit;

(iii) the income from the sale of companies was not to be
used to assist companies in difficulty which had not
yet been sold;

According to the Italian Government, these figures show
that
the efficiency objective in the plan has been
achieved.

To make a proper comparison, however, the figure that
must be looked at is the average number of employees
over the year (estimated on the basis of the arithmetic
average of
the end-of-year figures for two successive
years):

1993

1994

1995

1996

1997

(iv) no further State aid was to be granted in connection

with the privatisations.

Annual
staff
(Commission estimate)

average

n.a.

750

663

661

592

(i) The obligation to carry out the restructuring

measures called for in the plan

In the decision initiating the Article 93(2) proceedings,
the Commission argued that
the reorganisation of
Condotte called for by the restructuring plan had not
been completed. In particular, it observed that:

(cid:190) the number of employees on open-ended contracts
had increased in the period 1994 to 1996 from 383 to
431 (or 513 including Metroroma, which was taken
over in 1996),

(cid:190) this increase in staff coincided with a very unfavour-
able economic situation, with losses of ITL 71 billion
in 1995 and ITL 21 billion in 1996.

In its observations the Italian Government contends that
the figures used by the Commission include workers who
are entered on the company’s personnel register (libro
matricola) but are not actually working, such as those laid
off under
scheme.
According to the Italian Government, comparing compar-
able figures gives the following picture:

the Cassa integrazione guadagni

1993

1994

1995

1996

1997

1 003

759

550

. . .

609

854

645

680

642

543

Staff provided for
restructuring
(average)

in
plan

Staff at end of year (as
shown in personnel
register)

Note: Figures for entire construction sector (Condotte and Italstrade).

It will be seen that only in 1994 was the real average
figure in line with the restructuring plan; subsequently, in
both 1995 and 1996, it easily exceeded what was laid
down in the plan.

At the same time, and partly as a consequence, Condotte’s
financial results were heavily negative, in contrast to what
had been provided for in the plan. The plan anticipated a
net profit of ITL 19 billion in 1995, when there was in
fact a net loss of ITL 71 billion, and a net profit of ITL 40
billion in 1996, when there was in fact a net loss of ITL
21 billion. In 1997, whereas the plan anticipated a net
profit of ITL 37 billion, the company in fact made a loss
of ITL 78 billion.

It is not sufficient to say here, as the Italian Government
does, that the worsening situation was due to an unfore-
seeable decline in the market. The plan provided that
beginning in 1995, the internal restructuring measures
would enable Condotte to achieve a gross industrial
margin, before structural costs, equal to 7 % of turnover.
In theory, that margin would have allowed the company’s
losses to be contained at roughly ITL 20 billion in 1995,
despite the fall in revenue that actually took place.

With an industrial margin of 7 % the Commission took
the view that, even with a pessimistic forecast of the
market (which proved to be justified) the company would
be able to maintain a substantial economic balance
without
In fact
Condotte’s 1995 industrial margin was negative and
indeed it made a net loss in excess of its corporate assets.

to further capital

injections.

resort

However, in 1996 and above all in 1997 Condotte under-
took a more stringent effort than that in the plan that had
been approved, in order to deal with the manifest deteri-
oration in market conditions. The period 1995 to 1997
proved to be one of the most difficult periods experienced
by the construction sector in Italy (where Condotte gener-
ates over 70 % of its income).

22. 5. 1999

EN

Official Journal of the European Communities

L 129/35

Despite adverse trading conditions, Condotte maintained
an adequate operating profit margin and reduced its struc-
tural costs more drastically than assumed in the restruc-
turing plan approved by the Commission. As can be seen
from Table 1 its 1996 gross margin reached 12 % of net
turnover, compared with the figure of 7 % anticipated in
the plan. In 1997, its structural costs were around 20 %
below those anticipated in the plan, as a result of further
restructuring measures adopted by the enterprise.

Table 1

Condotte’s financial results

(in billion ITL)

1996
planned

1996
actual

1997
planned

1997
actual

Net turnover

1,425

496

1 366

603

Gross margin

126

61

120

41

Structural costs

(35)

(37)

(31)

Operating loss

38

(21)

37

(78)

Source: Condotte’s annual accounts for 1996 and 1997 (excluding for

Metroroma).

Much of the company’s net losses in the period resulted
from writing down assets in line with the smaller margins
which were capable of being generated on work in
progress and work already completed.

Moreover, Condotte’s rationalisation measures continued
into the first months of 1998; headquarters staff was
further cut from 110 as at 31 December 1997 to 105 as at
27 March 1998 (they had numbered 185 on 31 December
1996). Managerial staff, with an appreciably higher unit
cost, was cut from 25 as at 31 December 1997 to 19 as at
27 March 1998.

It can be concluded that the condition imposed by Article
1(2) of the Decision has been complied with, more espe-
cially in view of the action taken by the company to
contend with a market less favourable than that anti-
cipated in the restructuring plan.

(ii) The obligation to privatise Condotte in accord-
ance with the timescale submitted or, in any
case, within a reasonable time limit

One of the factors which was felt to justify the Decision
was the Italian Government’s undertaking to privatise
Condotte rapidly in accordance with the restructuring

plan; on the basis of the information submitted it was
considered in the Decision that privatisation would be
possible in a very short time (4). The intention to sell off
Condotte rapidly was considered a major factor in the
assessment of the aid granted to Iritecna, among other
things, in view of the enormous aid given to Iritecna’s
construction sector up to that time.

The Commission accepted that some restructuring of the
construction sector was still going on at the time of the
Decision but, in the light of the Iritecna plan, it expected
that this ‘should be completed by the end of 1995' (5),
allowing the companies to be sold off. For this reason,
Article 1(3) and (5) of the Decision expressly required that
Fintecna’s subsidiaries be privatised in accordance with
the timescale submitted to the Commission or, in any
event, within a reasonable time and that no further State
aid be given.

But the procedure for the sale of the companies was
suspended shortly after the Decision was adopted, and set
in motion again only in November 1995. According to
the Italian Government, this was because of the need to
study the legal implications of the contractual guarantees
given by IRI for the work on the high-speed rail network.

Only in March 1997 was a contract concluded for the sale
to Ferrocemento of 45,7 % of Condotte’s
capital
belonging to Fintecna. When it initiated proceedings, the
Commission did not have sufficient information to be
able to establish whether the sale could be considered
genuine and irreversible so as to satisfy the requirements
of the Decision. The Commission raised doubts regarding
the following aspects in particular:

(cid:190) the transfer from Fintecna to the buyer power to

appoint the management,

(cid:190) the financial implications for Fintecna of any further

losses by Condotte,

(cid:190) the terms of the transfer of the remaining 50,1 % of

the capital,

(cid:190) the possibility that the IRI guarantees in respect of the
high-speed rail network contracts might have to be
met.

In its reply, the Italian Government has supplied suffi-
cient
the doubts raised by the
Commission.

information to dispel

As regards the transfer of managerial power, the buyer is
given the responsibility for appointing the managing
director (amministratore delegato), who has the power to
manage the company subject to the authorisation of the
board of directors (consiglio di amministrazione). The
only restrictions relate to acts which might be damaging

(4) See Section III, point 6.
(5) See Section IV, point 3.

L 129/36

EN

Official Journal of the European Communities

22. 5. 1999

to Fintecna or IRI in connection with the work on the
high-speed rail network. The board of directors itself is
made up of seven members, three of them, including the
managing director, being appointed by Ferrocemento,
three by Fintecna, and the chairman by Ferrocemento
subject to Fintecna’s agreement.

On the basis of this information, it can be concluded that
the buyer takes over from Fintecna full power to manage
Condotte.

future losses by
Turning now to the possibility that
the
Condotte might have to be borne by Fintecna,
contract establishes a complex mechanism for the adjust-
ment of the selling price for the 50,1 % of the share
capital remaining with Fintecna; this has the result of
excluding Fintecna itself
from any financial burdens
whatsoever deriving from operating losses by Condotte.

The selling price for the 50,1 % is set at ITL 50,1 billion,
but this is to be adjusted to include:

(cid:190) the portion borne by Fintecna in any further capital
increase, whether or not intended to cover losses made
after the transfer of the shares (to be added to the
price),

(cid:190) the portion accruing to Fintecna in any profits made
by Condotte and distributed to the shareholders after
the transfer of the shares (to be subtracted from the
price),

(cid:190) any payments by Fintecna to cover losses made by
Condotte after the reference date laid down in the
contract (to be added to the price).

All of the items described, including the selling price, are
indexed from the date of the particular transaction to the
date of transfer of the remaining 50,1 % of the capital, at
a rate of interest laid down in the contract.

On the basis of this information, it can be confirmed that
Fintecna will not bear the financial effects of any further
losses by Condotte. It is clear, then, that Fintecna will no
longer be liable for the company’s operating losses. From
the point of view of liability, the privatisation of Condotte
can be regarded as complete even though Fintecna
continues to hold the majority of the share capital.

The contract lays down the following mechanism for the
transfer of the remaining 50,1 % of the share capital to
Ferrocemento:

(cid:190) Fintecna is entitled to transfer its 50,1 % to Ferroce-
mento at the predetermined price between 1 January
and 30 June 1999 or until six months after the
discharge by IRI of the guarantees for the high-speed
rail network,

(cid:190) Ferrocemento is entitled to acquire the 50,1 % in
Fintecna at the predetermined price at any time from
the date of discharge of the guarantees referred to

until 30 June 1999 or until six months from the date
of discharge of the guarantees by IRI.

It transpires from this that there is no legal obligation on
the parties to complete the transfer of Condotte. Each
party is entitled to call for completion of the sale, and
only if one exercises its right is the other obliged to
complete the transaction. It might conceivably happen
in that case the
that neither party exercises its right:
transfer of Condotte would not be completed, and the
condition laid down in the Decision would not have been
complied with.

However, the Italian Government has given an under-
taking that Fintecna will transfer the remaining holding
in Condotte on the contractual conditions, with particular
reference to the deadlines for the exercise of the option
itself. In view of that commitment Fintecna’s remaining
holding in Condotte can be considered a temporary one
only, serving merely to protect IRI with respect to the
guarantees it gave in connection with the contracts for the
high-speed rail network regarding the acquirer’s possible
failure to complete.

Despite the fact, then, that Fintecna continues to hold
50,1 % of Condotte, the condition laid down in Article
1(3) of the Decision has been complied with. The delays
in the sale were due to circumstances beyond Fintecna’s
control (the contractual clause in respect of the work on
the high-speed rail network); as far as was in its power,
Fintecna acted with the objective of privatising Condotte
as rapidly as possible. That objective has been achieved, as
was explained, by virtue of the clauses in the contract of
sale and the commitment given by the Italian authorities
that
the remaining holding will be
completed as soon as possible.

the transfer of

The Commission notes that negotiations are taking place
between IRI and TAV, the company which awarded the
contract, with a view to removing the clause that requires
the
IRI to continue holding an absolute majority of
capital
that a
in Condotte. The Commission notes
positive outcome to those negotiations could speed up the
formal transfer of the entire capital of Condotte to Ferro-
cemento.

(iii) The prohibition on using the proceeds of the
asset sales by Fintecna to assist companies in
difficulty, and (iv) The prohibition on granting
further State aid in connection with privatisa-
tions

In order to determine whether Fintecna has complied
with the conditions set out in Article 1(4) and (5) of the
Decision, and in particular
the prohibition on the
granting of further aid, it has to be established whether
the funding that Condotte received after 1994 can be
considered an investment on market lines or whether it
constitutes State aid for the purposes of Article 92(1) of
the Treaty.

22. 5. 1999

EN

Official Journal of the European Communities

L 129/37

When it has to determine whether the financial relations
between a State and a public enterprise include a State-aid
component caught by Article 92 of
the
Commission applies the private-investor test to the finan-
cial flows between them. In the case under consideration,
the funds given to
this means considering whether
Condotte after 1995 were public resources and,
if so,
whether they would have been invested in accordance
with the private-investor test.

the Treaty,

Under the Iritecna plan, Condotte was transferred to
Fintecna, a wholly owned subsidiary of IRI, an industrial
holding company itself wholly owned by the Italian
Treasury. The Italian Government appoints the board of
directors of IRI, which in turn appoints the board of
Fintecna.

According to the settled case-law of the Court of Justice
of the European Communities, in particular its judgment
of 21 March 1991 in Case C-305/89 Italy v. Commis-
sion (6), in order to establish whether an aid measure can
be considered State aid within the scope of Article 92 of
the Treaty, ‘no distinction should be drawn between cases
where aid is granted directly by the State and cases where
it is granted by public or private bodies established or
appointed by the State'. Thus, even if the funds given to
Condotte did not come directly from the State, it may
nevertheless be that they are public funds.

It is not enough to affirm here, as the Italian Government
does in its observations, that the financial measures taken
by Fintecna used resources generated by the operation of
its own business and not obtained from the State. If
Fintecna’s operating cash flow is used for an unprofitable
purpose, as it was in the case of Condotte, that reduces
the profit accruing to Fintecna’s shareholder IRI and thus
ultimately to the State. Fintecna might have used its own
funds to engage in activities with a better return; this
would have enabled IRI, and consequently the State, to
obtain a better economic return on its investment.

A lower return on IRI’s investment in Fintecna will ulti-
mately be reflected in a loss of profit to the State so that,
even though the funds given to Condotte were not
provided directly by the State, they can nevertheless be
said to constitute State resources. In order to establish
whether or not they are caught by the prohibition in
Article 92(1) of the Treaty, they have to be studied in the
light of the private-investor principle (7).

transaction
According to that principle, a financial
between the State and a public undertaking contains a
State-aid component if it would not have been acceptable

[1991] ECR I-1603, paragraph 13.

(6)
(7) Commission communication to the Member States on the
application of Articles 92 and 93 of the EC Treaty and of
Article 5 of Commission Directive 80/723/EEC to public
undertakings in the manufacturing sector (see Part III), (OJ C
307, 13.11.1993, p. 3).

to a private investor operating under normal market
economy conditions. In particular, the presence of State
aid can be presumed ‘where the financial position of the
company, and particularly the structure and volume of its
debt, is such that a normal return (in dividends or capital
gains) cannot be expected within a reasonable time from
the capital invested' (8).

Accordingly, an analysis has to be made of Condotte’s
financial position in the years before the increases in
capital; this is shown in Table 2.

Table 2

Condotte’s financial results

(in billion ITL)

1992

1993

1994

1995

1996

Net turnover

672,1

660,3

445,3

352,9

495,7

Gross margin

33,8

14,8

19,5

(19,0)

60,9

Operating income

(9,1)

(34,9)

(9,0)

(74,8)

0,1

Net profit (loss)

(40,7)

(87,7)

(23,9)

(70,9)

(20,4)

Net worth

39,9

63,9

46,9

(23,9)

28,1

Source: Condotte’s annual accounts.

The figures set out above show that Condotte was not a
profitable concern when Fintecna provided the funds.
Fintecna provided further funding in 1996 despite the
fact that, given Condotte’s results, Fintecna could not
reasonably expect any significant return on its investment.

It is not sufficient to plead that the costs of putting the
company into liquidation would have been higher than
those of the recapitalisations carried out. A private share-
holder faced with declining market prospects and the
impossibility of a return to viability would have put the
company into liquidation well before 1996, and indeed
before 1994, thus avoiding costly recapitalisations and
substantially reducing the costs of the liquidation itself.

Furthermore, a shareholder not subject to the unlimited
guarantee rule in Article 2362 of the Civil Code would
have been liable for Condotte’s debts only up to the
amount of the equity of the company, possibly via insol-
vency proceedings, and would consequently have been
than those
liable for amounts
actually injected into Condotte.

significantly smaller

(8) Ibid., paragraph 16.

L 129/38

EN

Official Journal of the European Communities

22. 5. 1999

The financial resources given by Fintecna to Condotte in
1996 and 1997 therefore constitute State aid within the
meaning of Article 92(1) of the Treaty. Thus the condition
laid down in Article 1(5) of the Decision has not been
complied with; consideration will accordingly have to be
given not only to the compatibility of
the fresh aid
granted, but also to the compatibility of the aid received
by Condotte and approved in the Decision, which
amounted to ITL 110 billion.

reason to conclude that the sale took place at the market
price and thus that no aid was given to Ferrocemento in
its acquisition of Condotte.

Moreover,
the contract of sale does not contain any
clauses specifically obliging the acquirer to continue any
loss-making activities. In any case, no element of aid for
Condotte can be discerned in the terms of sale.

it

In assessing compliance with the Decision,
is not
enough to say that the total volume of aid approved has
not been exceeded. The Decision expressly provided that
the individual privatisation operations were not to be
financed by further State aid. The purpose of this obliga-
tion was to reduce the distorting effect of the aid granted
and, consequently, to ensure that any resources acquired
as a result of the sell-offs were devoted to reducing the
costs of putting the Iritecna/Fintecna group into liqui-
dation.

In addition, given that the businesses likely to be most
attractive to potential private investors had been trans-
ferred to Fintecna primarily with a view to sale, and only
within limits with a view to restructuring, the Decision
expressly prohibited further aid to those businesses.

In principle, when State-owned businesses are privatised
it may be permissible to grant State aid for purchasers
where the sale does not take place on market conditions
or for the business where the contract of sale requires the
acquirer of the business to carry on unprofitable segments
which would have been discontinued by an investor oper-
ating on market conditions.

Regarding the sale of Condotte to a private investor, that
sale was carried through in compliance with the relevant
Community rules. Both the 1994 procedure, which was
subsequently abandoned, and the 1995 procedure, which
terminated in the sale of the company to Ferrocemento,
entailed making public offers to buy the business. Thus
about 20 investors were initially interested in the sale of
Fintecna’s civil engineering businesses. Of the 20, 13
submitted offers, of which two were placed on a shortlist.
Only Ferrocemento submitted a binding offer and there-
fore it alone was admitted to the due diligence stage.

In the procedure followed by Fintecna all potential
investors were placed on an equal footing in the sale and
the best offer was chosen. That gave the Commission

As has been explained, the aid granted to Condotte after
1994 constitutes State aid within the scope of Article 92(1)
of the Treaty and, as a result, the aid received by the
company before 1994, which the Commission approved
in the Decision, is in principle likewise unlawful; the
possibility has now to be considered whether the grants of
aid, taken as a whole, are compatible with the common
market.

IV

Under Article 92(2) and (3) of the Treaty certain aid is, or
may be declared, compatible with the common market.

Paragraphs 2, 3(a) and 3(b) of Article 92 of the Treaty
cannot be applied to measures of the kind under consid-
eration here. In view of the variety of Condotte’s activities
and locations, and the fact that the aid does not have a
regional objective, the only possible exemption is that
provided for in paragraph 3(c), which deals with aid to
facilitate the development of certain economic activities.
By its very nature, the aid in this case must be considered
aid for the restructuring of firms in difficulty.

As regards such aid,
the Commission has published
Guidelines on State aid for rescuing and restructuring
firms in difficulty (9). In practice, if it is to approve one-off
measures to restructure a firm in difficulty, the following
tests must be satisfied:

(i) the measures must restore the long-term viability of

the firm;

(ii) the measures must

avoid undue distortion of

competition;

(iii) the measures must be in proportion to the costs and
benefits of restructuring and thus limited to the strict
minimum needed;

(iv) the restructuring plan must be fully implemented;

(v) the implementation of the restructuring plan must be

monitored and verified by the Commission.

(9) OJ C 368, 23.12.1994, p. 12.

22. 5. 1999

EN

Official Journal of the European Communities

L 129/39

Only if all of these tests are satisfied can the Commission
take the view that the effects of the aid are not contrary to
the Community interest and approve it under Article
92(3)(c) of the Treaty.

As regards test (i), the restoration of viability, the Italian
authorities had submitted a restructuring plan at the time
of the Decision which was intended to restore Condotte
to profitability from 1996 onward. The aid given to
Condotte up to 1994 (ITL 110 billion) was held to be
compatible with specific regard to that plan and to the
Community Guidelines. However, Condotte did not
achieve the financial results expected and so had to fall
back on public assistance once again (receiving ITL 163
billion, as has been explained).

It should be pointed out, however, that Condotte’s failure
to return to profitability was the result of a market situa-
the
tion which was not
Decision.

foreseeable at

the time of

Condotte’s restructuring plan, which the Commission
approved in the Decision, was based on prudent estimates
of the future development of the company’s order book.
On 31 December 1992 that portfolio of work amounted
to ITL 2 255 billion, of which more than ITL 795 billion
related to contracts connected with the high-speed rail
network. On the basis of the work schedule laid down by
the company awarding the contract, it was reasonable to
expect Condotte’s
to
develop as shown in Table 3.

turnover and financial

results

Table 3

Forecast financial results of Condotte

(in billion ITL)

1995

1996

1997

Net turnover

896

1 425

1 366

Gross margin

Operating result

Net profit (loss)

66

31

19

126

120

91

38

83

37

Source: Iritecna’s restructuring plan.

company would be focusing on work related to the high-
speed rail network. None the less, the crisis in the sector
continued until 1996 with a severity that was not foresee-
able, giving some signs of recovery only in the second
half of 1997.

Moreover,
the contracts already secured for the high-
speed rail network were delayed for reasons outside the
company’s control.

With the interaction of those two factors, Condotte’s turn-
over was in fact substantially lower than forecast in the
plan, as is shown in Table 1:

(cid:190) in 1995 it amounted to ITL 353 billion, or 39 % of

the figure forecast,

(cid:190) in 1996 it amounted to ITL 496 billion, or 35 % of

the figure forecast.

In both those years, as in 1994, Condotte’s turnover was
about 40 % less than in 1992 and 1993, years in which
the crisis in the industry in which Condotte operates was
already very serious. Faced with this crisis on the market
around it, Condotte reacted by taking further restruc-
turing measures, going beyond what had been provided
for in the plan; although these were not enough to secure
net profits, they did allow the company to record a posi-
tive operating result in 1996, its first in a long time.

In particular, the restructuring measures concentrated on
reducing structural costs, which in 1996 reached levels
some 10 % below what had been provided for in the
restructuring plan. In 1997, as has been indicated, these
costs were about 20 % below what had been provided for
in the restructuring plan. In that period, the company
stepped up its internal restructuring effort with the aim of
returning to a stable level of profitability. For example,
headquarters staff, an item reflected in structural adminis-
trative costs, was reduced from 201 on 31 December 1995
to 105 in March 1998, with management staff, which has
a higher unit cost, falling from 51 at the end of 1995 to
19 in March 1998 (down 61 %).

As a result of these operations and of further restructuring
the group,
efforts affecting the entire structure of
Condotte succeeded in 1996 in reversing the negative
economic trend that had been apparent up to 1995, in
spite of the crisis in the construction sector. Its gross
margin went from –5,4 % of turnover to positive figures
in both 1996 and 1997 (ITL 61 billion and ITL 41 billion
respectively).

The above valuations have already given due regard to the
difficulties of the civil engineering sector, which experi-
enced a severe crisis in the 1990s, in staging a recovery.
They allowed for a rate of acquisition of orders much
below Condotte’s potential and indeed assumed the

In 1996 and 1997 Condotte recorded a net loss, particu-
larly heavy in 1997, but this was due mainly to the
extraordinary items representing the costs of restruc-
turing.

L 129/40

EN

Official Journal of the European Communities

22. 5. 1999

The restructuring efforts undertaken will bring the
company to a better level of profitability in future years,
bearing in mind the anticipated slow-down in work on
the high-speed rail network, as forecast in the industrial
plan presented to the Commission.

Table 4

Condotte’s industrial plan 1998 to 2000

(in billion ITL)

1998

1999

2000

Net turnover

660

570

459

Gross margin

Operating result

Operating loss

95

13

8

84

9

8

70

10

5

Source: Condotte’s 1998 to 2000 restructuring plan.

As a result of the company’s restructuring effort, particu-
larly in the period 1996 to 1997, in addition to the plan
approved by the Commission Decision, Condotte will be
able to reach a satisfactory level of profitability despite the
forecast deterioration in market conditions. Nevertheless,
it must be kept in mind that long-term profitability is
being attained through the crucial contribution of
internal rationalisations (reductions in capacity etc.) rather
than on the basis of favourable market prospects.

It may be considered that the first test of the admissibility
of aid for restructuring is thus satisfied.

The Commission notes that the company has been trans-
ferred to a private shareholder, so that the State will not,
under the contractual terms, be made financially liable for
any losses that Condotte may incur. The presence of a
private controlling shareholder
(see section III) also
provides a better assurance of Condotte’s prospects of
profitability.

The second test requires that the aid avoid undue distor-
tion of competition. In principle, any aid granted by a
State to a firm causes undue distortion of free competition
since it leaves that firm in a more favourable economic
situation than its competitors. This effect consequently
has to be offset by reductions in production capacity,
especially in an industry such as construction, where there
is substantial overcapacity.

In this case the restructuring plan approved by the
Commission in the Decision has already provided for
significant cuts in production capacity. The production

capacity of a construction firm, both in terms of its ability
to plan and design and in terms of its ability to imple-
ment its plans, is based mainly on its human resources;
the significant reduction in the size of Condotte’s human
resources base at the time of the Decision, along with the
relevant decline in production, pointed clearly to a
substantial
in its market share. The Commission
accordingly held that the aid given to Condone up to 31
December 1994 satisfied the tests for restructuring aid.

fall

But Condotte received further aid after the Decision, and
it must therefore be asked whether these new resources
have not affected trade between Member States in a
manner contrary to the common interest; this would be
so if Condotte had been put in a position to use the
resources to finance trading practices enabling it
to
increase its own market share at the expense of competi-
tors who had received no State aid.

As has been explained, however, Condotte reduced its
staff and thus its production capacity in 1995 and espe-
cially in 1996 and 1997, and the reductions went beyond
what was provided for in the plan.

The Commission took the view that the development of
turnover provided for in the plan (see Table 3) would not
affect trade to an extent contrary to the common interest.
As it turned out, Condotte’s turnover during the period
1995 to 1997 was about 40 % of what was called for in
the plan, and the rate of incoming orders was a great deal
slower, as is shown in Table 5.

Table 5

Condotte’s turnover and orderbook

1993

1994

1995

1996

1997

Net turnover

660

445

352

495

603

Order book

2 012

2 411

2 214

2 376

2 058

Including
rail network

high-speed

795

1 566

1 516

1 792

n.a.

Source: Condotte’s annual accounts.

the

It is clear from these figures that, as a result of the
restructuring of
company, Condotte has been
competing less and less on world markets. Its order book
for work connected with the high-speed rail network
(orders won as a result of the formation of the Iricav
consortia at the beginning of the 1990s) has increased as a
proportion of its overall activities, from 39 % in 1993 to

22. 5. 1999

EN

Official Journal of the European Communities

L 129/41

75 % in 1996. The increase in the order book in 1994
was almost entirely due to the acquisition by Iritecna of a
further share in the Iricav consortium for the high-speed
rail network. In the same way, the increase in turnover in
1996 is the direct consequence of the progress of the
work of the consortium itself.

Moreover, the industrial plan for the period 1998 to 2000
that was drawn up by the company’s new management
entails, through its concentration on orders already placed
for the high-speed rail network, a further reduction in the
company’s presence on the market. In future, turnover
will therefore be reduced, resulting in a further reduction
in the distortion caused by the grants of aid.

At the same time, the company has substantially reduced
its operations abroad, where the number and value of new
contracts has fallen significantly. It has consequently
reduced its production capacity by much more than what
was called for in the restructuring plan for the company.
Accordingly, its ultimate competitive position will not
affect trade to an extent contrary to the common interest.

Test (iii) requires that aid be in proportion to costs and
benefits: if State aid is to be declared compatible, it must
be limited to the strict minimum needed to finance the
return to viability and must not be used to finance aggres-
sive competitive practices, except to the extent necessary
to restore the firm itself to profitability.

From the information supplied by the Italian Govern-
ment it can be concluded that the funding provided by
Fintecna to Condotte was needed to cover losses due
mainly to the writing-down of activities and to the costs
of reducing production capacity (staff cuts). During the
delays in the sale of Condotte, Fintecna financed further
restructuring efforts, going beyond what was laid down in
the Iritecna plan, in order to cope with the unexpected
worsening of market prospects.

The Commission takes the view, therefore, that the aid
granted did not bring the company additional liquidity
which was unrelated to the process of restructuring and
might have helped to finance aggressive commercial or
investment practices not necessary to the restructuring
operation.

The Commission also observes that Condone will not
qualify for any tax credit in respect of the losses covered
by the funds contributed by Fintecna.

the company, through the mechanism for adjusting the
price of the transfer of the 50,1 % of the share capital still
in Fintecna’s possession.

The Italian Government should be required to submit
periodic reports on the progress of privatisation and on
the implementation of the restructuring plan drawn up
for Condotte,

HAS ADOPTED THIS DECISION:

Article 1

The aid to Societ(cid:133) Italiana per Condotte d’Acqua SpA
(Condotte) to which this Decision relates, namely the
capital injections granted in the years 1995 to 1997 total-
ling ITL 163 billion, and the aid granted up to 1994
already approved by the Commission, amounting to a
total of ITL 110 billion, constitute State aid within the
meaning of Article 92(1) of the Treaty and Article 61(1) of
the EEA Agreement.

It satisfies the tests laid down in the Community Guide-
lines of 27 July 1994 on State aid for rescuing and
restructuring firms in difficulty. The aid is consequently
declared exempt, under Article 92(3)(c) of the Treaty and
Article 61(3)(c) of the EEA Agreement, from the prohibi-
tion imposed by Article 92(1) of the Treaty and Article
61(1) of the EEA Agreement, being aid that is compatible
with the common market, provided that Article 2 is
complied with.

Article 2

Italy shall transfer its remaining shares in Condotte to the
private shareholder on the terms and conditions stipu-
lated in the contract of sale, in particular the terms within
which the option is to be exercised.

Article 3

In order to secure full cooperation in the arrangements
for monitoring this Decision, Italy shall provide the
Commission with half-yearly reports on Condotte’s
economic and financial situation and communicate to it
in good time the main steps in the transfer of Fintecna
SpA’s remaining holding in Condotte.

Lastly, the recipient will make a significant contribution
to the financing of the restructuring operation, as any
further burdens are to be borne entirely by the buyer of

The first report shall set out Condotte’s economic and
financial results at 30 June 1998 and shall reach the
Commission by 31 December 1998.

L 129/42

EN

Official Journal of the European Communities

22. 5. 1999

This Decision is addressed to the Italian Republic.

Article 4

Done at Brussels, 16 September 1998.

For the Commission

Karel VAN MIERT

Member of the Commission