1999/675/EC: Commission Decision of 8 July 1999 on the state aid implemented by Germany in favour of Kvaerner Warnow Werft GmbH [notified under document number C(1999) 2266] (Text with EEA relevance) (Only the German text is authentic)
Date: 1999-07-08
Institutions: European Commission
Subjects: Germany, State aid, application of EU law, control of State aid, reimbursement of aid, shipbuilding

23.10.1999

EN

Official Journal of the European Communities

L 274/23

COMMISSION DECISION

of 8 July 1999

on state aid implemented by Germany in favour of Kvaerner Warnow Werft GmbH

[notified under document number C(1999) 2266]

(Only the German text is authentic)

(Text with EEA relevance)

(1999/675/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European
Communities, 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 Council Directive 90/684/EEC (1) of
21 December 1990 on aid to shipbuilding and Council
Directive 92/68/EEC (2) of 20 July 1992 amending Directive
90/684/EEC on aid to shipbuilding,

Having called on interested parties to submit their comments
pursuant to the provisions cited above (3) and having regard to
their comments,

Whereas:

I. Procedure

(1)

By receiving on 4 September 1998 the regular moni-
toring report of 30 June 1998 on the shipbuilding
capacity of Kvaerner Warnow Werft GmbH (herein-
after referred to as KWW),
the Commission was
informed that KWW would exceed its annual new-
building capacity limitation of 85 000 cgt in both
1998 and 1999. The foreseen production indicated in
the report was 106 945 cgt for 1998 and 104 560 cgt
for 1999. The Commission services sent a letter to the
German authorities on 25 September 1998 requesting
them to take the necessary measures to make the
undertaking comply with the capacity limitation and
to inform the Commission of the contents and the
result of these measures. Germany replied with its
letter dated 20 October 1998.

(2)

By letter dated 16 December 1998, 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 exceeding of the capacity limitation.

(3)

(4)

(5)

(6)

(7)

(8)

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

The Commission has received comments from interes-
ted parties. It has forwarded them to Germany, which
was given the opportunity to react. Germany submitted
its comments with a letter dated 18 February 1999.

The Commission services conducted a regular monit-
oring visit to the yard with an external expert on
14 January 1999. It was discovered that the actual
production of KWW in 1998 was much greater than
indicated in the monitoring report of 30 June 1998.
The Commission requested Germany to comment on
the findings of the visit in a letter dated 4 February
1999. Germany submitted its comments with a letter
dated 18 February 1999.

On the further request of
the Commission with
the letter of 1 March 1999, Germany confirmed the
findings of the Commission as regards the production
figures of 1998 in its letter of 19 March 1999 and
indicated a revised production figure of 122 414 cgt.

The Commission services conducted a further monit-
oring visit to the yard on 25 March 1999 with an
external expert
in order to verify the amount of
excess production in 1998. It was confirmed that the
production of KWW in 1998 was 122 414 cgt and its
production in 1997 was 93 862 cgt, also exceeding
the capacity limitation. The foreseen production for
1999 was indicated to be 109 134 cgt.

to

open the procedure pursuant

This decision concerns only the exceeding of KWW of
its capacity limitation in 1998. The Commission
intends
to
Article 88(2) of the EC Treaty as regards the exceeding
the capacity limitation in 1997. This opening
of
of procedure is subject to a separate Commission
decision.

(1) OJ L 380, 31.12.1990, p. 27. Directive as last amended by

Directive 94/73/EC (OJ L 351, 31.12.1994, p. 10).

(2) OJ L 219, 4.8.1992, p. 54.
(3) OJ C 41, 16.2.1999, p. 23.

(4) OJ C 41, 16.2.1999, p. 23.

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Official Journal of the European Communities

23.10.1999

(9)

(10)

(11)

II. Detailed description of the aid

92/68/EEC

The Commission approved restructuring aid in accord-
ance with Directive 90/684/EEC on aid to shipbuilding
amending Directive
and Directive
90/684/EEC on aid to shipbuilding,
to allow the
comprehensive restructuring of the former East Ger-
man shipyard Kvaerner Warnow Werft GmbH with its
decisions communicated to Germany with the letters
of 3 March 1993 (N 692/D/91), 17 January 1994
(N 692/J/91), 20 February 1995(N 1/95), 18 October
1995 (N 637/95) and 11 December 1995 (N 797/95).
The aid was approved subject to a capacity restriction
of 85 000 cgt per year, the compliance of which the
Commission monitors.

in

The shipyard Warnow Werft, situated in Rostock-
Warnemünde
Mecklenburg-Vorpommern,
Germany, was sold by the Treuhandanstalt to the
Norwegian industrial group Kvaerner a.s. in October
1992. According to paragraph 27 of the sales contract,
sent to the Commission for scrutiny and approval by
Germany with a letter dated 30 October 1992,
Kvaerner undertook until 31 December 2005, with
regard to Warnow yard, not to exceed its annual
building capacity of 85 000 cgt unless the require-
ments based on the EC Treaty became less restrictive.

Directive 92/68/EEC amending Directive 90/684/EEC
contains a derogation from the rules on operating aid
applicable to other Community yards for the shipyards
in the former GDR in order to create the possibility for
these yards to undergo urgent and comprehensive
restructuring and to become competitive. After the
privatisation of Warnow Werft
the Commission
approved the restructuring aid for the yard in four
tranches in accordance with the provisions of Direct-
ives 90/684/EEC and 92/68/EEC. The total amount of
aid approved by several decisions was as follows:

N 692/D/91 — Commission letter of 3 March 1993 (SG
(93) D/4052)

— DEM 45,5 million operating aid,

— DEM 82,4 million operating aid in the form of an

exemption from previous liabilities,

— DEM 127,5 million investment aid,

— DEM 27,0 million closure aid;

N 692/J/91 — Commission letter of 17 January 1994
(SG (94) D/567)

— DEM 617,1 million operating aid;

N 1/95 — 20 February 1995 (SG (95) D/1818)

— DEM 222,5 million investment aid;

N 637/95 — Commission letter of 18 October 1995 (SG
(95) D/12821)

— DEM 66,9 million investment aid;

N 797/95 — Commission letter of 11 December 1995
(SG (95) D/15969)

— DEM 58,0 million investment aid.

Consequently, the total amount of aid concerned by
these decisions was EUR 372,5 million operating aid
(DEM 745 million) EUR 237,45 million investment aid
(DEM 474,9 million) and EUR 13,5 million closure aid
(DEM 27,0 million). This results in total aid of EUR
623,45 million (DEM 1 246,9 million).

The aid was approved on the condition that the yearly
newbuilding capacity does not exceed 85 000 cgt. The
capacity limitation is included both in the notified sales
contract (paragraph 27) concerning the privatisation
of Warnow Werft and in the above mentioned Com-
mission decisions authorising the aid. In the Com-
mission decisions communicated to Germany by the
Commission letters of 17 January 1994, 20 February
1995, 18 October 1995 and 11 December 1995 it
was clearly stated that the Commission will be obliged
to demand the recovery of the aid if the restriction of
capacity is not complied with.

In the opening of the procedure the Commission noted
that the main condition for the approval of the aid was
an annual capacity limitation of 85 000 cgt. Such a
limit was set in order to offset the distortive effect of
the aid on the shipbuilding industry. According to the
regular monitoring report of 30 June 1998 on the
shipbuilding capacity of Kvaerner Warnow Werft
GmbH, the yard would exceed its annual newbuilding
capacity limitation of 85 000 cgt in 1998, by produ-
cing 106 945 cgt
and in 1999, by producing
104 560 cgt. This information indicated that an essen-
tial condition under which the aid was approved, was
not being complied with.

For this reason the Commission doubted whether
the aid approved by the Commission to allow the
restructuring and the continued operation of
the
former East German shipyard Warnow Werft by its
decisions communicated to Germany with the letters
of 3 March 1993 (N 692/D/91), 17 January 1994
(N/692/J/91), 20 February 1995 (N 1/95), 18 October
1995 (N 637/95) and 11 December 1995 (N 797/95)
was any longer compatible with the common market.

(12)

(13)

(14)

III. Comments from interested parties

(15)

The Commission has received comments from KWW,
a Member State (Denmark), The Federation of Danish
Industry (Dansk Industri) and the Association of Dan-
ish Shipbuilders (Foreningen af Jernskibs- og Maskin-
byggerier i Danmark).

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Official Journal of the European Communities

L 274/25

(16)

The comments of KWW concentrate on five main
arguments. The first argument of KWW is that an
annual production limitation of 85 000 cgt was never
imposed on it. The only condition imposed on KWW
when the aid was approved was that the new yard to
be built would allow a possible production of
85 000 cgt at 31 December 1995 and that certain
lay-out-related criteria (bottle-necks) of the yard which
limit the production should not be changed. These
bottle-necks in the course of production were con-
sidered decisive for the production possibilities of the
yard.

(17) Only in its decision of 18 October 1995 does the
Commission refer for the first time to the production
‘Further monitoring will be
of the yard as follows:
necessary to ensure, as evidenced by the two pro-
duction monitoring reports received so far by the
Commission, that the actual and planned production
respects the capacity limit. The German Government
gave an undertaking that the yard will comply with the
capacity limitation’. According to KWW,
the first
sentence implies that during the capacity limitation the
lay out of the yard cannot be changed. That sentence
also mentions for the first time the actual and planned
production that shall respect that capacity limit. KWW
understood at the time the undertaking of the German
Government, according to which the yard will comply
with the capacity limitation, in a sense that only the
compliance with the investments plans is ensured. In
any case, this first reference to the monitoring of
production is not worded as a condition.

(18)

Consequently, according to the first two Commission
decisions the concept of capacity limitation means that
the lay out and facilities of the yard should be designed
in a certain way and that they could not be changed.
Such a construction of
the yard leads to limited
production of the yard. In addition, it is not correct
that
the capacity limitation of 85 000 cgt was a
condition for the approval of the aid. A condition for
the approval was only that the approved and examined
production facilities would be kept in accordance with
the investment plans.

(19)

Secondly, KWW argues that according to the wording
of Article 10a(2)(c) of Directive 90/684/EEC (5) and the
Commission decisions approving the aid, the capacity
gains due to productivity increases above the level
foreseen by the Commission expert as until the end
of the restructuring period, should be possible and
permitted to the yards.

(20)

Article 10a(2) of the Directive 90/684/EEC lays down
conditions for the compatibility of operating aid
granted to former GDR shipyards with the common

(21)

(22)

(23)

market. Its provision (c) provides that the German
government shall carry out a genuine and irreversible
reduction of capacity of 40 % net of the capacity
existing on 1 July 1990.

The Court of First Instance has interpreted the notion
of ‘irreversibility’ in its judgment of 22 October 1996
in Case T-266/94 (6), Skibsvaerfstforeningen and others
v. Commission, as meaning that, with the Com-
mission’s agreement, capacity may be increased five
years after the end of restructuring and in the absence
it may be increased ten years
of such agreement,
thereafter. In the opinion of KWW this interpretation
means that the production facilities which were agreed
and defined together with the Commission and the
technical bottle-necks approved by the Commission,
as well as the production bottle-necks resulting from
them can only be changed after the defined periods of
time. According to KWW the Court did not consider
and decide on the legal situation where the productivity
is increased due to the general economic and technical
progress so that capacity gains are created on top of
the existing, by 40 % reduced production capacities.

It is the opinion of KWW that irreversible reduction of
capacity in the meaning of Article 10a(2)(c) is only to
be understood as a prohibition to change the approved
investment arrangements and not as a limitation of
production possibilities of the yard.

According to KWW, capacity limitation and pro-
duction limitations are different concepts that should
not be equated. Whereas production limitation con-
cerns the product, the production of which is limited,
the capacity limitation is a more open concept, which
allows, with the same facilities, a higher production
when productivity is increased due to general economic
and technical progress. Especially when looked at in
the time period of 10 years, it is possible that the
productivity develops in a way which allows that more
can be produced with the same facilities than at the
beginning of this period. Using pre-prepared parts
produced by subcontractors with delivery ‘just in time’
has lead in the last couple of years to productivity
increases world-wide in the shipbuilding sector. In
1995 this progress was not yet available to KWW,
which has after this date increased its productivity
through internal reforms and its own efforts.

(24)

The production capacity of KWW at 31 January 1995
was established in 1992 by an independent expert
commissioned by the Commission (A. & P. Appledore
International Ltd) who concluded that the yard would
achieve a good or even very good European pro-
ductivity level by 31 December 1995.

(5) As amended by Directive 92/68/EEC.

ECR 1996 II, p. 1399.

(6) Case T/266/94, Skibsvaerftsforeningen and others v. Commission,

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Official Journal of the European Communities

23.10.1999

(25)

In 1992 KWW could understand and have in fact
understood the Commission approval of the aid in a
sense that capacity gains based on increased pro-
ductivity above the good/very good European pro-
ductivity level can benefit KWW. This assumption was
based among others on the following:

— the wording of the Commission decisions approv-
ing the aid does not mention production limitation;

— the Commission commissioned an independent
expert to examine the investment plans and the
production volumes of the yard at 31 December
1995 under certain productivity assumptions,
which would not have been necessary if
the
Commission intended to impose a production
limitation;

— Germany explained in 1993 that it will ensure that
the investment plans for the yards would not be
changed, which would not have been necessary if
the Commission intended to impose a production
limitation from 1995 onwards. The capacity gains
following the increased productivity when main-
taining the approved investment and construction
plans were not subject to the ‘capacity limitation’.

In its third argument, KWW explains that the high
production volume of KWW in 1998 is caused by
acceptance of offers to build three large 5 000 TEU
container ships and a drilling rig. KWW acquired these
offers in competition with Asian competitors; no other
European yard applied for these offers. This indicates
that KWW’s exceeding of its production limitation, as
the Commission sees it, does not as such mean a
disadvantage to other yards. Moreover, carrying out
these offers would mean that KWW will not compete
in the European market and bid for contracts on
products, which other European yards build for a time
period of almost two years. The switching of KWW to
a special market segment in which other European
yards were not active in fact promotes the European
state aid policy and should not be punished.

The fact that KWW proves its competitiveness on the
world market and thereby improves the position of the
EU-shipbuilding industry without thereby impairing
in any apparent way intra-Community competition,
indicates that this is not a behaviour that would be
incompatible with the common market. As far as other
European yards do not compete with KWW for
certain specific contracts, like in this case, there is no
Community interest at stake. On the contrary, the
behaviour of KWW fortifies the position of the EU-
shipbuilding industry as a whole in the world market.

(26)

(27)

limitation, should be considered as an average pro-
duction of several years. According to KWW, the three
large container ships (production with cgt-value) and
the drilling rig (production with no cgt-value) cannot
be built in parallel because of the time needed for
occupation of the dock for both projects. Conse-
quently, the production with cgt-value will remain
considerably under 85 000 cgt during the construction
of the drilling rig whereas it will exceed this limit
during the previous years. On the average, anyway, the
limit of 85 000 cgt will not be exceeded during
these years. This technical aspect was not taken into
consideration when the Directive was adopted and the
decisions on approval of the aid were taken. For this
reason it seems appropriate to consider the capacity
limitation, if it is seen as production limitation, as a
long-term average production. This would take into
account the fact that KWW, as a recipient of aid,
entered successfully into competition in the world
market and also entered into a new market segment,
thereby proving that it has become a competitive yard.
This would be in line with the European state aid
policy and its objectives. Considering the capacity
limitation as an average of several years would also be
meaningful due to the changed economic situation and
technical requirements in the shipbuilding sector and
would correspond to the reality and circumstances of
this sector much better than annual limitation.

(29)

of

a genuine

to Article 10a(2)

The fifth argument of KWW is that there is no legal
basis for laying down the maximum capacity limit
for individual yards. The German Government
is,
according
the Direct-
ive 90/684/EEC, only obliged to carry out, before
and irreversible
31 December 1995,
reduction of capacity of 40 % net of the capacity
existing at 1 July 1990. This has lead to the maximum
capacity of 327 000 cgt for all yards active in the new
German Länder per 31 December 1995. KWW refers
to the already abovementioned judgment of the Court
of First Instance of 22 October 1996 (7) and concludes
that according to this judgment, allocation of the
capacity between the East German yards is purely
an internal German matter that cannot be made a
prerequisite for permissibility of a decision on approval
of aid. The Commission did not qualify this matter as
such in its decisions either.

(30)

Denmark explains in its comments that in the context
of adoption of Directive 92/68/EEC Germany commit-
ted itself to reduce in a genuine and irreversible way
the shipbuilding capacity of yards situated in former
East Germany to 327 000 cgt. The state aid now in
question was granted to KWW under a condition that
it complies with an annual capacity limitation of
85 000 cgt.

(28)

The fourth point raised by KWW in its comments is
that the capacity limitation, if it is seen as production

(7) Case T/266/94, Skibsvaerftsforeningen and others v. the Com-

mission, ECR 1996 II, p. 1399.

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Official Journal of the European Communities

L 274/27

(31)

(32)

(33)

(34)

Since 1990 the global shipbuilding capacity has
increased much more than originally anticipated,
which is mainly due to increase of capacities of
Japanese and Korean yards. This has led to a world-wide
overcapacity and a considerable fall in prices in the
world market. This development has affected also
Denmark strongly so that many yards have been
obliged to cut their activities in a way which has led to
a considerable loss of workplaces in the sector. This
development took place in Denmark without any state
aid having being paid in this context.

It is emphasised that the production programmes
of German shipyards are comparable with Danish
shipyards since these are more or less identical as
regards location, state of technological development
and competition in the world market.
It is noted
that three TEU 5 000 container ships that have partly
caused the exceeding of the capacity limitation are the
kind of ships also being built by Danish yards. The
actual contract won by KWW has therefore had a
direct impact on the market in which also Danish
yards operate. The considerable amount of aid received
by KWW has thus created a competitive advantage for
the German yards and affected the competitiveness of
Danish yards.

The Commission states in the opening of the procedure
that according to Germany, the exceeding of capacity
shall be compensated in years 2000 and 2001 when
the building of the drilling rig will reduce the possibilit-
ies of KWW to bid for new contracts. Denmark
supports the position of the Commission according to
which the existing rules do not foresee any possibility
of relaxing the capacity limitation and that such flexible
application of them is thereby not possible. Making
concessions in this respect would mean a danger of
creating a constantly increasing production and the
capacity limit exceeding production without ever com-
pensating it with lower production.

Further, it referred to the German comments on the
opening of the procedure according to which the
capacity limitations should be re-examined. The Ger-
man Government stipulates that in 1992 the develop-
ment of the world capacity was not foreseen and
consequently the flexible application of the existing
limitations is the only way to increase the international
competitiveness of former East German yards. Den-
mark states that the international development with a
considerable increase of capacity above all in the Asian
market makes it necessary to consider the maintenance
of the existing rules. Nevertheless, this is a problem
that concerns the whole European shipbuilding indus-
try and therefore it should not be solved on the basis
of problems of one individual yard. It is essential that
the EU actively seeks for a global solution to the
capacity problem since this is the only way the EU
can maintain its credibility internationally. Unilateral
increasing of capacity of yards in certain regions would

not only be harmful for European shipbuilding but
would also destroy the possibilities to achieve results
in the international forum in the long run.

(35)

Both the Federation of Danish Industry and the Associ-
ation of Danish Shipbuilders state in their comments
that they support fully the Commission position and
remarks as expressed in the opening of the procedure.

(36)

(37)

(38)

In addition, the Association of Danish Shipbuilders
explains in its comments that the container ships being
built by KWW and partly causing the excess are ships
also being built by Danish yards. The contract of KWW
has consequently a direct impact on the market, which
is very important for Danish yards. It also refers to the
development since 1992 which has led to closure of
many yards and to a loss of a considerable amount of
jobs in the sector. Therefore it is decisive for the
European yards that effective steps to reduce the
negative effects of the overcapacity are taken globally.
Since such are not possible without an active support
from the EU, it is important that the EU maintains its
international credibility. An international initiative to
reduce overcapacities would not be coherent with a
simultaneous accepting of a considerable exceeding of
the EU’s own capacity limitation, like in this case.

According to the Association of Danish Shipbuilders,
the capacity limitations of the former East German
yards are, among other factors, a basis for investment
and production planning of other yards. Consequently,
the dispositions of other yards are affected by the
exceeding of the capacity limitations. These limitations
should stay in place ten years and a flexible application
of them was never foreseen.

The German Government stipulates that the capacity
limitation should be re-examined in order to be able to
react to the special situation in world shipbuilding, the
unforeseeable increase of productivity. The Association
of Danish Shipbuilders comments on this point that
the considerable amounts of state aid were supposed
to contribute exactly to increased productivity. If the
East German yards have not become internationally
competitive under the conditions laid down in 1992
and in spite of productivity increases exceeding all
expectations, the restructuring of the yards must be
considered as failed. Yet this should not lead to the
conditions being adapted to the disadvantage of the
rest of the European shipbuilding industry.

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Official Journal of the European Communities

23.10.1999

(39)

(40)

(41)

(42)

The German Government also explained in the open-
ing of the procedure that it was necessary for KWW to
accept the contracts that have led to the excess in order
to secure jobs and to be able to conduct business. The
Association of Danish Shipbuilders notes that a state
based on the rule of law cannot refrain from its
legal obligations only on the grounds that economic
advantage is gained or economic loss avoided.
Accepting this argument of the German Government
would mean that each Member State could grand
state aid and even contrary to Community law, if it
considered this necessary under these circumstances.

The German Government has known and accepted
since 30 June 1998 that KWW would exceed its
capacity limitation both in 1998 and 1999. There was
a lot of time to take the appropriate measures to
change the production plans to avoid the exceeding of
the capacity limitation. Yet nothing was done in due
time.

According to the Association of Danish Shipbuilders,
it is clear that both the German Government and
KWW are bound to respect the capacity limitation.
The maximum capacity limit was set by the Council as
a condition for approval of the aid and according to
Directive 92/68/EEC. The Commission shall monitor
that the capacity limitations set for the former East
German yards are respected. In this context the Com-
mission established in 1997 that
two yards had
exceeded their capacity limitations in 1996, the MTW
yard by 1 637 cgt and KWW by 92 cgt. Consequently,
a corresponding reduction of production was imposed
on both yards in 1997. Therefore there is no doubt
about the fact that the management of KWW knew
very well that it cannot without any consequences
accept orders that would lead to exceeding of the
capacity limitation.

IV. Comments from Germany

Germany concentrates in its comments on four main
arguments. Firstly, it states that the method of cgt-
calculation served originally the purpose of collecting
national data comparable in economic terms. It is an
inadequate method for measuring a capacity limitation
of an individual yard. This becomes particularly evident
when the production of KWW is looked at more
closely. To the disadvantage of the yard, the so-called
serial-effect is not taken into account in the conven-
tional cgt-calculation. Building sister-ships uses in fact
less capacity than calculated, since less working hours
are needed to build the second, similar ship. In the
years 1997 to 1999 KWW built among others two
series of ships and altogether the serial-effect reduced
the actual working hours in a way, which reduced the
cgt-values considerably. In addition, in the context of
the restructuring a considerable amount of work was

(43)

(44)

(45)

(46)

sub-contracted. This results in 34 000 cgt having in
fact being produced by the sub-contractors and not by
the yard.

Secondly, Germany contests the Commission’s obser-
vation that an annual capacity limitation of 85 000 cgt
was the main condition for approval of
the aid.
Germany explains that the basis of the approval was
much more the restructuring concept linked with the
privatisation, which is meanwhile successfully carried
out by KWW. The successful execution of the restruc-
turing has led to a considerable increase of pro-
ductivity, which in general will also be achieved
worldwide by other yards.

Germany stipulates that in its decisions on releasing
the tranches of aid, the Commission only imposed on
the yard restrictions as regards the layout of the new
yard. The Commission examined which new building
capacity according to the restructuring plans was
possible for the new yard. The expert opinion that the
Commission commissioned showed that the capacity
of the future yard would not exceed 85 000 cgt. The
yard was constructed according to these plans and
its layout has not been changed afterwards. The
unforeseeably high increase of productivity during the
last couple of years cannot change this assessment.

An exclusively formal position as regards the capacity
limitation would mean, taking into account the unfore-
seeably high increase in productivity, that the yard
could not operate the whole year. An artificial idle
running of the undertaking would question the econ-
omic success of the restructuring. Due to the pro-
ductivity and the production mix (large container
ships), a temporary exceeding of the capacity limitation
is unavoidable, but this excess will be equalised during
the period of several years.

The third argument of Germany is that the successful
bidding of KWW for the offshore contract (drilling
rig) has caused the temporary exceeding of capacity
limitation, since building the rig would block the dock
for a long time and the ships under construction would
therefore need to be built ahead of schedule. This
exceeding of the capacity limitation, though, has no
negative effect on the European shipbuilding market
since KWW has achieved the offshore contract without
any European competition. In addition, the capacity
limitation concerns only the shipbuilding sector and
not offshore business and therefore the Commission’s
reference to the possibility of other yards to penetrate
into the offshore market is irrelevant. The application
of provisions as regards the shipbuilding sector cannot
be extended to other economic sectors only on the
basis of assumed or factual behaviour of other partici-
pants on the market.

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Official Journal of the European Communities

L 274/29

(47)

(48)

(49)

The fourth argument of Germany points out that as
laid down in its letter of 23 December 1998 to
the Commission, KWW was allocated an additional
capacity of 22 000 cgt for year 1998, so that, taking
into account the serial-effect, KWW will not exceed the
total capacity of 107 000 cgt allocated to it for 1998.
As a countermove, KWW was earlier demanded by
Bundesveranstalt für vereinigungsbedingte Sonderaufgaben
(hereinafter referred to as BvS) to repay part of the aid
granted to it for fresh equity capital and investments in
the context of the privatisation. Consequently, KWW
paid on 23 December 1998, without recognising there-
by any legal obligation, a partial amount of DEM 12
million to a blocked account until the final Com-
mission decision.

V. Assessment

The Commission notes that
the aid approved in
compliance with the provisions of Council Directive
90/684/EEC on aid to shipbuilding and Directive
92/68/EEC amending Directive 90/684/EEC is con-
sidered as being compatible with the common market
as it complied with Article 87(3)(e) of the EC Treaty.
However, this applies only so long as the conditions
laid down in the Commission decisions approving
the aid in accordance with the above Directives are
respected. Should the conditions for approving the aid
not be complied with, the aid falls under the general
prohibition of Article 87(1) of the EC Treaty and
may therefore be considered incompatible with the
common market, unless it can be declared compatible
for other reasons.

Directive 92/68/EEC amending Directive 90/684/EEC
contains a derogation from the rules on operating aid
applicable to other Community yards for the shipyards
in the former GDR in order to create the possibility for
these yards to undergo urgent and comprehensive
restructuring and to become competitive. According
to Article 10a(2) of Directive 90/684/EEC as amended
by Directive 92/68/EEC, until 31 December 1993,
operating aid for the shipbuilding and ship conversion
activities of the yards situated in the former GDR may
be considered compatible with the common market
under certain conditions relating to the amount of aid
and an annual reporting obligation of the German
Government. One of the conditions laid down in this
provision is the agreement of the German Government
to carry out before 31 December 1995 a genuine and
irreversible reduction of 40 % of the shipbuilding
capacity of 545 000 cgt existing on 1 July 1990.

linked to a

corresponding

directly
irreversible
reduction of capacity of other yards in the same
Member State over the same period. Article 6(3) pro-
vides that investment aid may be deemed compatible
with the common market provided that the amount
and intensity of such aid is justified by the extent of
the restructuring involved. According to Article 7, aid
to defray the normal costs resulting from the partial or
total closure of shipbuilding or ship-repair yards may
be considered compatible with the common market
provided that the capacity reduction resulting from
such aid is of a genuine and irreversible nature.

(51)

In the Commission proposal for Council Directive
92/68/EEC providing changes to the Seventh Directive
on aid to shipbuilding, it is stated that taking into
account the impact of the restructuring on conditions
of competition in the Community, balance has to be
found between the restructuring of the former GDR
shipbuilding industry, which is only possible with the
support of a substantial amount of state aid and
the possible negative influence on the competition
conditions of other Community yards resulting from
this aid. The possibility of giving extra aid above the
current ceilings has to be met by accompanying
restructuring and capacity reductions.

(52) One of the conditions laid down in Article 10a(2) of
Directive 90/684/EEC for the compatibility of the
operating aid with the common market is the agree-
ment of the German Government to carry out before
31 December 1995 a genuine
and irreversible
reduction of 40 % of the shipbuilding capacity of
545 000 cgt existing on 1 July 1990. The correspond-
ing maximum overall capacity for the shipyards situ-
ated and operating in the territories of the former
German Democratic Republic amount therefore to
327 000 cgt. Germany distributed this total capacity
to the five remaining new building yards.
In this
context the capacity for KWW was set at 85 000 cgt (8).

(53)

In its letter of 27 November 1992 to the Commission
on the privatisation of Warnow Werft, Germany states
that Kvaerner had contractually committed itself not
to exceed the capacity of 85 000 cgt foreseen for KWW
before 1 January 2006. It is noted that paragraph 27
of the privatisation contract of Warnow Werft, titled
‘Limitation on Future Building Capacities’, reads as
follows:
‘Kvaerner undertakes up until 31 December
2005 with regard to Warnow yard not to exceed its
annual building capacity of 85 000 cgt unless the
requirements based on the EEC Treaty are less restric-
tive from time to time.’

(54)

The Commission notes that the subsequently notified
aid programme for the restructuring of the Warnow
Werft yard was based on this annual capacity.

(50)

Investment aid is regulated in Article 6 of Directive
90/684/EEC and closure aid in its Article 7. According
to Article 6(1), investment aid may not be granted for
investment in existing yards unless it is linked to a
restructuring plan which does not involve any increase
in the shipbuilding capacity of the yard or unless it is

(8) The Commission recalls that the Court of First Instance confirmed
the importance of the allocation of capacities to the individual
yards for the legality of the aid decision in case T-266/94 of
22 October 1996 (paragraphs 151 to 198).

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(55)

(56)

(57)

(58)

(59)

The total amount of EUR 623,45 million (DEM
1 246,9 million) of restructuring aid was approved in
four tranches in five separate Commission decisions.
The first decision releasing the first tranche of aid was
communicated to Germany by a letter of 3 March
1993 (N 692/D/91). In this decision it is stated that
although the independent technical study mandated by
the Commission had established that the new building
capacity of Warnow Werft is unlikely to exceed the
85 000 cgt set by the German Government as the
contribution of this yard to the maximum available
East German capacity of 327 000 cgt, future monitor-
ing is deemed necessary during the implementation of
the investment programme in order to ensure that the
reduction of the shipbuilding capacity is carried out.

The second decision was communicated to Germany
in the letter dated 17 January 1994 (N 692/J/91). In
this decision the same provision as the one mentioned
above was laid down, with the difference that further
monitoring was deemed necessary in order to ensure
that the restriction of the shipbuilding capacity is
respected. In addition, the German Government was
reminded of the fact that non-compliance with the
capacity limitation would oblige the Commission to
request reimbursement of all aid.

In the third decision, communicated to Germany in
the letter dated 20 February 1995 (N 1/95), it was
again stated that further monitoring of the compliance
with the capacity limitation is still needed. In addition,
it was stated that the German Government had ensured
that the yard would comply with its capacity limitation.
The German Government was as well reminded of the
fact that non-compliance with the capacity limitation
would oblige the Commission to request reimburse-
ment of all aid.

The fourth decision was communicated to Germany in
the letter of 18 October 1995 (N 637/95) and the fifth
in the letter of 11 December 1995 (N 797/95). In both
decisions it was provided that further monitoring will
be necessary to ensure that the actual and planned
production respects the capacity limit. The same
remarks as above on Germany’s assurance that the
capacity limitation will be complied with by the yard
and on the possibility of reimbursement of all aid in
case of non-compliance were repeated in the decisions.

The Commission notes that the annual capacity limi-
tation of 85 000 cgt was one of the main conditions
for the approval of the aid. The aid was approved
the restructuring notified to the
on the basis of
Commission. This annual limitation was taken into the
privatisation contract of Warnow Werft, which was
approved by the Commission as part of the restructur-
ing programme. In addition, the obligation to comply
with the capacity limitation of 85 000 cgt was
expressly mentioned in all other Commission decisions
approving the aid except the first one, dated 3 March
1993. In these decisions it was also expressly stated
that in case of non-compliance with this capacity
limitation the Commission would be obliged to request
for the reimbursement of all aid.

(60)

(61)

(62)

In the monitoring visit to the yard on 24 March 1999
it was confirmed that the production of KWW was
122 414 cgt in 1998. The production figures were
discussed with the management of the yard in the
presence of German authorities and these figures, as
being based on the cgt-calculation method, were not
contested by any of the parties. Consequently, the
figures are considered as confirmed and incontestable.
This means that KWW has exceeded its annual capacity
limitation of 85 000 cgt by 37 414 cgt in 1998.

The Commission notes that the overall capacity lim-
itation set by Article 10a of Directive 90/684/EEC
for all
former East German yards is 327 000 cgt.
According to Article 10a(2)(c), the reduction of the
overall capacity is to be ‘genuine and irreversible’. The
Court of First Instance has confirmed the Commission’s
interpretation of the notion of ‘irreversibility’ in its
judgment of 22 October 1996 (9) as meaning that,
with the Commission’s agreement, capacity may be
increased five years after the end of restructuring and
in the absence of such agreement, it may be increased
ten years thereafter. The Court stated that this notion
shall be interpreted in the light of other provisions of
Directive 90/684/EEC, such as its Article 7. Since the
this
restructuring ended end 1995,
capacity limitation is until end 2000 and 2005 respect-
ively.

the period of

Germany allocated the overall capacity of 327 000 cgt
between the five former East German yards as follows:
KWW — 85 000 cgt; Volkswerft Stralsund —
85 000 cgt; MTW-Schiffswerft — 100 000 cgt; Peene-
Werft 35 000 cgt and Elbewerft Boizenburg —
22 000 cgt. According to the monitoring report dated
22 February 1999 the production of Volkswerft was
84 805 cgt in 1998 and that of MTW-Schiffswerft
99 997 cgt. According to the results of the monitoring
visit to Peene-Werft on 26 March 1999, the production
of this yard was 34 037 cgt in 1998. As regards
Elbewerft Boizenburg, the yard was closed end 1997.
Germany informed the Commission with its letter of
17 November 1998 that they withdrew their notifi-
cation as regards restructuring aid to the yard and
closed it permanently.
is noted that Elbewerft
It
Boizenburg produced 0 cgt in 1998. Consequently, the
production of yards other than KWW in 1998 amounts
to 218 839 cgt.

(63)

The Commission notes that the total unused capacity
of other yards within their respective capacity limits
was 23 161 cgt. Yet KWW has exceeded its annual
capacity limitation of 85 000 cgt by 37 414 cgt in
1998. Consequently, due to the considerable exceeding
by KWW of its capacity limitation in 1998, Germany
has exceeded the overall capacity limitation of
327 000 cgt set for all former East German yards by
14 253 cgt in 1998.

(9) Case T/266/94, Skibsvaerftsforeningen and others v. the Com-

mission, ECR 1996 II, p. 1399.

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(64)

(65)

(66)

According to the judgment of the Court of Justice of
18 May 1993 in joined cases C-356/90 and C-180/91
(Belgium/Commission) (10), the compliance with the
ceiling set pursuant to the provisions of the Council
Directive setting the criteria for derogation from the
prohibition of aid in Article 92 of the Treaty is the
essential condition for aid to shipbuilding to be
regarded as compatible with the common market and,
where that ceiling is exceeded, the aid in question
is automatically incompatible.
the
Commission’s role is limited to checking that that
condition has been observed.

In this context

The Commission notes that an essential condition for
the approval of aid, that is the compliance with the
annual capacity limitation of 85 000 cgt as laid down
in the Commission decisions approving the aid in
accordance with Directive 90/684/EEC as amended by
Directive 92/68/EEC, has not been respected in 1998.
In addition, the Commission also notes that as regards
1998, Germany was in breach of Article 10a(2) of
Council Directive 90/684/EEC laying down the overall
capacity limitation for all former East German yards
as a condition under which operating aid for the
shipbuilding and ship conversion activities may be
considered compatible with the common market.

The Commission notes that this decision addresses
firstly, the breach of the individual capacity limitation
of 85 000 cgt and secondly, the breach of overall
capacity limitation of 327 000 cgt. The Commission
stresses that the individual annual capacity limitation
of 85 000 cgt was set in the five Commission decisions
approving the aid as a condition for the compatibility
of that aid with the common market. This annual limit
was also acknowledged by Kvaerner as part of the
privatisation contract and its compliance is both
subject to monitoring by the Commission and to an
annual reporting obligation by the yard. Moreover, the
state aid concerned in this case is the lawfulness of the
very aid approved by the Commission in its five
decisions under the condition of the annual capacity
limitation and the distortive effect of this aid on the
shipbuilding sector.

(67)

For these reasons the Commission considers the con-
siderable breach of the individual annual capacity
limitation of 85 000 cgt as the main subject of this
decision and therefore the consequences of exceeding
the capacity limitation are decided on this basis. The
exceeding of the overall capacity limit is a subsidiary
consequence, even if a serious one, of the exceeding of
the individual limit.

(68)

The objective of Council Directive 92/68/EEC was to
allow the urgent and comprehensive restructuring

it

of the shipbuilding industry in former GDR in order
for
to become competitive. The Commission
acknowledges that capacity limitations were intro-
duced in this context in order to offset the distortive
effect the state aid granted to the East German ship-
yards has on competition in this sector. It also stresses
that when this capacity limitation, as a compensating
factor and as an essential condition for approval of the
aid and thereby for the compatibility of the aid with
the common market, is not complied with, the aid is
rendered incompatible with the common market.

The Commission notes that in its decision concerning
aid to MTW-Schiffswerft and Volkswerft Stralsund (11)
the Commission concluded that MTW had slightly
exceeded its capacity limitation in 1996. The compen-
sation for this excess was determined on the basis that
MTW had to reduce its production correspondingly
the following year and the amount of the operating aid
to be granted to it the following year was reduced by an
amount that corresponded to the excess. Consequently,
the consequences of the excess were determined on the
basis of the scale of the excess production in question,
matching the financial consequences of this breach to
the gravity of it, that is to the amount of the excess.

The Commission notes that the purpose of the notion
on the recovery of aid in case of non-respect of the
conditions set for the approval of aid in the Com-
mission decision is to remind the recipient of the aid
of its obligation to comply with these conditions and
to make the consequences of the non-compliance clear.
The aim and actual effect of recovery of aid is to seek
to re-create the status quo ex-ante by annulling the
negative effect on competition caused by the illegal
aid, the illegality of which is caused by the non-
compliance with the conditions set for the approval of
the aid and thereby for its compatibility with the
common market. In this case the condition breached
is the capacity limitation. Consequently, and following
the reasoning of the Commission decision concerning
aid to MTW-Schiffswerft and Volkswerft Stralsund (12),
the scale of exceeding the capacity limitation indicates
the scale of distortion of competition in question.

Since the scale of exceeding the capacity limitation
indicates the scale of distortion of competition in
question, the Commission considers that the amount
of aid, which corresponds to the exceeding of the
capacity limitation, is to be considered incompatible
with the common market.

The Commission notes that aid which is incompatible
with the common market shall be recovered.

The Commission notes that in its decisions communi-
cated to Germany with letters of 17 January 1994,
20 February 1995, 18 October 1995 and 11 December
1995 it stated that the Commission will be obliged to
demand the recovery of all aid if the restriction of
capacity is not complied with.

(69)

(70)

(71)

(72)

(73)

(10) ECR 1993 I, page 2323.

(11) OJ C 344, 14.11.1997, p. 2.
(12) OJ C 344, 14.11.1997, p. 2.

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(74)

(75)

(76)

(77)

(78)

Following the reasoning in the judgment of the Court
of First Instance in case T-140/95 of 15 September
1998 (13) (Ryanair/Commission), it should be examined
whether by declaring only the amount of aid, which
corresponds to the exceeding of the capacity limitation,
as incompatible with the common market and thereby
subject to recovery, the Commission departs from the
scope of its previous decisions on granting the aid in
which it stated that the Commission will be obliged to
demand the recovery of all aid if the restriction of
capacity is not complied with.

The Commission notes that the aim and actual effect
of recovery of aid is to seek to re-create the status quo
ex-ante by annulling the negative effect on competition
caused by the illegal aid. Following the reasoning of
the Commission decision concerning aid to MTW-
Schiffswerft and Volkswerft Stralsund (14), the scale of
exceeding the capacity limitation indicates the scale of
distortion of competition in question.

Since the amount of aid which corresponds to the
excess of the capacity limitation is declared incompat-
ible it is subject to recovery. The recovery seeks to
annul the negative effects of the exceeding of the
capacity limitation on the competition, whereby the
purpose and actual effect of the recovery are fulfilled.

Therefore the Commission considers that by declaring
the amount of aid, which corresponds to the exceeding
of the capacity limitation, as incompatible with the
common market in this case it does not depart from
the scope of the conditions of its previous decisions in
a way that would have an effect on aim, purpose and
effect of those conditions, the seeking to annul the
negative effect on competition.

Therefore, the Commission concludes that the part of
the aid of EUR 623,45 million (DEM 1 246,9 million)
granted to Kvaerner Warnow Werft and approved by
the Commission in four tranches with its decisions
communicated to Germany with its letters of 3 March
1993 (N 692/D/91), 17 January 1994 (N 692/J/91),
20 February
1995
(N 637/95) and 11 December 1995 (N 797/95), which
corresponds to the exceeding of the annual capacity
limitation of 85 000 cgt by 37 414 cgt, is no longer
the EC Treaty
compatible with Article 87(3)(e) of
and therefore incompatible with the common market
pursuant to Article 87(1) of the EC Treaty.

1995 (N 1/95), 18 October

(79)

In their comments, both Germany and KWW contest
the Commission’s observation that an annual capacity
limitation of 85 000 cgt was the main condition for
approval of the aid. They claim that a condition for the
approval was only that the approved and examined
production facilities would be kept in accordance with
the restructuring programme and investment plans.

(80)

(81)

(82)

(83)

The Commission notes that both the compliance with
the investment programme and respecting the capacity
limitation are conditions for approval of the aid. It is a
constant practice of the Commission in all restructur-
ing aid cases to approve the investment plan and
monitor its compliance. Nevertheless, this does not
change the fact that another essential condition for the
approval of the aid was the compliance with the annual
capacity limitation. The total amount of aid was
approved in five separate Commission decisions, in
four of which it is expressly mentioned that monitoring
is necessary in order to ensure that the restriction of
the shipbuilding capacity is respected. In addition, in
four of these five decisions Germany is reminded of
the fact that in case of non-compliance with the
capacity limitation the Commission would be obliged
to request reimbursement of the aid in question. In
three of these decisions it is stated that the German
Government had ensured that the yard would comply
with its capacity limitation. Consequently, there is no
doubt about the capacity limitation of 85 000 cgt
being a condition for the approval of the aid and for
the compatibility of the aid with the common market.

The second argument raised by KWW in its comments
is that according to the wording of Article 10a(2)(c) of
Directive 90/684/EEC and the Commission decisions
approving the aid, the capacity gains due to pro-
ductivity increase above the level
foreseen by the
Commission expert as until the end of the restructuring
period, should be allowed to the yards. Capacity
limitation and production limitation are different con-
cepts and KWW did not understand the limitation as a
production limitation.

The Commission notes that KWW had titled its
production report of first half of 1995, submitted to the
Commission by Germany with its letter of 16 August
1995, as ‘Report on respecting the capacity limitation’
(Bericht über Einhaltung der Kapazitätsbeschränkungen). It
titled its report of 1996, submitted to the Commission
by Germany with its letter of 17 February 1997, as
(Pro-
‘Production limitation by EU-Commission’
duktionsbeschränkung durch EU-Kommission). Moreover,
the Commission had in its letters of 18 and 19 Nov-
ember 1996 to Germany requested it to inform the
yards to strictly respect their capacity limitations in
1996 and in the following years.

In its letter of 3 March 1997 to Germany the Com-
mission points out that KWW had exceeded its capacity
limitation slightly in 1996 and that
the planned
production for 1997 is also very close to the limit. It
asks Germany to take the necessary measures to correct
the situation. In its letter of 14 April 1997 to Germany
the Commission once again asks Germany to intervene
to see that the yard changes its production plan in
order not to exceed its capacity limit.

(13) ECR 1998 II, page 3327.
(14) OJ C 344, 14.11.1997, p. 2.

(84)

In its letter to the Commission of 1 April 1997,
Germany states that BvS has demanded KWW to

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respect its capacity limitation of 85 000 cgt when
planning its production of 1997. As a result of this,
KWW would submit a new plan for 1997 where the
in its letter of
capacity limit is respected. Further,
6 June 1997 to the Commission, Germany explains
that the capacity of KWW in 1997 will be reduced by
the amount of the slight excess of 1996, 92 cgt, so
that in 1997 it would have a reduced capacity limit.
Germany stressed that this was a non-recurring situ-
ation and in general division of capacity between
different years to compensate excess was not possible.
This was clearly explained to the yard as well. Germany
also states that it had explained to the yard that
even slight excesses of capacity limitation cannot be
accepted in the future and that KWW had committed
itself to deduct the 92 cgt exceeding of its capacity
limitation in 1996 from its capacity of 1997.

(85)

Considering the above, the Commission notes that
there is no doubt about the fact that KWW has been
very well aware of the nature and meaning of the
capacity limitation of 85 000 cgt imposed on it.

(86)

The fourth point raised by KWW is that the capacity
limitation, if seen as a production limitation, should be
considered as an average production of several years.

(87)

The Commission notes that an annual capacity limi-
tation was an essential condition for approval of the
aid. This limit was set in order to offset the distortive
effect of the aid on the shipbuilding industry and
cannot be interpreted as an average annual target since
this would deprive the limit of its purpose and effect.
Moreover, the annual capacity limitation is clearly laid
down in point 27 of the privatisation contract of the
yard and accepted by KWW who is under the obliga-
tion to plan its production accordingly. The obligation
to respect the annual capacity limit and the fact that
dividing capacity between several years is not possible
was clarified to KWW by Germany in 1997, according
to Germany’s letter on 6 June 1997 to the Commission.

(88)

The last argument of KWW is that there is no legal
basis for laying down the maximum capacity limit for
individual yards.

(89)

The Commission notes that it has in its decisions on
the approval of restructuring aid to KWW laid down
an annual capacity limitation of 85 000 cgt as a
condition for the approval of the aid. It is normal
practice for the Commission to attach to its decision
on state aid conditions that would ensure the compati-
bility of that aid with the common market pursuant to
Article 87 of the EC Treaty. By doing so the Com-
mission acts in accordance with the Articles 87 and 88
of the EC Treaty, and in this present case the relevant
specific rules on aid to shipbuilding.

(90)

(91)

(92)

Germany argues
the cgt-
calculation method is an inadequate method for
measuring a capacity limitation of an individual yard.

in its comments

that

The Commission notes that the capacities of the East
German yards before the restructuring were defined
using cgt-calculation. In 1992 when the proposal for
Directive 92/68/EEC (15) was discussed at the Council
and the whole restructuring of
the East German
shipyards and its modalities were examined in detail,
the capacity reductions of these yards were defined
the
using cgt-calculations as well. Consequently,
Council has in 1992 confirmed this calculation method
as a basis of defining the capacities in the context of
the restructuring of the East German yards.

The Commission also notes that cgt-calculation was
agreed between Germany and the Commission as a
basis of the reporting in context of the monitoring of
former GDR yards. Germany confirms this in its letters
of 12 July 1994 and 3 April 1995 to the Commission.
In the letter of 3 April 1995 Germany states that
‘Germany and the Commission have reached agree-
ment on the fact that the monitoring of production
will be based on cgt-calculation based on coefficients
in force before 1 January 1994’. This method has been
used from the beginning of the restructuring and
during the whole monitoring period and as regards all
monitored yards. Germany has agreed on its appli-
cation without ever contesting its application. The
Commission sees no reason to speculate on the
adequacy of this method on the basis of one yard
breaching its capacity limitation.

(93)

Both Germany and KWW argue in their comments
that the exceeding by KWW of its capacity limitation
has no negative effect on competition.

(94)

(95)

The Commission notes that the very purpose of the
capacity limitation is to offset the distortive effect
the aid has on the European shipbuilding industry.
Consequently, exceeding this limit already implies a
distortion of competition.

The Commission also notes that KWW operates in the
market where other European yards operate. KWW
itself confirms this in its comments by stating that due
to building of the drilling rig it cannot compete in the
European market and bid for contracts on products
which other European yards build for a time period of
two years. Consequently, by exceeding its capacity
limitation set to offset the distortion of competition
KWW has acted detrimentally to other yards in this
market.

(15) SEC (92) 991 final.

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(96)

(97)

(98)

This position of the Commission is reinforced by the
comments of interested parties. These indicate in their
comments that the large container ships being built by
KWW and partly causing the excess are the kind
of ships also being built by other European yards.
Consequently, the excess of KWW has a direct impact
on the market where other European yards operate.
They also stipulate that the capacity limitations of
former East German yards are, among other factors, a
basis for investment and production planning of other
yards. Therefore the dispositions of other yards are
affected if these limits are exceeded.

The last point raised by Germany in its comments is
that KWW was allocated an additional capacity of
22 000 cgt for 1998, so that taking into account this
factor and the serial-effect, KWW’s capacity does not
exceed 107 000 cgt allocated for it for 1998.

The Commission notes that any changes of allocation
of capacity would need the consent of the Commission
since the capacity limits are linked with the restructur-
ing aid granted to the respective yards. In this case,
the Commission has not approved an allocation of
additional capacity of 22 000 cgt for KWW for 1998.
In its letter of 4 December 1998 the Commission
has communicated to Germany, that a capacity of
22 000 cgt of the Elbewerft yard cannot be reallocated
as regards year 1998 since that capacity was not
available for reallocation for the whole year but
only from 17 November 1998 onwards when the
notification for aid to the yard was withdrawn. In
addition, it was the Commission’s constant practice
not to accept a retroactive reallocation of capacity.
This was further confirmed by the Commission’s letter
of 8 January 1999 to Germany on the issue.

(99)

For these reasons, and because there is no legal basis
for retroactive reallocations, the statement of Germany
according to which the additional
capacity of
22 000 cgt has been allocated to KWW for 1998 has
no legal effect and is of no relevance for this procedure.

(100)

For the reasons explained above in points 48 to 77,
the Commission concludes that since the part of
the aid of EUR 623,45 million (DEM 1 246,9 million)
granted to Kvaerner Warnow Werft and approved by
the Commission in four tranches with its decisions
communicated to Germany with the letters of 3 March
1993 (N 692/D/91), 17 January 1994 (N 692/J/91),
20 February
1995
(N 637/95) and 11 December 1995 (N 797/95), which
corresponds to the exceeding of the annual capacity
limitation of 85 000 cgt by 37 414 cgt, is no longer
compatible with Article 87(3)(e) of the EC Treaty. As
no other basis of compatibility exists or has indeed
been invoked by Germany or KWW, this part of the

1995 (N 1/95), 18 October

aid is incompatible with the common market pursuant
to Article 87(1) of the EC Treaty.

(101) The Commission has considered various options in
determining the amount of the incompatible aid and
has concluded the following.

(102) The Commission notes that the duration of KWW’s
annual capacity limitation of 85 000 cgt is 10 years.
Considering that the capacity limitation was exceeded
in one year,
in 1998, the Commission could have
decided to determine the amount of unlawful aid solely
on this basis. That would have led to the result
that 1/10 of the aid would have been considered
incompatible with the common market. On the other
hand, it would also have been possible to calculate the
proportion of the excess of 37 414 cgt to the total of
the capacity limitation during the 10-year period
(850 000 cgt) which would have given the proportion
of 4,4 % as the amount of illegal aid.

(103) The Commission has come to the conclusion that
both the above methods are insufficient in order to
determine the amount of unlawful aid, since they do
not take into account the proportion in which the
annual capacity limitation of 85 000 cgt is exceeded.
In order to take this element into account the Com-
mission has based its calculation on the combination
of the pure proportional approach and a supplemen-
tary part which addresses the aggravated distortion of
competition caused by the considerable amount of
exceeding the annual capacity limitation in this case.

leading to the proportion of 4,4 %.

(104) Since the duration of KWW’s annual capacity limi-
tation of 85 000 cgt is ten years, the proportion of the
excess of 37 414 cgt
to the total of the capacity
limitation during this period (850 000 cgt) has been
In
calculated,
addition to this, the considerable exceeding of the
capacity limitation in 1998 needs to be addressed
since the Commission considers that the distortion of
competition caused by the excess increases the greater
the excess. Since the amount of excess of 37 414 cgt
exceeds the yearly capacity limitation by more than
20 %, this additional element having impact on the
level of distortion of competition has been taken into
account in the calculation as well. This has been done
by calculating the proportion of the amount of excess
exceeding 20 % of the annual limitation (20 414 cgt)
to the total of the capacity limitation (850 000 cgt),
which gives the proportion of 2,4 %.

(105) Consequently, the amount of the incompatible aid is
the proportion of the total of the excess and the
additional element linked to the greater distortion of
competition caused by the excess of more than 20 %
of the annual capacity limitation, to the total of the

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L 274/35

aid

EUR

investment

capacity limitation calculated on the basis of all
operating aid EUR 372,5 million (DEM 745 million)
and
237,45 million)
(DEM 474,9 million), altogether EUR 609,95 million
(DEM 1 219 ,9 million) paid to KWW. Consequently,
the amount of the aid which is considered incompatible
with the common market on the basis of KWW’s
exceeding of its capacity limitation in 1998 is EUR
41,5 million (DEM 83,0 million). This aid shall be
recovered.

(106) The Commission notes that in its decision to open the
procedure (16) in this case, it stated that the closure aid
of EUR 13,5 million (DEM 27 million), approved by
the Commission in its decision communicated to
Germany with its letter of 3 March 1993, has been
paid to finance the redundancy pay and other social
measures in favour of former workers. As the yard had
passed such monies to its former employees,
the
Commission would not seek the recovery of this
amount. For this reason the closure aid is not included
in the above calculation.

(107) The Commission stresses that the sums to be recovered
shall bear interest from the date on which they were
made available to the recipient until
their actual
recovery. The recovery shall be effected in accordance
with the procedures of national law and the interest
shall be calculated on the basis of the reference rate
used for calculating the grant-equivalent of regional
aids.

corresponds to the exceeding of the capacity limitation
of 85 000 cgt by 37 414 cgt in 1998, is no longer
compatible with Article 87(3)(e) of
the EC Treaty
and thereby incompatible with the common market
pursuant to Article 87(1) of the EC Treaty.

(110) Therefore, the aid of EUR 41,5 million (DEM 83,0 mil-
lion) is incompatible with the common market and
shall be recovered. The sums to be recovered shall bear
interest from the date on which they were made
available to the recipient until their actual recovery,

HAS ADOPTED THIS DECISION:

Article 1

The state aid, which Germany has implemented in favour of
Kvaerner Warnow Werft GmbH in an amount of EUR 41,5
million (DEM 83,0 million), is incompatible with the common
market pursuant to Article 87(1) of the EC Treaty.

Article 2

VI. Conclusions

Germany shall take the necessary measures to recover
1.
from the recipient the aid of EUR 41,5 million (DEM 83,0 mil-
lion).

(108) The Commission concludes that Kvaerner Warnow
Werft GmbH has in 1998 exceeded its annual capacity
limitation of 85 000 cgt by 37 414 cgt. This annual
capacity limitation was set by the Commission in its
decisions communicated to Germany with the letters
of 3 March 1993, 17 January 1994, 20 February 1995,
18 October 1995 and 11 December 1995 as an essen-
tial condition for approval of a total of EUR 623,45
million (DEM 1 246,9 million) aid in accordance with
Directive 90/684/EEC on aid to shipbuilding and
92/68/EEC amending Directive 90/684/EEC on aid to
shipbuilding and thereby for the compatibility of the
aid with
to
common market
Article 87(3)(e) of the EC Treaty.

pursuant

the

(109) Since it is the opinion of the Commission that the scale
of exceeding the capacity limitation indicates the
scale of distortion of competition in question, the
Commission considers that the amount of aid, which

2. Without prejudice to any order of the Court of Justice of
the European Communities pursuant to Article 242 of the
Treaty, recovery shall be effected without delay and in
accordance with the procedures under German law, provided
that it allows the immediate and effective execution of the
Commission’s decision. To this effect and in the event of a
procedure before German courts, Germany shall
take all
necessary steps which are available in its legal system, including
provisional measures, without prejudice to Community
law (17).

3.
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 aids.

(16) OJ C 41, 16.2.1999, p. 23.

(17) See Article 14(3) of Council Regulation (EC) 659/1999,

OJ L 83, 27.3.1999, p. 1.

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Article 3

Article 4

This Decision is addressed to the Federal Republic of Germany.

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

Done at Brussels, 8 July 1999.

For the Commission

Karel VAN MIERT

Member of the Commission