1999/657/EC: Commission Decision of 3 March 1999 on the aid which Germany has granted by way of development assistance to Indonesia in connection with the construction of two dredgers by Volkswerft Stralsund and the sale of the dredgers to Pengerukan (Rukindo) (notified under document number C(1999) 585) (Text with EEA relevance) (Only the German text is authentic)
Date: 1999-03-03
Institutions: European Commission
Subjects: Germany, Indonesia, State aid, aid to industry, development aid, shipbuilding

6. 10. 1999

EN

Official Journal of the European Communities

L 259/19

II

(Acts whose publication is not obligatory)

COMMISSION

COMMISSION DECISION

of 3 March 1999

on the aid which Germany has granted by way of development assistance to Indonesia in
connection with the construction of two dredgers by Volkswerft Stralsund and the sale of the
dredgers to Pengerukan (Rukindo)

(notified under document number C(1999) 585)

(Only the German text is authentic)

(Text with EEA relevance)

(1999/657/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European
Communities, 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 last extended by
Council Regulation (EC) No 2600/97 (2), and in particular
Article 4(7) thereof,

Having called on interested parties to submit their comments
pursuant to Article 93 of the EC Treaty cited above (3) and
having regard to the comments received,

Whereas:

I. Procedure

The European Dredging Association informed the Commission
that Germany had granted aid for the sale of three dredgers
which were built in Germany, and that the aid appeared to be
in breach of Directive 90/684/EEC (hereinafter referred to as
‘the Shipbuilding Directive’).

By letter dated 6 November 1996, Germany provided the
Commission with further information.

(1) OJ L 380, 31.12.1990, p. 27.
(2) OJ L 351, 23.12.1997, p. 18.
(3) OJ C 192, 24.6.1997, p. 9.

By letter dated 15 April 1997,
the Commission informed
Germany that it had decided to initiate Article 93(2) proceed-
ings in respect of the aid.

The Commission decision to initiate proceedings was published
the European Communities (4). The
Journal of
in the Official
Commission invited interested parties
their
comments on the measures.

to submit

The Commission received comments from interested parties.
They were forwarded to Germany, which was given the oppor-
tunity to react; its comments were received by letters dated 18
June and 9 October 1997.

By letter dated 24 March 1998, the Commission informed
Germany that it had decided to close part of the proceedings,
namely the proceedings regarding the vessel KK Aru II. By letter
dated 24 June 1998, Germany provided the Commission with
additional information regarding the other two dredger vessels,
CD Batang Anai and FF Bali II.

II. Detailed description of the aid

Stralsund

In 1994 the Commission approved development aid to be
granted in connection with the sale of three dredgers by Volks-
corporation
werft
Pengerukan (Rukindo), hereinafter referred to as ‘Rukindo’. By
letter SG(94) D/6533 of 17 May 1994,
the Commission
informed Germany of its approval. The development aid was

Indonesian public

to the

(4) See footnote 3.

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Official Journal of the European Communities

6. 10. 1999

granted in the form of a loan from the Kreditanstalt für Wieder-
aufbau. The loan covered 90 % of the contract value for a
period of 11 years at an interest rate of 3,5 %. The OECD aid
equivalent was 25,35 %. Rukindo is a state limited-liability
corporation, 100 % of its shares being owned by the Ministry
of Finance, and the borrower of the loan is the Republic of
Indonesia, represented by the Ministry of Finance.

In the notification of the proposed aid of 24 March 1994, it
was stipulated in which locations in Indonesia the dredgers
were to be used. In its letter of approval to Germany, the
Commission stated that the dredgers were to be used only in
Indonesia.

The European Dredging Association informed the Commission
that
the vessels were being used in Taiwan and Thailand.
Apparently the operator of the vessels participated in inter-
national
companies
supplying dredging services. According to the Association, the
aid enabled the supplier to charge a price which was below the
market price.

in competition with other

tenders

Germany confirmed that one dredger had been used outside
Indonesian waters, in Malaysia. However, it did not mention
any operations in Taiwan or Thailand, as reported by the
European Dredging Association.

Germany 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 in-
vitations to tender. In addition, Germany undertook to draw
the Indonesian Government's attention to the fact that the
dredgers could properly be used only for the purpose for which
they were originally acquired.

Germany could not provide information on Rukindo's financial
situation, since this subordinated body did not draw up any
certified and informative annual accounts and since no direct
loan relationship existed with the company.

In the light of the answer given by Germany, the Commission
took the view that the manner in which the dredgers had been
to comply with the Commission's
used did not appear
approval of 17 May 1994. Furthermore,
the Commission
doubted whether the project could still be assumed to be in the
nature of development aid, and it therefore questioned whether
the measure was compatible with the conditions laid down in
Article 4(7) of the Shipbuilding Directive.

The Commission therefore decided to initiate proceedings
under Article 93(2) of the EC Treaty.

III. Comments from interested parties

Following publication of a notice on the initiation of proceed-
ings, Denmark and the 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
Shipbuilding Directive.

IV. Comments from Germany

Germany made the following points.

The dredgers were acquired in connection with the develop-
ment of the main Indonesian ports in Tanjung Priok, Batam,
Bojonegra, Surabaya, Belawan, Semarang, Panjang and Ujung
Padang, which have water depths of up to nine metres.

furthermore,

Due to unforeseeable financial difficulties, it proved impossible
to make available all the funds required for the development
work, and dredging work was carried out only to a limited
extent in the ports of Belawan, Tanjung Priok and Surabaya.
Since,
the maritime development projects are
being carried out by private firms as well as by the Indonesian
Government, delays are becoming less and less predictable. The
delays affect projects for the development of ports or land
reclamation in the following locations: Bojonegra, Benoa/Bali,
Maruda/Jakarta, Situbondo, Kuala Namu, Ancol Barat, Ancol
Timur, Surabaya, Kapuk Naga, Pantai Mutiara, Pelabuhan Ratu,
Kerawang, Ring Road/Surabaya, Betio Benoa Bali and Bali
Benoa Marina. In line with the availability of funds, all of
Rukindo's dredgers,
including KK Aru II, FF Bali II and CD
Batang Anai, are being used to continue or complete the
projects. However, Rukindo does not know what the results of
the current Indonesian crisis might be in terms of
further
delays in carrying out projects.

At
the time when the contracts were concluded for the
dredgers and when the aid was granted, it was not known what
other scope would exist for deploying the vessels outside Indo-
the planned Indonesian projects
nesia. The deferment of
became clear only after the dredgers had been delivered; only at
that point in time, which was long after the aid had been
granted, did Rukindo try to find other ways of deploying the
dredgers.

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. The deeper draught of these
dredgers restricted the opportunities for alternative deployment
in other Indonesian harbours and waterways. In order to limit
periods of inactivity as far as possible and 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 dredging firms, which then used the vessels
outside Indonesia. Use abroad occurred only during slack
periods when harbour extension projects were delayed. The
leasing-out of the dredgers for use abroad should be seen as an
effort to make efficient use of the development aid by gener-
ating additional capital for the project in the form of foreign
currency. Furthermore, the use of the dredgers abroad made it
possible to acquire and develop know-how during the periods
when the dredgers could not be used in Indonesia.

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Official Journal of the European Communities

L 259/21

The use of the dredgers abroad did not run counter to the
primary objective of developing Indonesian transport infra-
structure. The completion of work on domestic projects
continued to have absolute priority. Rukindo used the dredgers
for the project work that had to be carried out in Indonesia,
while any use of the dredgers outside Indonesia was excep-
tional (CD Batang Anai: Taiwan 1995, 35 working days out of
a total of some 130 days spent in Taiwan; FF Bali II: Malaysia
1995, 35 days, 1997, 120 days) and did not involve any
economic profit. The exceptional use of the vessels in Taiwan
and Malaysia is of negligible significance compared with the
use made of the vessels in Indonesia and compared with the
11-year term of the credit or the total technical
life of the
dredgers.

Rukindo only twice requested tender documents, but in both
cases it did not participate in the tender. Rukindo itself never
participated directly in international tenders and never entered
into direct competition with foreign firms. Rukindo thus had
no direct influence on the pricing of services by the main
tendering contractor, especially since the usual practice was for
the main contractor not to enter into negotiations with the
various dredging companies until after being awarded the
contract. As a subcontractor or sub-subcontractor, Rukindo
had to accept the prices specified.

The use of the dredgers abroad in fact resulted in actual losses
and not in financial earnings. No income was earned that
would have made the granting of aid unnecessary. The use of
CD Batang Anai in Taiwan represented a real loss in terms of
the total subcontracting period, a loss which exceeded the costs
of any alternative idle or non-productive times in Indonesia.

Through the Kreditanstalt für Wiederaufbau, Germany has called
on the Indonesian Ministry of Finance to ensure that
the
dredgers acquired on the basis of the aid are used solely within
Indonesia. Germany notes that the loan agreement does not
contain any particular provision regarding the places where the
dredgers are to be used. However, in the discussions it was
made clear to the relevant
the
dredgers must be used only within Indonesia and that they
must not be used abroad. Domestic use is therefore the
unwritten commercial basis for the loan.

Indonesian ministries that

Finally, Germany requests that the effects of the economic and
financial crisis in East Asia and in Indonesia in particular be
taken into account.

V. Assessment of the aid

In 1994 the project was approved under Article 4(7) of the
Shipbuilding Directive. According to Article 4(7), 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 interpretation of
Articles 6 to 8 of the Understanding on Export Credits for
Ships, or with any corrigendum to the said Agreement.

The Commission must be given prior notification of any such
individual aid proposal. It will verify the particular develop-
ment content of the proposed aid and satisfy itself that it falls
within the scope of the Agreement.

In its judgment of 5 October 1994 the Court of Justice held in
‘It is precisely the examination of this
Case C-400/92 that:
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 that it complies
with the OECD criteria, constitute aid in favour of a shipyard in
a Member State which must be subject to the ceiling...’ (1).

The Commission's letter of 17 May 1994 stated on the basis of
the German notification that the dredgers were to be used only
in Indonesia.

Germany has confirmed that FF Bali II and CD Batang Anai
have not been deployed exclusively in Indonesia, which means
that the vessels have not been used in accordance with the
conditions attached to the Commission's approval. Conse-
quently, the aid has been misused.

Germany argues that these deployments of the dredgers were
not foreseeable at the time when the vessels were ordered and
the aid granted. The Commission cannot rule out the poss-
ibility that this was in fact the case; however, owing to the
delays, the primary objective of the aid has not been fully
achieved. It is uncertain to what extent the development aid
has in fact enabled Indonesia to fully pursue the development
objective.

The Commission takes note of the argument put forward by
Germany that Rukindo might not have had any influence on
the tender prices abroad and that the deployment abroad might
not have been profitable to any great extent. However, it does
not preclude that the vessels were deployed outside Indonesia
in competition with other companies and that
the prices
offered were below the market price as a result of the aid. In
fact, on the basis of the information made available to the
Commission, it is not possible to distinguish between the use
of the vessels within Indonesia and outside Indonesia in a way
that ensures that the aid was beneficial only to Indonesia and
not directly beneficial to countries that in principle should not
benefit from development aid. Thus, the deployment outside
Indonesia is problematic in any case. The Commission cannot
accept Germany's argument that the use outside Indonesia did
not explicitly run counter to the initial objective of the aid. The
initial objective was to aid development inside Indonesia. By
using the dredgers outside Indonesia, there was not only a
reduction in the development contribution to Indonesia in the
form of dredging carried out by the dredgers within Indonesia,
but, in addition, there might have been distortion created on
the dredging market in a country which is not on the list of
countries eligible for development aid. Consequently, since the
vessels which received development aid have been deployed
outside Indonesia and in addition have been deployed on a
purely commercial basis in Malaysia and Taiwan, which are not
on the list of countries eligible for development aid (2), the
development aid content of the project is put in doubt.

(1) [1994] ECR I-4701, paragraph 21.
(2) Commission letters to Member States SG(89) D/311 and SG(97)

D/4341.

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6. 10. 1999

Germany has argued that the deployment outside Indonesia has
been negligible compared to that in Indonesia. Tables provided
by Germany show, however, that, from 1994 to 1997, FF Bali
II was used for 743 days in Indonesia and 155 days in
Malaysia. From 1995 to 1997, CD Batang Anai was used for
357 days in Indonesia and 35 days in Taiwan, where the vessel
was stationed for no less than approximately 130 days in
1995. The Commission does not share the view that use of the
vessels outside Indonesia amounting over a period of three to
four years to approximately 9 % and 17 % can be considered
exceptional or negligible.

Furthermore, in view of the large number of islands making up
Indonesia, the Commission is not convinced that it was im-
possible to deploy the vessels elsewhere in Indonesia, thereby
ensuring a genuine development content and compliance with
the Commission's approval. Moreover, the fact that the condi-
tion regarding the location of the vessels was not stated in the
loan agreement obviously did not explicitly encourage the
operator to seek such options. Although Germany informed
the Indonesian parties that the vessels could be used only in
Indonesia, in reality the Indonesians were not legally obliged to
comply with this request given that no such condition was
stated in the loan agreement.

Germany was obliged to ensure that the granting of the loan
was in line with the conditions laid down in the Commission's
approval of 17 May 1994. Therefore, the fact that Germany did
not specify this important condition in the loan agreement and
thus did not fully comply with the conditions of the Commis-
sion decision, cannot serve Germany as an excuse for the
misuse of the aid or its inability to influence Indonesia in this
matter. In addition, the omission of the condition in the loan
agreement raises doubts as to whether the development objec-
tive was the main concern in the project.

the time of

Had the Commission known at
its approval
decision (letter of 17 May 1994) that the vessels were not
intended for exclusive use in Indonesia and that they would in
fact be used on a commercial basis in Malaysia and Taiwan, it
would not have approved the aid. Consequently, the Commis-
sion considers that the aid has been misused and that a genuine
development objective was not pursued.

VI. Conclusions

The Commission finds that the aid granted by Germany in
connection with the building of the dredgers FF Bali II and CD
Batang Anai has been misused. The aid cannot be considered to
be genuine development aid within the meaning of Article 4(7)
of the Shipbuilding Directive. The aid distorts or threatens to
distort competition within the common market and affects
trade between Member States in relation to shipbuilding to an
extent contrary to the common interest,

HAS ADOPTED THIS DECISION:

Article 1

The state aid which Germany has granted in the form of a
credit facility in connection with the sale of the dredgers FF Bali
II and CD Batang Anai to Pengerukan (Rukindo), Indonesia, has
been misused and is incompatible with the common market.

Article 2

Germany shall recover from the recipient the aid referred to in
Article 1.

Recovery shall be effected in accordance with the procedures
and provisions of German law. The sums to be recovered shall
bear interest from the date on which they were made available
to the recipients until their actual recovery. Interest shall be
calculated on the basis of the reference rate used for calculating
the grant-equivalent of regional aid.

Article 3

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

Done at Brussels, 3 March 1999.

For the Commission

Karel VAN MIERT

Member of the Commission