1999/600/EC: Commission Decision of 21 April 1999 on the state aid granted by Germany to Dieselmotorenwerk Rostock GmbH (notified under document number C(1999) 1121) (Text with EEA relevance) (Only the German version is authentic)
Date: 1999-04-21
Institutions: European Commission
Subjects: Germany, State aid, application of EU law, control of State aid, diesel fuel, engine

L 232/24

EN

Official Journal of the European Communities

2. 9. 1999

II

(Acts whose publication is not obligatory)

COMMISSION

COMMISSION DECISION

of 21 April 1999

on the state aid granted by Germany to Dieselmotorenwerk Rostock GmbH

(notified under document number C(1999) 1121)

(Only the German version is authentic)

(Text with EEA relevance)

(1999/600/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)(1) thereof,

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

Having called on interested parties to submit their comments
on the aid,

Whereas:

Germany replied by letters of 30 April, 14 July and 10 and 12
September 1997, in which it also informed the Commission of
additional aid granted and of a restructuring plan. Further
particulars were provided at a meeting on 15 October 1997
between representatives of the Commission and the German
authorities.

By letter of 17 December 1997, the Commission informed
Germany of its decision to extend the procedure laid down in
Article 93(2) of the EC Treaty to the aid measures taken in the
meantime and of its continuing doubts as to the compatibility
of
the total amount of restructuring aid with the internal
market.

I. PROCEDURE

the Bundesanstalt

By letter of 25 April 1996, Germany informed the Commission
that
für vereinigungsbedingte Sonderauf-
gaben (BvS, the successor to the Treuhand privatisation agency)
had granted DEM 20 million in rescue aid in form of a loan to
Dieselmotorenwerk Vulkan GmbH (DMV).

By letter of 11 February 1997,
the Commission informed
Germany of its decision to initiate the procedure laid down in
Article 93(2) of the EC Treaty in respect of this aid. In so
doing, the Commission gave Germany formal notice to provide
it with all the information needed for examining the aid within
one month of being notified of the decision.

The Commission decision to extend the procedure was
published in the Official Journal of the European Communities (2)
The Commission again invited interested parties to submit their
comments on the aid.

II. DETAILED DESCRIPTION

1. Dieselmotorenwerk Rostock GmbH (DMR), which was
known as Dieselmotorenwerk Vulkan from 1995 until 31 July
1997, was divided until recently into four locations:

The Commission decision to initiate the procedure was
published in the Official Journal of the European Communities (1).
The Commission invited interested parties to submit
their
comments on the aid.

— the head office and the engine factory in Rostock-Warne-
münde and in the city of Rostock, with a workforce of
about 360; the main activity is the production, testing and
repair of heavy two-stroke diesel engines for cargo vessels,

(1) OJ C 119, 17.4.1997, p. 8.

(2) OJ C 169, 4.6.1998, p. 8.

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Official Journal of the European Communities

L 232/25

— the erstwhile engine factory in Bremen-Vegesack, which
produced ship engines until August 1997;
is now
primarily a foundry and a facility for heavy steel construc-
tion which produces a number of basic components for the
engines mounted in Warnemünde as well as foundry and
steel products for other customers; its present workforce is
about 155,

it

— Mecklenburger Metallguß GmbH (MMG)

in Waren, a
medium-sized company producing mainly fixed-pitch
propellers for vessels, with a workforce of about 110; DMR
sold MMG on 27 January 1999 to Walzengießerei Coswig
GmbH and Herzberg & Partner GmbH,

— Wismarer Propeller and Maschinenbau GmbH (WPM)

in
Wismar, a medium-sized manufacturer of
shafts and
controllable-pitch propellers for vessels, with a workforce
of about 50; this company was sold in October 1998 to
Schottel-Werft Josef Becker GmbH & Co. KG and Schottel
Antriebstechnik GmbH.

The scope of this decision is limited to the parent company
DMR, with its factories in Rostock and Bremen. As WPM and
MMG were sold during the state aid proceedings and as their
restructuring entails separate restructuring aid, the Commission
will take separate decisions on the rescue and restructuring aid
for them.

2. The origins of DMR date back to 1947, when motor
production began in Rostock in the former German Demo-
cratic Republic (GDR). After the unification of Germany, DMR
was part of the Deutsche Maschinen and Schiffbau AG (DMS).
DMR was first privatised in 1992 and sold to Bremer Vulkan
Verbund AG (BVV) (3). By a contract dated 16 December 1994,
DMR was merged with the engine manufacturing department
of Bremer Vulkan Werft GmbH in Bremen to form the new
company DMV.

After its first privatisation, DMR/DMV carried out an invest-
ment programme DEM 192,5 million primarily for
the
construction of a new engine plant in Rostock-Warnemünde
which was commissioned in 1994-96. The investment cost
exceeds the minimum amount specified in the privatisation
agreement of 1992.

DMR underwent restructuring on several occasions after 1990,
and the situation was exacerbated on account of the purchase
of the loss-making engine factory in Bremen at its book value

(3) The sales agreement (Kauf- and Abtretungsvertrag) of 11 August 1992
was concluded between the Treuhandanstalt and DMS, on the one
hand, and BVV and Schichau Seebeckwerft AG, on the other. This
privatisation was governed by the Treuhand regime of 1992
(Commission Decision of 8 December 1992). An individual notifica-
tion to the Commission was not required under those rules since
the size of DMR and the financial transactions involved were below
the relevant thresholds.

for
of DEM 65 million. According to the auditor's report
1995, DMV had been in severe economic difficulties since
1994. The company had to report
for 1995 a loss of
DEM 165 million, with its equity (capital and reserves) being
reduced from DEM 178 million to DEM 12,9 million. The
liquidity of the company was ensured primarily by loans of
DEM 52,6 million (4) under BVV's cash concentration system
and by a loan of DEM 25 million granted by BvS in 1994.

3. Towards the end of 1995 BVV, DMV's parent company,
ran into severe financial difficulties. It had to apply for a debt
composition procedure (Vergleich) on 21 February 1996 and
went into receivership on 1 May 1996. BVV's cash concentra-
tion system was terminated at the end of 1995. At the end of
March 1996 DMR faced a liquidity gap of some DEM 18
million, which threatened to rise to about DEM 30 million by
end of April 1996. No commercial bank was prepared to
provide fresh money to the company.

4.
In order to rescue the DMR group and to ensure continua-
tion of the restructuring, BvS and the Land of Mecklenburg-
Western Pomerania provided the following aid by end of 1998:

1. a loan of DEM 30 million (DEM 20 million from BvS and
DEM 10 million from the Land authorities), originally at an
interest rate of 3 % above the discount rate, was disbursed
on 2 April 1996, originally to fall due on 31 December
1998;

2. a loan of DEM 19,5 million (BvS, DEM 13 million; Land
authorities, DEM 6,5 million), was disbursed in July 1996,
on the same terms as at 1;

3. a credit line of DEM 25 million (again jointly financed by
BvS and the Land authorities):
first tranche of DEM 15
million disbursed in June 1997; second tranche not yet fully
disbursed; maturity: 31 December 1999;

4. state guarantees for an amount of up to DEM 15 million,
increased in September 1997 to a maximum of DEM 60
million. These guarantees are counter guarantees (Avale) for
advance payments received as well as performance bonds
and post-delivery guarantees to be provided by DMR in the
context of contracts for ship engines; the guarantees were
originally valid until privatisation or until 31 December
1999 at the latest;

5. a 100 % state guarantee (5) provided on 22 February 1996
by the Land authorities to secure a commercial bank loan of
DEM 10 million;

6. a 100 % state guarantee provided by BvS and the Land
authorities in the autumn of 1997 and running until 31
December 1998 to secure a credit line of DEM 10 million.

(4) As at 31 December 1995. See Commission Decision 98/2405/EC of
22 July 1998 (not yet published in the Official
Journal) on the
misuse of restructuring aid for MTW-Schiffswerft and Volkswerft
Stralsund,
two companies formerly belonging to Bremer Vulkan
Verbund, and on the unauthorised provision of an investment loan
of DEM 112,4 million to MTW. Section II.5 of
that decision
contains a detailed description of the cash concentration system. As
stated in Section IV of that decision, it is very likely that the main
debtors, one of these being DMR, received some of the misused aid.
However, since the funds were mixed,
it has not been possible to
obtain evidence in full.

(5) This guarantee is

fully secured by land charges

(Grundschulden)

amounting to DEM 35 million.

L 232/26

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Official Journal of the European Communities

By letter of 10 September 1997, Germany informed the
Commission that BvS and the Land authorities had waived
payment of interest and redemption for the loans mentioned at
points 1 to 3 and that these loans could be converted into
subordinate shareholder loans if the need arose. According to
loans for an amount of
the auditor's report
DEM 49,5 million had been declared subordinate in order that
DMR need not go into receivership (Gesamtvollstreckung). By the
same letter, Germany also announced that BvS had waived
interest on the investment loan of DEM 25 million granted in
1994 and that this loan would be converted into equity. The
original interest rate was 8,5 % per annum. The principal was
to be repaid on 30 October 2000.

for 1997 (6),

By letter of 21 December 1998, Germany notified the intention
of BVS and the Land authorities to grant DEM 10 million in
social aid to the 140 or so staff to be laid off in 1999. The
detailed restructuring plan annexed to that
also
mentioned the need to prolong the state guarantees amounting
to DEM 60 million until at least the end of 2001 (7).

letter

Since 1996 DMR has taken a number of financial meas-
5.
ures in favour of
its subsidiaries WPM and MMG. As the
present decision does not extend to WPM and MMG, the
amounts involved have to be deducted. It is obvious from
Germany's letters of 10 September 1997 and 14 December
1998 (8) as well as from the auditor's reports that at least the
waiver of claims and the capital increases in cash in favour of
WPM and MMG were refinanced with aid given to DMR.
Therefore an amount of DEM 10,0 million has to be deducted
from the aid specified in point 4 above, as this amount was not
used for DMR proper but for its subsidiaries (9).

6. DMR's financial results for the period 1994-98 show sharp
fluctuations reflecting the changes in its main activity (produc-
tion and repair of ship engines), which contributes more than
80 % of turnover. The figures shown in the following table are,
however, not fully comparable as there was a radical change in
accounting practices between the business years 1994 and
1995. The positive annual result in 1997 is caused mainly by
the debt waiver agreed at the time of the separation of DMR
from BVV.

DMR/DMV: Turnover and financial results 1994-98

Year

Turnover

Operating
result

180,5

4,4

(million DEM)

Annual
result

4,1

1994

1995

1996

1997

181,4

– 165,2

– 165,2

252,7

210,7

– 70,5

– 26,3

– 71,0

30,1

(6) Received by the Commission on 6 October 1998.
(7) Arthur D.

Little, Überarbeitete Geschäftsplanung

1999–2001

(Chapter 3.4).

(8) Notification of the privatisation of WPM.
(9) For information purposes:

(a) WPM

Liquidity aid: DEM 1,5 million
Supplies and services: DEM 0,6 million
User fees: DEM 0,2 million

(b) MMG

Increase in capital (physical assets,
land): DEM 1,7 million
Increase in capital (capital contribution): DEM 6,00 million.

Year

Turnover

1998 (p) (1)

194,1

1998 (e) (2)

[...] (*)

Operating
result

12,7

n.a.

1999 (p)

2000 (p)

2001 (p)

[...]

[...]

[...]

n.a.

n.a.

n.a.

2. 9. 1999

(million DEM)

Annual
result

4,2

[...]

[...]

[...]

[...]

(1) Planned results according to the 1997 restructuring plan.

(2) Estimated results according to the revised plan of December 1998 (DMR
without WPM and MMG); the deterioration in 1998 was caused mainly by loss
provisions for the planned redundancies in the following years.

(*) Business secret.

7. The number of ship engines delivered was 19 in 1994, 17
in 1995, 29 in 1996, 18 in 1997 and 17 in 1998. DMR plans
to produce [...] in 1999, [...] in 2000 and [...] in 2001.

In the period 1993-97 DMR was the largest supplier of large
two-stroke diesel engines in the Community. In Germany it
had a market share of between 53 % (1995) and 83 % (1996).
For the period 2000/2001 DMR hopes to retain a market share
in Germany of some 50 %.

for

8. The two-stroke diesel engines produced by DMR are used
for cargo vessels. Normally tankers, bulk carriers and container
vessels are equipped with two-stroke engines while most other
types are equipped with four-stroke engines. The engines are
produced under licence. On a worldwide basis, there are three
licensors
such engines: MAN B & W AG (based in
Germany), Wärtsilä NSD Oy AB (based in Finland) and Mitsu-
bishi Heavy Industries (based in Japan). DMR has a licensing
agreement with all three, but the Mitsubishi licence has not
been exploited. The agreements cover Germany and eastern
Europe except Poland and Croatia. Hence, the demand for
engines from DMR depends basically on the contracts for cargo
vessels awarded to German yards.

As long as DMR was linked to Bremer Vulkan, the company
obtained almost all the engine contracts for new ships built at
Bremer Vulkan yards, and the original business concept was
based on the expectation that this would secure full capacity
utilisation for DMR. On the other hand, DMR had hardly any
access to orders from other yards as these were very reluctant
to place orders with a competitor.

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L 232/27

In 1995 the Bremer Vulkan yards (10) had received a large
number of orders for container vessels. Although some of these
orders were later cancelled, this provided DMR with a very
healthy order book extending in some cases until 1999. Never-
theless as regards new contracts, DMR's position has changed
totally with the collapse of BVV. It is now forced to bid for
contracts on the open market, often in direct competition with
yards in eastern Asia licensed by Man B & W or Wärtsilä NSD.
Apart from problems caused by its weak financial standing,
DMR's position is difficult because it is almost the only engine
builder linked neither to a licensor nor to a major shipyard.

The number of cargo vessels built
in the Community is
decreasing. The European market share is almost negligible for
tankers and bulk carriers. The market for container vessels, the
mainstay of German shipbuilding, has become very difficult as
well, with a sharp decrease in new orders in 1996 and again in
1998. Most of the German yards are attempting to address this
problem by producing different
types of ship or offshore
equipment, although this does not produce any orders for
engines from DMR.

The prices of engines in German mark terms were under heavy
pressure in 1994/95 and again in 1998. DMR's consultant
expects the price level to remain at the present low level until
the end of 2001 (final year of the investigation period). The
main competition now comes from Korea, where a few large
engine factories have come on stream in recent years. European
manufacturers, and in particular DMR's new plant, do though
enjoy advantages when it comes to servicing European yards
on account of their closeness to customers, which bears fruit in
the mounting and testing period. The financial results of most
players on this market were unsatisfactory in 1998. Profits
come less from the sale of new engines than from the delivery
of spare parts and repair works. There is fierce competition
between the licensors and, despite the licensing agreements,
fierce competition as well between engine manufacturers,
although this is felt mostly outside the Community.

Following the collapse of

the BVV group in February
9.
1996, BvS and the Land authorities entered into negotiations
with the administrator of BVV with a view to its separation
from the group. These negotiations were held up because of
parallel negotiations on an early sale of DMR to one of the
licensors (MAN B & W) which broke up in September 1996. By
an agreement of 28 April 1997, the shares were transferred at
a symbolic price from BVV's intermediate holding company
Vulkan Industrie Holding GmbH in Konkurs (VIH) to BvS
(51 %) and to the Land of Mecklenburg-Western Pomerania
(49 %). At the same time it was agreed, subject to approval
from the European Commission, that VIH would waive repay-
ment of about DEM 54,8 million of claims against DMV

(10) The main yards were: Bremer Vulkan Werft, Schichau Seebeckwerft,

Flender Werft, MTW-Schiffswerft and Volkswerft.

related to the cash concentration system that operated until the
beginning of 1996 (11).

According to the auditor's report for 1996, bankruptcy of
DMR in that year was avoided only by making VIH's claims
subordinate and by the informal declaration by BvS and the
Land authorities that they would acquire DMR.

10. BvS and the Land authorities acquired DMR with the firm
intention of reprivatising it as soon as possible. Back in 1996
they had concluded an agreement with Goldman, Sachs & Co.
OHG to assist them in the search for potential buyers. The sale
proved, however, to be extremely difficult. First, owing to the
high degree of concentration in this industry, the number of
potential buyers is very small. Second, it was necessary to begin
by renegotiating the licensing agreements. The previous agree-
ments had been concluded with DMV when still a subsidiary of
BVV and their transfer to DMR needed the approval of the
licensors. Third, a sale of DMR was hardly possible as long as
the fate of its main customers, the former BVV yards, was
unresolved. Volkswerft GmbH and MTW-Schiffswerft GmbH
were reprivatised only in early 1998.

Discussions with potential investors started in early 1998. Until
now no tangible results have been achieved. According to
Germany's letter of 30 September 1998, negotiations on a
privatisation are taking place with H. Cegielski-Poznan SA
(HCP), a Polish engine builder. However, HCP is itself in the
process of being privatised and restructured. All the other plans
mentioned, such as discussions with two consortia of medium-
sized mechanical engineering firms who would use DMR's
facilities mainly for the manufacture of other products, remain
rather vague. It must therefore be concluded that the prospects
for a privatisation of DMR in its present form are remote.
Germany expects that privatisation will not be possible without
additional aid in the form of a debt waiver and in respect of the
costs of further redundancies.

11. DMR's attempt to draw up a restructuring plan with
assistance of the management consultant Arthur D. Little (ADL)
was considerably delayed by the privatisation negotiations in
1996, which finally collapsed. The plan, which has been partly
implemented since the autumn of 1996 and was finalised by
ADL in July 1997, was based mainly on the assumptions of an
annual production of 15 to 18 engines per year and stable
(1997) prices in German mark terms. The plan contains 56
different measures for achieving a sharp reduction in produc-
tion costs and the generation of operating profits from 1997
onwards. DMR managed to implement virtually all of these
measures, except the planned reduction in wages. It was there-
fore able to reduce operating losses in its ship-engine-related
activities from DEM 31,7 million (1996) to DEM 22,1 million
(1997) and it would have achieved an operating profit of
DEM 9,4 million in 1998 if special depreciation and loss
provisions for the coming years had not proved necessary.

(11) See footnote 4. More than 99 % of the shares of VIH had been
held by BVV, which exercised full financial and operational control
over the group. VIH's and BVV's bankruptcy procedures are being
overseen by the same administrator.

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2. 9. 1999

The Asian crisis and in particular the developments in the
Korean maritime industry caused at the beginning of 1998 a
sharp drop in the prices for ship engines, and German yards
won very few orders for cargo vessels equipped with two-
stroke engines. Consequently, DMR too was awarded very few
orders in 1998. The owners of DMR thus asked ADL to review
the July 1997 restructuring plan. The latest revised plan dates
from 21 December 1998. ADL expects the market to remain
very difficult until 2001, with low prices and depressed
demand. Production is to be reduced to only [...] engines in
1999, [...] in 2000 and [...] in 2001, this being regarded as the
bare minimum from a commercial point of view. Apart from
another 140 to 150 redundancies, the plan foresees temporary
closures in 1999, a wage freeze until the end of 2000 and
some diversification of production. The business plan is expli-
citly geared towards overcoming the present crisis, minimising
losses in 1999/2000 and breaking even in 2001. It does not
discuss the DMR's prospects in the medium and long term.

12. The Commission had opened and extended the proceed-
ings primarily because it had doubts whether:

(a) the commercial viability of DMR could be restored by

means of the planned restructuring;

(b) the very high level of aid granted was limited to the
amount absolutely necessary and whether the abnormally
low financing costs would cause distortive effects on
competition on the markets for ship engines and foundry
products.

III. COMMENTS FROM INTERESTED PARTIES

The Commission received comments on the opening of
proceedings from one Member State, which in its letter of 16
May 1997 supported the Commission's position. By letter of 6
June 1997, the Commission forwarded these comments to
Germany, which was given the opportunity to react. No such
reaction was forthcoming.

The Commission received no comments from interested parties
on the extension of the proceedings.

IV. COMMENTS FROM GERMANY

The comments received from Germany prior to the Commis-
sion's decision to extend the proceedings are quoted and
discussed in that decision (12). By letter dated 20 February
1998, Germany provided detailed information on DMR's
the restructuring
production programme,

the progress of

(12) See footnote 2.

programme and its financing, and the status of the negotiations
with potential

investors.

At a meeting on 1 July 1998 in DMR's head office, the restruc-
turing programme was discussed by the German Government,
the Land Government of Mecklenburg-Western Pomerania, BvS,
DMR and the Commission. It was concluded that the business
plan set out in the 1997 restructuring programme no longer
reflected market conditions, which had dramatically changed
since the end of 1997. It was agreed that the business plan
should be extensively revised.

By letter of 30 September 1998, Germany submitted a revised
provisional plan (13) based on an annual production of 10
engines. In its reply of 30 November 1998, the Commission
expressed strong doubts as to the viability of the plan, which
could not, in its view, restore a sound financial structure and
would necessitate open-ended financial support from the State.

By letter of 21 December 1998, received by the Commission
on 30 December 1998, Germany gave details of
further
changes to the business plan to cope with the continuing
deterioration on the market. DMR's board had decided on these
changes at its meeting on 7 December 1998. In its reply of 26
January 1999, the Commission informed Germany of its posi-
tion regarding the latest changes. While it accepted that the
revised plan was more realistic, it pointed out that the plan
more closely resembled a temporary rescue plan than a
genuine restructuring plan. The basic problem, namely that
DMR would need further state aid and that there were no
realistic prospects for a successful privatisation, remained.

V. ASSESSMENT OF THE AID MEASURES

1. The loans totalling DEM 74,5 million and the subsequent
waiver of
interest on them granted by BvS and the Land
authorities since April 1996 constitute state aid. The state
guarantees amounting to DEM 80 million also rank as state
aid. In their report for 1995, the auditors explicitly state that
the continued operation of DMR (then DMV) was possible only
if the State provided the necessary loans and/or guarantees (14).
Consequently, DMR was not able to receive loans from
commercial financial

institutions.

A further loan of DEM 25 million granted on 6 July 1994 by
BvS on market terms was converted into state aid in June
1997. At the time, BvS waived interest payments on this loan
and announced that it would be converted into equity if this
proved necessary (15).

The intended grant of DEM 10 million to finance the volun-
tary payments under the ‘social plan’ for employees to be made
redundant in 1999 represents new state aid as these payments
result from a specific agreement with the workforce and the
trade union. This aid was not covered by the extension of
proceedings as it was notified only on 21 December 1998.

(13) In the interests of a comprehensive presentation of

the restruc-
the letters of 30
the detailed contents of
turing programmes,
September and 21 December 1998 are discussed in Section II of
this Decision.

(14) C & L Treuarbeit Deutsche Revision AG, Bericht No 18 10 0147,
Jahres-

Dieselmotorenwerk Vulkan GmbH Rostock, Prüfung des
abschlusses zum 31.12.1995 (paragraph 125).

(15) See Section II.4.

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2. Under the agreement of 28 April 1997 on the takeover of
DMR (then DMV) by BvS and the Land of Mecklenburg-
Western Pomerania, VIH would dispose of DMV at a zero price
and waive its claims of DM 54,8 million (including accrued
interest) on DMV. These claims result from the cash concentra-
tion system practised in the Bremer Vulkan group until early
1996. The market value of VIH's claims was certainly very
much lower than the nominal value of DEM 54,8 million and
was probably even close to zero as the loans would have
ranked as equity in a bankruptcy procedure. VIH and its
administrator could therefore hardly expect any income to
accrue from their claims if they had retained ownership of
DMR. Any other private buyer of DMR would also have
required that the seller VIH waive its claims on DMR as the
company clearly had a negative value. BvS and the Land
authorities behaved therefore in this respect as a private
investor. The Commission can therefore accept this measure as
being in conformity with the private investor principle. It does
not constitute state aid.

and all subsequent aid as restructuring aid within the meaning
of the guidelines.

5. According to the guidelines, rescue aid must:

(i) consist of liquidity help in the form of loan guarantees or loans

bearing normal commercial

interest rates

State aid was provided in this form during the rescue
period. The loans from BvS carried an interest rate that
was three percentage points higher than the discount rate;
this can be regarded as a market rate given the originally
very short maturity of the loans. The credit line secured by
the state guarantee also carried a market interest rate. The
originally DEM 15 million
counter
(comprising for the most part Avale) secures business activ-
ities on commercial terms as well; most of them back bank
guarantees required to secure advance payments received
for ship engines under construction;

guarantees

of

3. The above aid is to be assessed under Article 92 of the
Treaty and in the light of the criteria set out in the Community
guidelines on state aid for rescuing and restructuring firms in
difficulty (‘the guidelines’) (16). Except for the DEM 10 million
grant notified on 21 December 1998, all the aid has to be
regarded as non-notified aid since all the measures were imple-
mented before the Commission was able to take a position on
them. Germany failed to respect its notification obligations
under Article 93(3) of the Treaty.

4. The guidelines distinguish between rescue and restruc-
turing aid. In the present case this distinction is difficult to
apply because DMR was already being restructured when the
Bremer Vulkan group collapsed at the beginning of 1996. Until
the autumn of 1996 there were good reasons to believe that
DMR could be sold to one of the licence holders and, conse-
quently, the preparation of a new restructuring plan and the
separation of DMR from VIH were deferred. The basic elements
of the restructuring plan were agreed on 11 February 1997 (17).
On that basis BvS and the Land authorities took over the shares
of DMR by means of an agreement dated 28 April 1997 and
the Commission was informed of the agreed restructuring plan
by Germany by letter of 10 September 1997. As the measures
taken immediately after the takeover by the new owners for a
financial restructuring of DMR were clearly intended to cover a
longer period, it is considered appropriate to consider the aid
granted prior to the agreement of 28 April 1997 as rescue aid

(ii) be restricted to the amount needed to keep a firm in business

Germany provided evidence that the funds were limited to
the minimum and disbursed only when the payment ob-
ligations became due. With the exception of very minor
amounts,
the loans and guarantees served to finance
DMR's day-to-day business since the company, as a part of
its
the bankrupt Bremer Vulkan group, had lost all
working capital in the group and had virtually no access to
commercial financing. Its clients were mainly the shipyards
of the former Bremer Vulkan group, which were finan-
cially strained and also had to undergo financial restruc-
turing;

(iii) be paid only for the time needed (generally not exceeding six
months) to devise the necessary and feasible recovery plan

As explained above, the Commission can accept in this
particular case the delays in drawing up a feasible restruc-
turing plan, primarily because the intended sale of the
enterprise failed at the last minute in September 1996
owing to a commercial decision taken by the administrator
of BVV (18) but also because of the extreme complexity
caused by the disintegration of the Bremer Vulkan group;

(iv) be warranted on the grounds of serious social difficulties and
have no undue adverse effects on the industrial situation in other
Member States

The main part of DMR is located in Rostock, a smaller part
in Bremerhaven. Both regions are classified as assisted
areas and suffer from very high unemployment. In addi-
tion, both were particularly affected by the collapse of
Bremer Vulkan as this group was one of their main indus-
trial employers. The rescue aid is therefore justified on
social grounds.

(16) OJ C 368, 23.12.1994, p. 12.
(17) KPMG Deutsche Treuhand Gesellschaft, Prüfungsbericht zum Jahres-

abschluß 1996.

(18) The administrator decided not to sell VIH's shares in Neue Sulzer
in this way, a higher

Diesel together with the DMR shares since,
price could be obtained.

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2. 9. 1999

engine

The analysis of the impact of the aid on the industry in
other Member States can concentrate on the German
market for ship engines as DMR's activities did not extend
beyond this market at the time (19). As described in Section
II.8, market access for engine producers is limited by the
licensing agreements, which usually delineate the territory
for the producer's activities. However, these agreements do
not grant a territorial monopoly. In practice, each engine is
put up for tender by the relevant shipyard in consultation
with the shipowner, and there is fierce competition for the
contracts worldwide. DMR and other
larger
Community engine builders have to compete primarily
against ‘trade engines’
(‘Handelsmotoren’) produced under
licence by east Asian, primarily Korean, manufacturers.
The prices are therefore more or less set by these leaders
on the world market and the competitiveness of European
manufacturers for standard types of engine depends a great
deal on the exchange rate and the capacity utilisation in
Asia. Producing a ship diesel engine takes about one year,
the full process from contract negotiations until delivery
two years. In the relevant rescue period (1996 to spring
1997), DMR received no new orders but lived on the
backlog of orders placed during the container ship boom
at the end of 1995. In view of this specific situation, it can
be assumed that the rescue aid had no adverse effect on
European competitors.

Although the rescue aid was not notified and was therefore
granted illegally, the Commission has been able to declare it
compatible with the common market given the specific circum-
stances described above. The financial measures were taken to
ensure the short-term survival of DMR and, in view of their
characteristics, they satisfy the criteria laid down in the guide-
lines.

6. The restructuring aid replaced the rescue aid, since all the
measures were prolonged on more favourable terms, and
comprised (20):

— the waiver of interest and the suspension of repayment of
the loans granted during the rescue period and under the
previous privatisation plan of 1994,

— the provision of fresh loans and the increase in the ceiling
for counter guarantees from DEM 15 million to DEM 60
million.

Land authorities had become subordinate and could be
converted into a participating interest.

The credit line of DEM 25 million created and partly disbursed
in June 1997 has also been given subordinate status. By letter
of 20 February 1998, Germany stated that a repayment as
from 1 January 1999 can be made only in so far as the
enterprise was not overindebted. This measure too is to be
considered as a grant to the extent of the amount disbursed,
with an aid intensity of 100 %, since DMR is overindebted.
According to the auditor's reports for 1996 and 1997, the
equity is negative.

The total cash aid amounts therefore to DEM 99,5 million, of
which DEM 10 million needs to be deducted as it was used for
the subsidiaries WPM and MMG.

The counter guarantees of DEM 60 million provided by BvS
and the Land authorities cover in essence the completion and
post-delivery risks associated with DMR's contracts. Given the
nature of the activities, a total loss is very unlikely since, even
in case of bankruptcy, most contracts will be settled. In consid-
eration of the deficiencies to be normally expected in such
situations, the Commission estimated an aid intensity of 20 %,
corresponding to an aid equivalent of DEM 12 million.

The guarantee of DEM 10 million provided by the Land
authorities to secure a bank loan of originally the same amount
has been reduced to DEM 6,85 million in view of the repay-
ments made by DMR according to Germany's letter of 20
February 1998. The aid intensity is 100 % of the outstanding
amount. The same applies to the guarantee of DEM 10 million
granted by BvS to secure short-term bridging loans.

8. The total aid equivalent of the restructuring aid provided
in the form of loans converted into grants and in the form of
guarantees is therefore put at DEM 118,35 million, equivalent
to some EUR 60,5 million. (On account of the conversion the
rescue aid has no aid element as the aid intensity cannot
logically exceed 100 %.) This figure can be reduced by the
amounts not disbursed by the date of this decision under the
lines provided. An additional amount of DEM 10
credit
million is provided for to finance redundancy costs under the
social plan in 1999.

9. The aid has to be assessed in the light of the following
criteria for restructuring aid laid down in the guidelines:

7. The suspension of interest and redemption of the principal
on the loans described in detail in Section II.4 and totalling
DEM 74,5 million and the announcement that these loans
might be given subordinate status are to be regarded as consti-
tuting conversion from loans into grants with an aid intensity
of 100 %. By letter of 10 September 1997, Germany had
informed the Commission that these loans from BvS and the

(19) As stated above, the decision does not extend to the subsidiaries.
(20) For a detailed description of the measures, see Sections II.4 and

II.9.

(i) restoration of viability

At the time the procedure was extended, the Commission
had doubts about DMR's capability to cover all its costs
and in particular its financing costs. Developments in
1998 and the latest revision of the restructuring plan as
communicated in Germany's letter of 21 December 1998
(and described in Section II of this decision) show that
DMR is not financially viable. The company has suffered
extremely high losses since 1995 which have led to its
overindebtedness.

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L 232/31

Additional losses are expected in 1999 and 2000, and in
2001 the company will be unable to pay interest on its
shareholder loans. The company remains dependent at
least on the operating aid being extended into the distant
future. Germany stated that a privatisation without addi-
tional state aid appeared impossible. The prospects for a
recovery on the market for two-stroke ship diesel engines
in the Community are bleak in the medium term. Since,
therefore, no return to viability can be expected in the
foreseeable future, this condition of the guidelines is not
met;

(ii) avoidance of undue distortions of competition through the aid

Although competition on the market
for ship diesel
the market structure
engines is limited on account of
described in Section II.8, the permanent financing of DMR
by means of state aid must be regarded as a distortion of
competition primarily because the orders in hand do not
cover costs. Adverse effects on European competitors,
which are mostly in a difficult situation as well, cannot be
excluded, particularly as most of the remaining engine
producers in Europe have lower capacity and were not
able to modernise. The reduction in DMR's capacity that is
planned in view of the present emergency situation cannot
the
be regarded as irreversible within the meaning of
guidelines.
remains
unchanged, DMR could return to its original capacity at
short notice by re-employing the necessary personnel;

installed

capacity

Since

plant

with the common market. The intended payment of DEM 10
million in social aid in 1999 can be regarded as being compat-
ible with the common market.

VI. CONCLUSIONS

The Commission finds that Germany has unlawfully imple-
mented a series of measures for rescuing and restructuring
DMR in breach of Article 93(3) of the Treaty. However, the
loans and guarantees provided before April 1997 for the rescue
of the company and the takeover of DMR by BvS and the Land
of Mecklenburg-Western Pomerania can be regarded as being
compatible with the common market in view of the particular
difficulties caused by the collapse of the Bremer Vulkan group
in 1996. However, the subsequent waiver of interest and the
suspension of repayments on loans amounting to DEM 89,5
million, as well as the continuing provision of state guarantees
for a nominal amount of DEM 80 million, cannot be regarded
as being compatible with the common market since the meas-
ures in question do not satisfy the criteria laid down in the
guidelines. These measures must therefore, be terminated and
the aid recovered. The intended payment of DEM 10 million in
social aid, in 1999, can be regarded as being compatible with
the common market,

HAS ADOPTED THIS DECISION:

(iii) aid in proportion to the restructuring costs and benefits

Article 1

The aid has been limited to the minimum necessary for the
company's continued operation. The recipient has not
been able to make a significant contribution to the restruc-
turing costs and it cannot be expected that DMR can be
sold at a positive price. The benefits consist essentially in
the (temporary) maintenance of employment
in two
regions suffering from severe unemployment. Nevertheless,
the guidelines recall that ‘it does not help a region to prop
up artificially companies which, for structural or other
reasons, are ultimately doomed to failure’. In line with its
position on aid to meet the social costs of restructuring
measures, in particular in regions with a low standard of
living and with severe underemployment as described in
the guidelines (21) and in the guidelines on national
regional aid (22), the Commission can, however, accept the
intended payment of DEM 10 million in social aid in
1999.

The financial measures which Germany implemented between
February 1996 and April 1997 for the rescue of Dieselmotor-
enwerk Rostock GmbH (at the time Dieselmotorenwerk Vulkan
GmbH), including the provisions on the transfer of ownership
of this enterprise contained in the agreement of 28 April 1997,
are compatible with the common market within the meaning
of Article 92(3)(c) of the EC Treaty.

Article 2

The state aid of up to DEM 118,35 million which Germany
has granted for
restructuring of Dieselmotorenwerk
Rostock GmbH since May 1997 is incompatible with the
common market.

the

Accordingly, the Commission has concluded that the restruc-
turing aid already granted and the intended prolongation of the
measures are not in line with the guidelines and not compatible

(21) See footnote 18 (point 3.2.5).
(22) OJ C 74, 10.3.1998, p. 9 (point 4.15).

The state aid of DEM 10 million which Germany intends to
grant for social measures linked to the redundancies at Diesel-
motorenwerk Rostock GmbH is compatible with the common
market within the meaning of Article 92(3)(a) of the EC Treaty.

Article 3

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Article 4

Germany shall take the necessary measures to recover from the recipient the aid referred to in Article

1.
2 and unlawfully made available to it.

Recovery shall be effected in accordance with the procedures of national

2.
law. The sums to be
recovered shall bear interest from the date on which they were made available to the recipient until their
actual recovery. Interest shall be calculated on the basis of the reference rate used for calculating the grant
equivalent of regional aid.

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

Article 5

This decision is addressed to the Federal Republic of Germany.

Article 6

Done at Brussels, 21 April 1999.

For the Commission

Karel VAN MIERT

Member of the Commission