1999/598/EC: Commission Decision of 4 May 1999 on the state aid which Portugal is planning to grant to Companhia de Têxteis Sintéticos, SA (Cotesi) (notified under document number C(1999) 1268) (Only the Portuguese version is authentic) (Text with EEA relevance)
Date: 1999-05-04
Institutions: European Commission
Subjects: Portugal, State aid, application of EU law, company modernisation, control of State aid, textile industry

31. 8. 1999

EN

Official Journal of the European Communities

L 230/9

COMMISSION DECISION

of 4 May 1999

on the state aid which Portugal is planning to grant to Companhia de Têxteis Sintéticos, SA
(Cotesi)

(notified under document number C(1999) 1268)

(Only the Portuguese version is authentic)

(Text with EEA relevance)

(1999/598/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

(4)

Having regard to the Treaty establishing the European
Community, and in particular the first subparagraph of Article
88(2) thereof,

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

Having regard to the Code on aid to the synthetic fibres
industry (1),

Having called on interested parties to submit their comments
pursuant to those provisions (2) and having regard to those
comments,

Whereas:

I. PROCEDURE

(1)

(2)

(3)

By letter dated 19 March 1998, the Portuguese author-
ities notified the Commission of a proposal to grant aid
in favour of Companhia de Têxteis Sintéticos, SA (here-
inafter ‘Cotesi’), a manufacturer of rope and nets located
in Grijó (Carvalhos). The proposed aid falls within the
scope of the control measures under the Code on aid to
the synthetic fibres industry.

Following a preliminary analysis, the Commission regis-
tered the case under number N 196/98 and requested
additional information by letters dated 17 April and 1
July 1998. The Portuguese authorities replied to the first
letter by letter dated 2 June and to the second by letter
dated 12 August 1998.

By letter dated 29 October 1998,
the Commission
informed the Portuguese Government of its decision to
initiate the procedure laid down in Article 88(2) of the
EC Treaty in respect of the above aid. The Commission
decision to initiate the procedure was published in the
the European Communities (3). The
Official
Commission called on interested parties to submit their
comments.

Journal of

(1) OJ C 94, 30.3.1996, p. 11.
(2) OJ C 405, 24.12.1998.
(3) See footnote 2.

in December 1998 and January 1999.

The Commission received comments from interested
parties
It
forwarded them to the Portuguese authorities, who were
given the opportunity to react; their comments were
received by letter dated 11 March 1999, registered by
DG IV on 15 March.

II. THE PROPOSED AID

support

amounts

The eligible costs for the project total EUR 10 006 095
and the proposed financial
to
EUR 2 883 864 (including Community co-financing).
Of the latter amount, EUR 318 446 is an outright grant
while EUR 2 565 418 is in the form of a subsidy repay-
able at zero interest over a period of five years, with a
grace period of 18 months. The Commission calculates
that the total amount of aid (including the grant equival-
ent of the repayable subsidy)
is some EUR 899 696,
with an aid intensity of around 9 % (gross).

The proposed aid will be granted under the specific
programme for modernising the Portuguese textile and
clothing industry (IMIT), as provided for in Council
Regulation (EC) No 852/95 (4), which stipulated that the
programme would be jointly financed by the Member
State and the Community and executed in conformity
with the Structural Funds regulations.

III. THE PROJECT

The Portuguese authorities stated that the project related
the company's production
to the modernisation of
process, with a view to replacing the tooling, improving
the storage areas, altering the layout and strengthening
the supply chain. The objective pursued is not
to
increase the production capacity but rather to achieve
higher efficiency and reduce costs. The project would
result
in the dismantling of a number of extrusion
machines and the acquisition of a new extrusion line.

The Portuguese authorities stated that Cotesi employs
1 524 persons, that its turnover in the year preceding
the launch of the project was some ECU 46 million and
that it had total assets of around ECU 47 million.

(5)

(6)

(7)

(8)

(4) OJ L 86, 20.4.1995, p. 50.

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Official Journal of the European Communities

31. 8. 1999

(9)

They also stated that the company's extrusion capacity
for polypropylene (PP) yarn would diminish as a result
of the project, while the production capacity for fibres
not covered by the Code on aid to the synthetic fibres
industry, such as polyethylene (PE), would increase.
More specifically, Cotesi would increase the production
capacity for high-density polyethylene and would start
manufacturing polysteel, a fibre made of 70 % PP and
30 % PE.

(10) According to the information transmitted by the Portu-
guese authorities by letter of 2 June 1998, the produc-
tion capacity for PP fell by 2,89 %, from 20 556 tonnes
to
per year (prior to the beginning of
19 962 tonnes per year (after the completion of the
project). The Portuguese authorities also pointed out in
their letter dated 12 August 1998 that this capacity
reduction took place in the context of a general
tendency for the company to cut capacity since 1992.
Cotesi had already reduced installed capacity by 2,1 %
between 1992 and 1995 and is forecasting a further 2 %
capacity cut in the years 1999-2001.

the project)

IV. GROUNDS FOR INITIATING THE PROCEDURE

(11)

The Commission was obliged to open the Article 88(2)
procedure since it was not satisfied that, as required by
the Code on aid to the synthetic fibres industry, the aid
resulted in a significant
reduction in the relevant
capacity.

V. COMMENTS FROM INTERESTED PARTIES

(12)

The Commission received comments from the Inter-
national Rayon and Synthetic Fibres Committee (IRSFC).
These comments did not concern the extent to which
the aid might or might not lead to a distortion of
competition in the polypropylene fibres sector, but
rather the criteria by which the Commission assesses the
‘significance’ of a capacity reduction. As explained
information transmitted by the
below, the additional
Portuguese authorities renders it unnecessary for the
Commission to take a definitive view in this case as to
whether a 2,89 % capacity reduction may be considered
significant.

(13)

The Commission also received comments from Ficcorfil
(Syndicat des producteurs français de ficelles, cordages et
filets) and from three French companies that manufac-
ture net and rope. These interested parties oppose the
granting of the aid, arguing:

— that there is a fierce competition in the products

concerned in what is a shrinking market,

— that the acquisition of a new extrusion line would
make it possible to manufacture products such as
fishing nets or synthetic cords for agricultural use,
for which there is excess capacity in Europe; one of
the consequences of excess capacity is pressure on
prices and manufacturers' margins,

— that

the

labour

cheaper

as
compared with France already constitute a competit-
ive advantage which should not be further increased
through subsidies,

in Portugal

costs

— that the scrapping of capacity is difficult to establish

in practice,

— and,

in some cases, that they have never received
subsidies whereas investments by Portuguese produ-
cers have been subsidised to a large extent.

VI. COMMENTS FROM THE PORTUGUESE AUTHOR-

ITIES

(14)

By letter dated 26 January 1999, the Portuguese author-
ities submitted their comments. The main points were as
follows:

— the information transmitted to the Commission prior
to the opening of the procedure and concerning the
installed extrusion capacities for the fibres covered
by the Code was inaccurate. More specifically, the
90 % (PP)/10 % (PE) capacity ratio, which was correct
in the three years preceding the project, should not
have been taken as the basis for evaluating the
change in capacity during the project period,

— during that period, Cotesi increased the capacity to
produce high-density polyethylene (HDPE), to the
detriment of PP. HDPE can be used in agriculture,
with better resistance to UV rays and pesticides than
PP. It is also more environmentally friendly and has a
longer life than PP. The investment also resulted in
the installation of a machine to extrude polysteel, a
hybrid fibre made of 70 % PP and 30 % PE. On
account of its strength and high resistance to abra-
sion, polysteel is increasingly used for fishing and for
mooring large ships,

— the Portuguese legislation on working time (Law
21/96 of 23 July, which came into force on 1
December 1996) was the cause of an estimated 8 %
reduction in viable capacity since, as a consequence
of that legislation, the working week was reduced
from 44 hours per week in 1995 (pre-project) to 40
in 1999 (post-project). The number of working days
in a year also fell from 270 in 1995 to 248 in 1999,

— from 1993 to 1998, 13 extrusion lines for PP were
scrapped, while only three new lines were installed
(one for PP, one for PE and one for polysteel),

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— the tables attached to the letter, which include details
of the capacity of all of Cotesi's extrusion machines
from 1993 to 1999, show that the 90 % (PP)/10 %
(PE) ratio which existed in 1995 (pre-project) had
become 79,5 % (PP)/20,5 % (PE)
in 1999 (post-
project),

— the actual installed capacity for the extrusion of PP
(including the 70 % PP capacity of the new machine
producing polysteel) diminished from 20 936 tonnes
in 1995 to 16 800 tonnes in 1999, a 19,7 % reduc-
tion.

(15)

the production of

By letter dated 11 March 1999, the Portuguese authorit-
ies responded to the comments from third parties. They
stressed that the latter had been based on inaccurate
information with regard to the capacity reduction. In
addition,
fishing nets would not
increase as a result of the project; these were in any case
not covered by the Code. Nor did the project envisage
investment in the production of agricultural fibres. The
stressed that physical proof
Portuguese authorities
existed of the reduction in capacity. They agreed that
increases in production could exacerbate the oversupply
situation in the sector and thus gave special attention to
projects which would result in a reduction in capacity.
it was important to ensure that Portuguese
However,
companies
invested in modern equipment. While
Portugal had certain advantages, e.g. relatively cheap
labour, it also had disadvantages such as a lack of raw
materials and not enough producers of equipment,
which had to be imported from other EU countries that
thus benefited from investments by Portuguese compan-
ies. The Portuguese authorities concluded that
the
proposed aid satisfied the conditions laid down in the
Code.

VII. ASSESSMENT OF THE AID PLAN

(16) Article 87(1) of the EC Treaty lays down the principle
that, except where otherwise provided, aid which
distorts or threatens to distort competition by favouring
certain undertakings or the production of certain goods
is, in so far as it affects trade between Member States,
incompatible with the
common market. Similarly,
Article 61(1) of the EEA Agreement states that, except
where otherwise provided, such aid is incompatible with
the functioning of the EEA Agreement.

(17)

The plan to grant aid to Cotesi undoubtedly constitutes
aid within the meaning of the Articles mentioned above
as it would allow the company to carry out the invest-
ment in question without having to bear the full cost.
intra-EEA trade in the products
There is significant

concerned by the investment and placed on the market
by the company (CN codes 5607 49 90, 6305 32 81,
5608 11 91 and 6002 43 31);
involved
amounted to about 30 000 tonnes in 1997. Accord-
ingly,
it can be said that the proposed aid would be
likely to distort competition and affect trade within the
meaning of Article 87(1) of the EC Treaty and Article
61(1) of the EEA Agreement.

trade

the

(18)

(19)

(20)

The exception provided in Article 87(3)(a) of the EC
Treaty and Article 61(3)(a) of the EEA Agreement relates
to aid to promote the economic development of areas
where the standard of living is abnormally low or where
there is serious underemployment. By enabling the
company to carry out the investment in question, the
proposed aid would promote the economic develop-
ment of Carvalhos, an Objective 1 area. However, the
the aid on the synthetic fibres sector are
effects of
subject to control, even for the most underdeveloped
areas of the Community.

Since 1977 the conditions under which aid may be
granted to synthetic fibres producers by way of support
for such activities have been prescribed in a code whose
terms and scope have been revised from time to time,
most recently in 1996 (5).

the notification of any
The current Code requires
proposal to grant aid, in whatever form, irrespective of
whether the Commission has authorised the scheme
concerned, (except where the aid would satisfy the de
minimis criterion) to synthetic fibres producers by way of
support for any of the following activities:

— extrusion/texturisation of all generic types of fibre
and yarn based on polyester, polyamide, acrylic or
polypropylene,

irrespective of their end-uses, or

— polymerisation (including polycondensation), where
it is integrated with extrusion in terms of the ma-
chinery used, or

— any ancillary process linked to the contemporaneous
installation of extrusion/texturisation capacity by the
prospective beneficiary or by another company in
the group to which it belongs and which,
in the
specific business activity concerned, is normally inte-
grated with such capacity in terms of the machinery
used.

(21)

In the present case, the proposed aid would be granted
to a large extent
the production of
in support of
synthetic fibres which fall within the scope of the Code,
namely the installation of new capacity for the extrusion
of polypropylene filament yarn. The extrusion of poly-
ethylene, on the other hand, falls outside the scope of
the Code.

(5) See footnote 1.

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Official Journal of the European Communities

31. 8. 1999

(25)

Taking into account the new information provided by
the Portuguese authorities in the course of the procedure
with regard to the capacity reduction resulting from the
project, which superseded the information provided
during the Commission's preliminary investigation and
on which the comments of third parties were based, the
Commission can accept that the actual 19,7 % capacity
reduction is significant within the meaning of the Code
on aid to the synthetic fibres industry. Moreover, the
planned aid intensity of approximately 9 % (gross)
is
well below 50 % of the ceiling of 75 % (gross) allowed
under the PEDIP II programme,

HAS ADOPTED THIS DECISION:

Article 1

The state aid which the Portuguese Republic plans to grant to
Companhia de Têxteis Sintéticos, SA (Cotesi) in the form of an
outright
of
EUR 318 446
EUR 2 565 418 repayable at zero interest over a period of five
years with a grace period of 18 months is compatible with the
common market.

subsidy

grant

and

of

a

This Decision is addressed to the Portuguese Republic.

Article 2

Done at Brussels, 4 May 1999.

For the Commission

Karel VAN MIERT

Member of the Commission

(22)

(23)

aid

The Commission regrets that the Portuguese authorities
did not notify the project sooner, bearing in mind that
the company applied for the aid in 1996, the year in
which the project started. Nevertheless, it notes that the
proposed
IMIT specific
conforms with the
programme, which the Commission authorised on 5
October 1995 and which is carried out within the
framework of
the PEDIP II programme, which the
Commission authorised as being compatible with the
common market by virtue of Article 87(3)(a) of the EC
Treaty (6).

The Code sets out in detail the criteria to be applied
when the Commission scrutinises proposals coming
within the scope of control. It states among other things
that, in assessing the compatibility of the proposed aid,
the fundamental consideration is the effect of that aid on
the markets for
the relevant products, namely the
fibre/yarn whose production would be supported by the
In all cases and irrespective of the state of the
aid.
market for the relevant product and the effect of the aid
on that market,
it provides for the limitation of the
intensity of aid. Investment aid will be authorised for
companies which are not SMEs, at up to 50 % of the
applicable aid ceiling, only on condition that either the
aid would result in a significant reduction in the relevant
capacity or the market was characterized by a structural
shortage of supply and the aid would not result in a
significant increase in the relevant capacity.

(24) Given that the market does not appear to be character-
ised by a structural shortage of supply, the Commission
must be satisfied that the aided project results in a
significant reduction in the relevant capacity, which is
the extrusion capacity for polypropylene filament yarn.

(6) By letter SG(94) D/5991 dated 2 May 1994.