2001/851/EC: Commission Decision of 21 June 2001 on the State aid awarded to the Tirrenia di Navigazione shipping company by Italy (Text with EEA relevance) (notified under document number C(2001) 1684)
Date: 2001-06-21
Institutions: European Commission
Subjects: Italy, State aid, control of State aid, maritime transport

4.12.2001

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II

(Acts whose publication is not obligatory)

COMMISSION

COMMISSION DECISION

of 21 June 2001

on the State aid awarded to the Tirrenia di Navigazione shipping company by Italy

(notified under document number C(2001) 1684)

(Only the Italian text is authentic)

(Text with EEA relevance)

(2001/851/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

(3)

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, pursuant to the aforementioned Articles, called on
interested parties to submit their comments (1),

Whereas:

1. PROCEDURE

(1)

Saremar,

Having received several complaints,
the Commission
decided to initiate the procedure laid down in Article
88(2) of the Treaty in respect of aid paid to six compa-
nies in the Tirrenia Group, namely Tirrenia di Naviga-
zione, Adriatica, Caremar,
and
Toremar. This aid takes the form of subsidies paid
the companies in the group to
directly to each of
support the maritime transport services those companies
provide under six agreements concluded with the State
in 1991; these agreements are designed to ensure the
provision of maritime transport services, for the most
part consisting of connections between mainland Italy,
on the one hand, and Sicily, Sardinia and other, smaller
Italian islands, on the other.

Siremar

(2)

the Commission
By letter dated 6 August 1999,
informed Italy that it had decided to initiate the proce-
dure. By letter dated 28 September 1999, the Italian
authorities forwarded their comments on this decision.

The Commission Decision to initiate the procedure was
published in the Official Journal of the European Communi-
ties (2). Following that publication, a number of private
operators who offer maritime transport services in
competition with the companies of the Tirrenia Group
forwarded their comments to the Commission. These
comments were in turn forwarded to the Italian authori-
ties to give them the opportunity to react.

(4)

During the investigation procedure, the Italian authori-
ties asked for the Tirrenia Group case to be split up so
that a final decision concerning the Tirrenia di Naviga-
zione company could be reached as a priority. This
request was made on the grounds that the Italian author-
ities wish to privatise the group, beginning with Tirrenia
di Navigazione, and intend to speed up the process
where this company is concerned.

(5) With regard to this request, the Commission first of all
notes that, while Tirrenia di Navigazione assumes the
role of group leader with respect to the group's financial
and commercial strategy, the six member companies are
legally independent
in geographically
and operate
distinct market segments which are subject to varying
degrees of competition, both from private Italian opera-
tors and from operators from other Member States. In
addition, the subsidies paid by the Italian authorities
under the agreements referred to in recital 1 are calcu-
lated to cover the net operating loss on the routes served
the abovementioned companies and are
by each of
awarded directly to those companies without going
through Tirrenia di Navigazione. Finally, the other parts
of the aid referred to in the initiation of the procedure

(1) OJ C 306, 23.10.1999, p. 2.

(2) See footnote 1.

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— investment aid and aid of a fiscal nature — call for
separate analysis of each company in the group. Conse-
the Commission can accede to the Italian
quently,
authorities'
request. This Decision therefore only
concerns the Tirrenia di Navigazione company.

In accordance with Law No 169 of 19 May 1975, the
concessionary companies, including Tirrenia di Naviga-
zione, also provide the service of transporting post and
packages and commercial services of a purely local char-
acter as an accessory activity.

2. DETAILED DESCRIPTION OF AID SCHEME

2.1. MARKET IN QUESTION

(6)

At present, Tirrenia di Navigazione's main commercial
activity is in providing connections with the largest
Italian islands, Sardinia and Sicily; its secondary activity
is in the international market, with connections between
mainland Italy, Sicily and Tunisia. The services offered
involve goods and passenger transport.

Cabotage with the Mediterranean islands was tempor-
arily exempted from application of
the principle of
freedom to provide services until 1 January 1999 by
virtue of Article 6(2) of Council Regulation (EEC) No
3577/92 of 7 December 1992 applying the principle of
freedom to provide services to maritime transport within
Member States (maritime cabotage) (3).

Tirrenia holds 67,3 % of the market share of passenger
transport and 55,3 % of the market share for goods
transport
in the medium and long-distance cabotage
market (4). The recent arrival of competing private oper-
ators has reduced Tirrenia's market share appreciably:
the company had a virtual monopoly on most of the
routes in 1990. The opening of the market to the free
should serve to increase in
services
provision of
competition over the next few years.

2.2. SUBSIDIES PAID IN RESPECT OF PUBLIC SERVICE

OBLIGATIONS

2.2.1. THE LEGAL CONTEXT

(7)

According to Article 8 of Law No 684 of 20 December
1974, maritime connections with the larger and smaller
Italian islands must satisfy the requirements connected
the
with the economic and social development of
regions concerned, particularly the Mezzogiorno. To this
end,
the Law provides for operators entrusted with
providing such services to be paid subsidies pursuant to
public service contracts of 20 years' duration.

Article 9 of Law No 160 of 5 May 1989 stipulates that
the routes to be served and the frequency of service to
be guaranteed are to be determined by the public
authorities on the basis of technical proposals from the
concessionary companies, which must
to that end
submit a service programme every five years.

(3) OJ L 364, 12.12.1992, p. 7.
(4) Source: Conto Nazionale dei Trasporti 1997.

Presidential Decree No 501 of 1 June 1979 specifies the
various elements (proceeds and costs) which enter into
the subsidy paid to concession
the calculation of
holders. It also stipulates that the times of departure and
arrival on each of the routes served by the abovemen-
tioned companies are to be approved by ministerial
decree. As far as vessels are concerned, the presidential
decree stipulates that concessionaries must use ships not
more than 18 years old, of which they must be the
owners, unless this is expressly waived by the Ministry.
This constraint, which obliges concession holders to
renew their fleet periodically, constitutes a specific obli-
gation imposed on these shipping companies. The
vessels used must in addition be assigned individually to
each of the public service routes. In addition to the
ordinary services, Article 40 empowers the Minister for
Merchant shipping to arrange for the provision of addi-
tional services to satisfy extraordinary requirements in
the public interest or for reasons of traffic.

Law No 856 of 5 December 1986 stipulates that fares
are to be set by Ministerial Decree on a proposal from
the concession-holding companies. Different fares apply
for ordinary travellers and for residents and migrant
workers, the latter two categories enjoying preferential
rates.

2.2.2. PUBLIC SERVICE AGREEMENTS

(8)

In July 1991, the Italian State concluded identical agree-
ments of 20 years' duration (Article 2), to run from 1
January 1989, with each of the six Tirrenia group under-
takings,

including Tirrenia di Navigazione.

These agreements state that the first five-year period
begins on 1 January 1990.

Under the terms of Article 3 of these agreements, the
amount of the annual subsidy is established on the basis
of an application which the company makes in the
month of February every financial year. The application
is the subject of interministerial consultations and is
approved in the following month of May by ministerial
decree. The purpose of the annual subsidy is to enable
the undertaking to cover the losses resulting from the
shortfall between its operating costs and income. Article
5 lists in detail the economic parameters used to calcu-
late the various cost elements taken into consideration,
pursuant to Presidential Decree No 501/79, to determine
the amount of the subsidy.

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2.2.3. THE FIVE-YEAR PROGRAMMES

(9)

In accordance with Article 1 of the public service agree-
ments, the five-year programmes specify the routes and
the ports to be served, the type and capacity of vessels
to be used for the maritime connections in question, the
frequency of service and the fares to be paid, including
subsidised fares, particularly for the residents of island
regions.

The first
five-year programme (1990 to 1994) was
approved by Ministerial Decree of 29 May 1990, which
was enacted to enter into force on 1 January 1990.

(10)

The second programme, covering the years 1995 to
1999, and approved by Decree of 14 May 1996, left the
routes and frequencies substantially unaltered but made
some changes regarding the vessels assigned to service
the routes,
in particular the acquisition of two high-
speed vessels for passenger and vehicle transport on the
Civitavecchia/Olbia line as from June 1998 and the entry
into service of two new ferries on the Naples/Palermo
line to replace old ships (mixed transport and cargo) of
broadly equivalent capacity.

The third programme (covering the years 2000 to
2004), submitted to the Italian authorities in September
1999, has not yet been approved. Pending the adoption
of this programme, a Decree of 8 March 2000 ordered

the undertakings of the Tirrenia group to maintain the
services referred to in Article 9 of Law No 160/89, using
the vessels at their disposal on the date of 31 December
1999.

2.2.4. THE ANNUAL BALANCING SUBSIDY

for

The agreement provides
the annual balancing
subsidy to be paid in the following manner: an initial
advance payment equivalent to 70 % of the subsidy paid
the previous year is made in March of each year. A
second payment, made in June, is equal to 20 % of this
subsidy. The difference between the amounts paid and
the shortfall between the operating costs and revenue
during the year in progress constitutes the balance,
which is paid at the end of the year. If it turns out that
the company has received a sum higher than the net
cost of the services provided (income minus losses), the
company is required to reimburse the difference in the
15 days following approval of the balance sheet.

(11)

The annual subsidy corresponds to the accumulated net
loss on the services referred to in the five-year plan, to
which must be added a variable amount corresponding
to the return on capital
invested. The amount of the
subsidy awarded to Tirrenia di Navigazione pursuant to
the public service agreement of 1991 has evolved as
follows (5):

Year

1992

1993

1994

1995

1996

1997

1998

1999

2000

Operating
costs
(a)

[...] (*)

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

(*) Business secret.

Operating
revenue
(b)

Net deficit
(cumulated losses –
cumulated income)
(a – b)

Return on
capital
invested

(in million ITL)

Amount of
annual subsidy

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

(5) Data taken from the PriceWaterhouseCoopers' study Valutazione dei
criteri di predisposizione dei conti economici gestionali per linea e stagiona-
lità relativi agli esercizi 1992-1999, completed for the year 2000 by
the Italian authorities. The study reproduces the analytical accounts
of
the operating costs and
income for each of the routes.

the Tirrenia company and assesses

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Efforts by Tirrenia di Navigazione to lower its operating
costs and optimise its results with the prospect of the
cabotage market being opened up and the company
being privatised in the future have led since 1997 to a
steady fall in the overall annual subsidy. The increase
observed in 2000 is a direct consequence of the impact
of rising fuel costs on the company's accounts, while
fares remained unchanged pursuant to a decision by the
public authority (6). The net operating loss is derived
from the difference between accumulated losses (usually
generated during the winter season, between 1 October
and 31 May) and recorded revenue, earned mainly in the
summer period (1 June to 30 September). According to
the Italian authorities, the loss of revenue directly attri-
butable to the preferential rates applied to island resi-
dents and migrant workers
imposed on the
(rates
companies)
is higher than the overall amount of the
annual subsidy.

With regard to the return on capital invested, informa-
tion received from the Italian authorities shows this to
represent, as a percentage of such capital, a return
which, varying from year to year, ranges from […] in
in line with the market rates
1992 to […] in 2000,
applied in those years. On the same question,
the
Commission observes that the Community guidelines on
State aid to maritime transport (7) state that the amount
of subsidy awarded as compensation for public service
obligations should take account of a ‘reasonable return
on capital employed’, which is applicable in the case
under examination.

2.3. INVESTMENTS PROVIDED FOR IN THE FIVE-YEAR
PROGRAMMES AND THE COMPANY'S BUSINESS PLAN

frequency,

(12) Apart from specifying which routes are to be served and
with what
the five-year programmes also
determine the investments which the concession-holder
intends to make in the period concerned in order to
guarantee service on the routes in question. During its
investigation, the Commission sought to ascertain in
particular in what way the costs of vessel acquisition and
depreciation were taken into account for the purposes of
calculating the annual subsidy.

— to enable the companies of the group to cope with
the changed conditions of
the Italian cabotage
market which have resulted from its liberalisation (1
January 1999) and prepare themselves
the
termination, in 2008, of the scheme under the agree-
ments signed with the State,

for

— to reduce the costs of the services provided pursuant

to the abovementioned agreements,

— to sustain the group's development and make best

use of available resources,

— to create the conditions for privatisation of

the

group companies.

The business plan provides, in particular, for a change in
the investments needed for the services referred to in the
public service agreements; this should take the form of
decommissioning old ships, transferring other vessels
within the group and new investments totalling ITL 700
billion.

2.4. PREFERENTIAL FISCAL TREATMENT

(13) Decree Law No 504 of 26 October 1995 introduced a
preferential fiscal scheme for mineral oils used as fuel for
shipping.
this
Decree, excise duties are reduced for lubricants used on
board.

In accordance with Article 63(3) of

In its decision to initiate the procedure, the Commission
had expressed some doubts about the way this fiscal
relief was being applied to vessels laid up in Italian ports
for maintenance purposes. The Commission wanted
reassurance that this measure was not discriminatory to
other maritime operators whose ships were in the same
situation.

3. COMMENTS FROM INTERESTED PARTIES

3.1. COMMENTS BY TIRRENIA DI NAVIGAZIONE

The Commission also wanted to check whether the addi-
tional investments planned on behalf of the undertak-
ings in the group, according to the business plan
adopted in March 1999 by Tirrenia for the period 1999
to 2002, did not contain any other element of aid. The
plan has the following main objectives:

(6) Expenditure on fuel, which amounted to ITL 74 179 million in

1999, soared to ITL 113 142 million in 2000.

(7) OJ C 205, 5.7.1997.

(14)

the compensation paid pursuant

Tirrenia di Navigazione submitted its comments on the
decision to initiate the procedure by letter dated 22
November 1999. Primarily, the company contested the
notion that
to the
agreements signed with the State can be qualified as
‘new aid’ and hence the legitimacy of the decision to
initiate the formal investigation procedure. According to
the company, the Commission had known for a long
time of the existence of a scheme for public service
obligation compensations and had never raised any
objections to the scheme. The company also contended

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that the value of the annual compensation payments
paid to the public operator is strictly necessary and
proportional to cover the additional net cost of the
public service obligations. Tirrenia concluded, therefore,
that there was no obstacle to competition with other
market operators.

At the same time, Tirrenia di Navigazione instituted
proceedings before the Court of First Instance pursuant
to Article 230(4) of the Treaty (8) against the Commis-
sion's decision to initiate the procedure.

3.2. COMMENTS FROM PRIVATE OPERATORS

(15)

The Commission received a number of comments from
various private operators competing with the conces-
sion-holders, which stressed above all
the following
aspects:

— Tirrenia is practising an aggressive commercial
policy on the routes where competition from private
operators is focused, characterised by voyages at
dumped prices,
and deferred payment
systems, the only explanation for which is the public
aid it receives,

rebates

— the public service obligations lack transparency, and
Tirrenia's ability to change the extent of the obliga-
tions incumbent upon it, particularly regarding the
routes it serves and the imposed timetables and
frequencies, is contrary to the very nature of public
service obligations,

— given that services are being offered by private oper-
ators on some routes served by Tirrenia, the need for
a public service appears contestable,

— the financing arrangements for investments carried
out since 1995, or scheduled in the business plan,
contain elements of aid, particularly as regards two
vessels acquired by Viamare in 1996 and Tirrenia's
generally more favourable access to bank loans,

— like other companies in the group, Tirrenia benefits
from preferential fiscal treatment for mineral oils
used on board its vessels when laid up in Italian
ports.

procedure. In their opinion, Article 4 of Council Regula-
tion (EEC) No 3577/92 (cabotage) allows the agreements
signed with each company of the Tirrenia group to
remain fully in force until their expiry date, namely
2008. Consequently,
the public service obligations
scheme which derives from these agreements may not
be questioned by the decision to initiate the procedure.

The Italian authorities also contest the notion that the
aid referred to by the Commission Decision constitutes
new aid within the meaning of Article 88(3) of the
Treaty and that it could have affected trade between
Member States before the opening of the Italian market
to cabotage on 1 January 1999.

Apart from these general comments, the Italian authori-
ties stress that the presence of private operators on the
routes served by Tirrenia di Navigazione is a recent and
limited phenomenon, being confined to a small number
of routes and concentrated in the summer season. More-
over, the method of calculating the annual compensa-
tion, which consists in deducting losses accumulated
during the winter from revenue accrued during the
summer, helps keep the amount of compensation to its
strict minimum. Consequently, according to the Italian
authorities, the compensation is necessary and strictly
proportionate in respect of the public service obliga-
tions, whose characteristics it is for the Member State to
define.

4.2. INVESTMENTS SCHEDULED IN THE BUSINESS PLAN

(17)

The Italian authorities stress that the investments sched-
uled in the business plan are designed to reduce the
costs of the service while maintaining a high level of
quality. They also insist that the methods for financing
the planned investments do not contain any aid element.
Investments will be financed partly from the company's
own resources and partly by means of loans contracted
under normal market conditions.

4. COMMENTS FROM THE ITALIAN AUTHORITIES

4.3. PREFERENTIAL FISCAL TREATMENT

4.1. SUBSIDIES PAID IN RESPECT OF PUBLIC SERVICE

OBLIGATIONS

(18)

(16)

By letter of 29 September 1999, the Italian authorities
the
forwarded their comments on the initiation of

(8) Case T 246/1999,

in progress.

The Italian authorities have given details of the legal
framework governing the fiscal treatment of mineral oils
used as fuels for shipping. The information provided to
the Commission shows that, through a general decision
of 2 March 1996, taken pursuant to Decree Law No
504/1995, the preferential fiscal treatment provided for
by this text is extended to fuels and lubricants used by
any vessel laid up in a port for maintenance operations.

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(19) At the same time, Italy went before the Court of Justice
to contest
the decision to initiate the procedure in
respect of the part containing the injunction to suspend
the grant of unlawful aid (9).

5. ASSESSMENT OF THE AID

5.1. SUBSIDIES PAID IN RESPECT OF PUBLIC SERVICE

OBLIGATIONS

5.1.1. EXISTENCE OF A NEW AID MEASURE

(20)

Pursuant to Article 87(1) of the Treaty, any aid granted
by a Member State or through State resources in any
form whatsoever which distorts or threatens to distort
competition by favouring certain undertakings or the
in so far as it affects
production of certain goods is,
incompatible with the
trade between Member States,
common market.

the annual balancing
that
The Commission notes
subsidy which the State grants directly to Tirrenia di
Navigazione within the framework of the 1991 agree-
ment confers on that company an advantage not
enjoyed by other competing companies offering or likely
to offer comparable services in the market in question.
The fact that this market was temporarily exempted, up
to 1 January 1999, from the application of Regulation
(EEC) No 3577/92 applying the principle of freedom to
provide services to maritime transport within Member
States (maritime cabotage) does not rule out the poss-
ibility that the subsidies paid to Tirrenia under the agree-
ment could have affected trade between Member States
and distorted competition. In this respect, the Commis-
sion notes, firstly, that operators from other Member
States were present on the routes served by Tirrenia even
before the cabotage market was opened up; secondly, it
records that, again before that date, some competing
companies were
liberalised
for maritime services
markets, such as the market
between Member States or between Member States and
non-member countries, in which Tirrenia di Navigazione
was also operating before 1 January 1999 and still is.
The Commission also points out the risk of cross-subsi-
dies between the services provided by Tirrenia di Naviga-
zione on the cabotage market and those provided on the
international market, particularly as the company does
not keep separate accounts for these different categories
the
of services. Finally,
annual balancing subsidy scheme provided for by the
1991 agreement was instituted for a period of 20 years
and that it is continuing, therefore, to have an effect

the Commission notes that

also operating in the

even after
concerned has been opened up to competition.

the market

cabotage

the

for

services

(21)

The Commission does not share Tirrenia di Naviga-
zione's view that the subsidies in question are existing
aid. Firstly, the Commission notes that
they do not
predate the entry into force of the Treaty. The annual
balancing subsidy scheme was only in fact set up in its
present form by Laws No 684/74 and No 169/75. In
addition, Decree No 501/79 and Law No 856/86 estab-
lished in detail various public service obligations and the
cost elements entering into the calculation of
the
balancing subsidy which Tirreniadi Navigazione enjoys
under the terms of the 1991 agreement. Secondly, the
Commission notes that it has never authorised the aid in
question. In particular, the fact that the Commission
may have had knowledge of the various legislative texts
instituting the annual subsidy scheme and the 1991
agreement does not mean, in the absence of prior noti-
fication within the meaning of Article 88(3), that tacit
authorisation was given to the annual subsidy scheme
(see judgment in the Lorenz case (10)). The Commission
considers, therefore, that the subsidies to Tirrenia di
Navigazione constitute new aid within the meaning of
Article 1 of Council Regulation (EC) No 659/1999 of 22
March 1999 laying down detailed rules for the applica-
tion of Article 93 of the EC Treaty (11).

5.1.2. APPRAISAL OF THE COMPATIBILITY OF THE AID

(22)

The ban on aid laid down in Article 87(1) of the Treaty
is not absolute. Article 87(2) and (3) and Article 86(2) of
the Treaty provide for exemptions.

a

social

character,

None of the exemptions provided for in Article 87(2) of
the Treaty apply to the aid awarded to Tirrenia under
the heading of the annual subsidy, which is neither aid
granted to individual
having
consumers, nor aid to make good the damage caused by
natural disasters or exceptional occurrences, nor aid
granted to the economy of certain areas of the Federal
Republic of Germany. With particular regard to aid of a
social character, the application of Article 87(2) presup-
poses that the measure benefiting individual consumers
does not favour certain undertakings or types of produc-
tion directly or indirectly. In this respect, the Commis-
sion notes that the loss of revenue Tirrenia di Naviga-
zione sustains by charging reduced fares for island resi-
dents and migrant workers is taken into account in the
calculation of
the annual compensation. The Italian
authorities cover these fare reductions, which benefit
consumers
consumers, only when the
individual
concerned travel with the public operator, benefiting the
latter vis-à-vis its private competitors.

(9) Case C 400/1999,

in progress.

(10) European Court of Justice, Case 120/73 Lorenz [1973] ECR 1471.
(11) OJ L 83, 27.3.1999, p. 1.

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Nor does this aid qualify for any of the exemptions listed
in Article 87(3) of the Treaty. The aid in question is not
intended to promote the execution of an important
project of common European interest or to remedy a
serious disturbance in the economy of a Member State,
as described under (b), nor is it intended to promote
culture and heritage conservation as described in (d).
Nor can the aid in question be qualified as regional aid,
within the meaning of points (a) or (c), as it is not part
of a multisectoral aid scheme which is open in a given
sectors
region to
concerned (12). Nor can the aid in question be regarded
as facilitating the development of certain activities as
referred to in (c), since this is aid intended to cover the
operating costs of a specific maritime operator and does
not fall within a general plan enabling the beneficiary
undertaking to become economically and financially effi-
cient without recourse to further aid.

undertakings

the

the

all

of

(23) Article 86(2) of

the Treaty states that undertakings
entrusted with the operation of services of general
economic interest […] are subject to the rules contained
in the Treaty, in particular to the rules on competition,
in so far as the application of such rules does not
obstruct the performance, in law or in fact, of the partic-
ular tasks assigned to them. The development of trade
must not be affected to such an extent as would be
contrary to the interests of the Community.

(24)

It

is not

therefore sufficient

In accordance with Community case-law, as this provi-
sion lays down a derogating rule it must be interpreted
restrictively (13).
in this
respect that the company in question has been entrusted
by the public authorities with the operation of a service
of general economic interest; the application of the rules
of the Treaty, specifically those of Article 87, must also
obstruct the performance of the particular tasks assigned
to the company and the interests of the Community
must not be affected (14).

(25)

To assess whether the subsidies paid to Tirrenia di Navi-
gazione under the 1991 agreement qualify for the
exemption referred to in Article 86(2) of the Treaty, the
Commission must first verify the existence and extent of
the public service obligations imposed on the company
in order to appraise the need for a public service and for
a subsidy to compensate for its cost.

(12) See the Guidelines on national regional aid (OJ C 74, 10.3.1998,

p. 9).

(13) Judgment of the Court of First Instance of 27 February 1997, Case
T-106/95 Fédération française des sociétés d'assurances (FFSA et al.) v
Commission [1997] ECR II-229, paragraph 173 of the grounds.
(14) See the judgment referred to in the previous footnote and the
judgment of the Court of 10 December 1991 in Case C-179/90
Merci convenzionali Porto di Genova [1991] ECR I-5889, paragraph
26.

The existence of public services

(26)

The abovementioned Community guidelines on State aid
to maritime transport stipulate that ‘public service obli-
gations may be imposed for scheduled services to ports
serving peripheral regions of the Community or thinly
served routes considered vital for economic develop-
ment of that region,
in cases where the operation of
market forces would not ensure a sufficient services
level’.

its routes,

By virtue of the legal acts and the provisions of the
agreement described above, Tirrenia di Navigazione is
subject, on all
to a series of obligations
regarding the ports to be served, voyage frequencies,
times of departure and arrival, type of vessel to be used
and fares to be charged, which obligations the company
would not assume (or would not assume to the same
extent or under the same conditions)
if it could act
interests.
solely in its own commercial

The purpose of these obligations is to guarantee that the
principle of territorial continuity is upheld and that a
scheduled maritime transport
sufficient number of
services are provided for passengers and goods to and
from the Italian island regions in order to meet the
social and economic development requirements of those
regions. The Commission concedes that this objective,
which is the expression of a legitimate public interest,
could not be achieved by the simple operation of market
forces. Indeed, in 1991, Tirrenia di Navigazione found
itself in a de facto monopoly situation on almost all the
routes concerned, even though the law conferred no
exclusivity on it in this respect.

The purpose of the agreement concluded with the State
was precisely to guarantee that these obligations would
be met and, in return, to allow compensation for the
costs directly related to the loss the company incurred in
satisfying the obligations.

(27) However, for the obligations in question to be able to
give rise to compensation and for the Commission to be
able to verify that the compensatory amount is limited
to what is strictly necessary, these obligations need to be
set out in advance and in a precise manner by the
competent public authorities. The Court, too, has recog-
nised the need to predetermine public service obligations
in a precise fashion (15).

The Commission notes here that the system introduced
by the Italian authorities to define the extent of the
public service obligations allows the concession-holder a
margin of flexibility on the routes where competition

(15) Judgment of

the Court of 20 February 2001, Case C-205/1999

‘Spanish maritime cabotage’, not yet published.

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from private operators is concentrated, particularly in
the high season, and that
this margin enables the
company to adapt its service offer to demand. This
flexibility, expressed sometimes as the simple fixing of a
maximum number of voyages and sometimes by the
total absence of references to the number of frequencies
to be offered, must be seen in conjunction with the
Italian public authorities' power to change the routes,
the ports to be served and the required frequency of
services in order to adapt the regulatory framework to
market trends within each five-year period.

a

right

service

conferring

and consequently

The Commission considers that, in view of the flexibility
allowed Tirrenia di Navigazione in terms of the extent of
its obligations, the services in question cannot be consid-
ered to be meeting public
requirements
task conferred on a
connected with a particular
company entrusted with a service of general economic
interest
to
compensation. Indeed,
in accordance with the above-
mentioned case law of the Court (16), in order to confer
the right to compensation, public service obligations
must be fixed in advance by the public authorities in a
precise manner. Such is not the case when the company
concerned may determine, on its own initiative,
the
frequency of service to operate and even judge whether
or not to operate the service at all depending on market
circumstances. Additional services of this kind, provided
by Tirrenia on routes where there is competition and in
the profitable periods (17) of the high season, cannot be
taken into consideration for the purposes of calculating
the annual compensation.

(28)

In the matter of verifying the existence and extent of the
public service obligations currently entrusted to Tirrenia
di Navigazione and the need to compensate the cost of
such services,
the Commission must ascertain that
competing operators do not offer services similar or
comparable to those offered by the public operator and
which would meet the requirements laid down by the
Italian authorities; this can be ascertained by carrying
out a comparative examination, route by route, of the
total demand for services and available supply.

To this end, the routes served by Tirrenia di Navigazione
can be grouped into two categories:

(a) those on which the company operates without any

competition;

(b) those on which the competition of private operators
focused, both in the high season only and

is
throughout the year.

(16) Ibid.
(17) See recital 30.

(29)

The routes on which there is competition from private
operators represent a significant percentage of Tirrenia's
traffic (80 % of passengers, 77 % of linear metres carried
on mixed ferries, 56 % of
freight carried on cargo
vessels) (18). Competition on these routes is a relatively
recent phenomenon; it has emerged essentially over the
last five years, during which time the market has experi-
enced a sharp increase in demand on these same routes.

(30) With regard to the routes where competition exists from
private operators, the Commission has ascertained the
following:

(a) Naples/Palermo

No competitors meet the requirements of annual
regularity and frequency of service as set out in the
agreement, for either passenger or goods transport.
Since 1997 a private company has been operating
the route during the high season (April to October);
however,
it offers services of limited capacity and
involving only rapid passenger transport, and is
therefore unable to meet the service requirements
laid down by the Italian public authorities, which are
basically for a year-round daily night-time sailing
from each of the two ports.

(b) Civitavecchia/Olbia

A private operator operating between Civitavecchia
and Golfo Aranci (19) has been competing with
Tirrenia on this route during the high season since
1996, and year-round since 1998. Competition
increased in June 2000 with the arrival of another
operator (20). The Commission nevertheless notes
that only Tirrenia di Navigazione meets all
the
requirements of the agreement,
in terms both of
frequencies (seven days a week, year-round) and of
ports to be served and departure times, including a
night-time sailing from both ports during the high
season. The Commission notes in particular that
neither of the two competing operators provides a
year-round daily link and that, in the low season, the
cumulated service supplied by these operators does
not guarantee the daily frequency required by the
agreement.

The Commission also notes that Tirrenia di Naviga-
zione offers additional services on this route, the
frequency of which may vary according to changes
in demand. Pursuant to the Ministerial Decree of 13
March 1998, these services may be carried out from

(18) The data refer to 1997 and have been taken from the ‘Azzurra’

study.

(19) The port of Golfo Aranci, situated 15 km from Olbia, may be

regarded as interchangeable with the latter.

(20) The services provided by this operator in the low season were

suspended in the autumn of 2000.

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from
June to September, alternating departures
Fiumicino and Golfo Aranci (21), thus giving Tirrenia
flexibility. The Commission
additional operational
would stress once again that,
in the absence of a
precise prior definition of
the level of services
required, these latter services cannot be regarded as
meeting public service requirements.

(c) Genoa/Porto Torres

Finally, the Commission notes that, pursuant to the
Ministerial Decree of 9 October 1998, Tirrenia also
serves the ports of La Spezia and Golfo Aranci (22)
with one daily sailing from June to September.

(e) Livorno/Cagliari

For the passenger segment on this route, Tirrenia di
Navigazione has faced competition from private
operators since 1994 in the high season and since
1999 in the low season. The Commission notes,
however, that in both the high and the low season,
no competing operator meets all
the regularity,
frequency and timetable requirements laid down by
the agreement, including in particular a year-round
daily night-time sailing from each of the two ports.
The Commission also notes that as the private oper-
ators do not have replacement vessels they are some-
times forced to suspend services for maintenance
reasons and sometimes deploy their ships on more
profitable services, such as cruises.

The Commission also notes that, in the high season,
Tirrenia di Navigazione offers additional high-speed
services, the precise frequency of which is laid down
by the current rules. The same is true of additional
freight
services, performed using a ro-ro ferry
according to traffic requirements. As the Commis-
in the absence of a
sion has already indicated,
precise prior definition of
the level of services
required,
these services cannot be regarded as
meeting public service requirements.

(d) Genoa/Olbia/Arbatax

Only since 1998, and only in the high season, has
Tirrenia faced competition from private operators on
this route. The Commission notes in this respect that
only Tirrenia di Navigazione meets all the regularity,
frequency and timetable requirements laid down by
the agreement, which provides for a year-round daily
night-time sailing from each of the two ports and
two weekly extensions to the port of Arbatax, which
no competing operator offers. The Commission also
notes that the high-speed services Tirrenia offers on
this route during the summer, as laid down in the
agreement, are not offered by its competitors.

Tirrenia di Navigazione carries freight on this route
in competition with two private operators, whose
cumulated service offer appears to meet the agree-
ment's requirements in terms of regularity, frequency
and capacity. One of these operators has been oper-
ating the route since 1995, and the other since
1998. The established presence of these operators
calls into question the need to provide compensation
for the loss made by the public operator on this
route. The Commission notes, however, that only
Tirrenia di Navigazione guarantees uninterrupted
year-round services as specified in the current rules;
in other words, Tirrenia maintains a replacement
ship, on a route on which the ship must be less than
20 years old. The Commission notes that
these
requirements involve specific additional costs for the
public operator not incurred by the private opera-
tors. The Commission therefore considers that these
additional costs, and only these, may give rise to
compensation. None the less, the Italian authorities
need to ensure that the amount of the compensation
paid is strictly proportionate to the additional costs
generated by the said public service requirements.

(f) Voltri/Termini Imerese

vessels on the parallel

Tirrenia uses ro-ro vessels on this route to provide
cargo transport services, in competition with services
offered by a private operator using mixed passenger/
goods
route Genoa/
Palermo (23). The Commission notes that the services
offered by the private operator satisfy the public
service requirements set out in the agreement in
terms of capacity and frequency. While the need for
compensation has been established for the earlier
five-year periods, before the private operator became
established and thus before it was able properly to
meet all these requirements, the same cannot be said
for the new five-year period. In this context, the
Commission notes the Italian authorities' under-
taking to cancel the services offered by Tirrenia on
this route for that period; these will accordingly no
longer be taken into account when calculating the
public service compensation amount.

(21) The ports of Fiumicino and Civitavecchia may be regarded as inter-
changeable, as is the case with the ports of Golfo Aranci and
Olbia.

(22) The ports of La Spezia and Genoa may be regarded as interchan-

geable,

like those of Olbia and Golfo Aranci.

(23) The ports of Voltri and Genoa may be regarded as interchangeable,

as may those of Termini Imerese and Palermo.

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(31) With regard to the services provided by Tirrenia on routes without any competition, the Commis-
sion notes that these concern both goods and passenger transport. The following table indicates the
routes and services operated by Tirrenia without competition in the last five-year period (1995 to
1999), most of which were also provided in the previous five-year period (1990 to 1994):

Lines

Type of service

Naples/Cagliari

Passengers/goods

Genoa/Cagliari

Passengers/goods

Civitavecchia/Cagliari

Passengers/goods

Fiumicino/Arbatax

Passengers/goods

Palermo/Cagliari

Passengers/goods

Cagliari/Trapani (2)

Passengers/goods

Livorno/Catania

Goods

(in million ITL)

Financial year results
(costs – income 1999) (1)

[...]

[...]

[...]

[...]

[...]

[...]

[...]

(1) The sums recorded in this column are accounted for in Table I in recital 38, which gives the costs and income of all the routes

considered as a whole, operated by Tirrenia di Navigazione in 1999, whether or not subject to competition.

(2) With extension to Tunis.

The absence of competition on these routes over the last decade shows that the free play of market
forces alone has not been sufficient to guarantee the transport services which Tirrenia has provided
in accordance with the agreement. Consequently, compensation is necessary to allow the company
to offset the extra costs generated by supplying these services.

(32)

The Commission also notes that, under the system introduced by the 1991 agreement, Tirrenia
operates on international routes, the net operating deficits of which have been taken into account
when calculating the annual subsidy. This applies to the Italy/Malta route and the Cagliari/Trapani/
Tunis route.

The Commission would point out that these routes are in the international maritime transport
market and not the Italian cabotage market. As this market is subject to actual or potential
competition from other Community operators, such compensation is to be analysed as operating aid,
which may only be authorised pursuant to Article 86(2).

Information supplied by the Italian authorities shows that the Italy/Malta route was operated on a
year-round basis until 1992. The arrival on the market of competitors during the summer season led
the Italian authorities to restrict the service obligation to the winter period from 1993 to 1994 and
to suspend services on this route entirely as from June 1994. Under these circumstances, the
Commission considers that, in the absence of comparable services offered by other Community or
non-member country operators, the compensation paid to Tirrenia up to that date was needed to
meet the service requirements laid down by the Italian authorities. In addition, in the absence of
proven competition from other Community operators, the compensation paid to Tirrenia to cover
the net deficit for operating this route was not of a nature to affect trade between Member States to
an extent contrary to the common interest.

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As for the Cagliari/Trapani/Tunis route, the Commission observes that the link to Tunisia is an
extension of the Cagliari/Trapani cabotage route on which Tirrenia operates without competition.
Information forwarded by the Italian authorities shows that the services performed on the inter-
national part of the route do not entail any additional financial burden which may be taken into
account when calculating the annual compensation. The figures supplied for the years 1993 to 1996
inclusively show a net positive result for the Trapani/Tunis connection, which itself helped reduce
the deficit recorded for the Cagliari/Trapani link and in turn the negative sum taken into account to
calculate the annual compensation.

Need for compensation

(33)

To determine whether the annual compensation paid to Tirrenia corresponds to the minimum
needed to provide services which meet the public service requirements laid down by the Italian
authorities, the Commission needs to examine all the parameters which generate additional costs for
the public operator for the services it has provided.

The Commission notes that the compensation calculation mechanism provides for income made
during the high season to help reduce the deficits accumulated in the low season, with the result that
the resulting level of annual compensation remains lower overall than it would be if the accumulated
deficits alone were added together, route by route. The Commission also notes that the company's
proceeds are subject to a dual constraint in terms of fares, namely the preferential fares for certain
social categories and the need for the company to obtain the public authorities' approval for any
change in the fares. The information forwarded by the Italian authorities shows that Tirrenia is not
free to adapt its fares to take account,
in particular, of changes in operating costs. This dual
constraint, which leads to an appreciable reduction in the company's income, and which is reflected
in the amount of the annual compensation, cannot be described under such circumstances as an
aggressive commercial policy, characterised by predatory pricing.

Secondly, the Commission notes that the cost elements taken into consideration in order to calculate
the compensation have been defined by the public authorities, leaving the company with no margin
of discretion. These elements reflect all the fixed and variable costs directly linked to providing the
services classified by the public authorities as services of general interest and which, as such, are
covered by the agreement previously cited (see Table I, recital 38). These cost elements include
depreciation of vessels and expenditure on fuel and mineral oils. Regarding ship depreciation, the
Commission considers that, to the extent that the ships in question are used exclusively for the
services covered by the agreement, this cost element may be regarded as necessary for the provision
of those services, and may thus legitimately enter into the calculation of the annual compensation.
Regarding the cost of fuels and mineral oils used by these ships, the Commission has found no
discriminatory element reducing the cost of such fuels and lubricants to the benefit of Tirrenia di
Navigazione compared with other maritime operators.

(34)

To enable the Commission to check that the compensation paid has been proportional to the public
service requirements, the Italian authorities sent it an analysis of the operating accounts for each of
the routes served by the public operator over the last 10 years. The analysis showed some routes to
be profitable overall on an annual basis, even if they sometimes present a somewhat substantial
deficit in the winter period, while others are loss-making overall. The routes which are profitable
overall are essentially those on which the competition of private operators is focused.

The Commission notes that the mechanism for calculating the annual compensation described above
is such that the net positive result of the routes which show an overall profit helps to reduce the
amount of compensation awarded, and thus to ensure its proportionality.

(35)

The Commission considers that, generally, only costs directly linked to the burdens resulting from
the public service obligations laid down by the Italian authorities may be taken into consideration
when calculating the annual compensation. Consequently, the net cost of additional services which

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(36)

(37)

are not subject to the specified regularity, frequency and capacity requirements may not be taken
into account for the annual compensation figure. The Commission notes, however, that, where they
have been provided, such services, most of which are operated during the high season and on routes
where there is competition, have proved profitable and have thus not contributed to the overall
operating deficit which the compensation is intended to offset.

loss, which is taken into account

Regarding the services for which a comparable level of competition has been shown to exist (namely
on the Livorno/Cagliari route), information provided by the Italian authorities shows that this route
is operated at
for the purposes of calculating the annual
compensation amount. The Commission notes that the arrival on the market of competing operators
post-dates the approval of the first five-year plan. With respect to the second five-year period, the
Commission considers that the Italian authorities could have still deemed it necessary to continue
compensating for the loss incurred by Tirrenia on this route, since the only competitor then present
in the market could not yet be considered to be established. Consequently, until the end of 1999, the
annual compensation amount could include all the net costs of the services offered by Tirrenia on
this route, namely total costs minus income generated by the service. The situation is different for
the new five-year period. Indeed, the Commission considers that only the additional costs engen-
dered for the public operator by the need to maintain a replacement vessel in order to ensure
regularity of service year-round and the obligation to use a vessel less than 20 years old and to
charge the fares imposed by the Italian authorities may henceforth be taken into account for the
purposes of calculating the annual compensation. To take operating costs into account would
constitute overcompensation and be incompatible with Article 86(2) of the Treaty.

In examining the proportionality of the aid paid to Tirrenia, the Commission became aware of a
(hereinafter the ‘Azzurra study’) (24), commissioned by a
study by an independent consultant
complainant, regarding the projected profitability of the routes operated by Tirrenia within the terms
of the agreement. The analysis is based on the projected operating results of a fictitious company,
Azzurra di Navigazione, subject to the same regularity, frequency, capacity and vessel-type require-
ments to which Tirrenia was subject in 1997, on the medium- and long-distance national connec-
tions operated by Tirrenia. The study divides the routes operated by Azzurra into three categories:
clearly profitable, more or less in balance and loss-making. Taking 1999 as the reference year, the
study also shows that Azzurra would have obtained a positive net operating result, for its routes as a
whole, of ITL 21 722 million. However, information forwarded by the Italian authorities, which
supplied analytical accounts for Tirrenia, drawn up by an independent expert, revealed that for the
same year, 1999, the public operator made a net operating loss of ITL 21 252 million. Moreover,
while for certain routes Tirrenia's operating results are quite close to those of Azzurra, the situation
is quite different on the other routes. In the light of these discrepancies, the Commission called on an
independent consultant to pinpoint the reasons for them and establish or rule out the existence of
any overcompensation.

(38)

The study by the Commission's consultant (25) highlighted the difficulty of drawing working conclu-
sions from comparing the operating results projected for a fictitious company such as Azzurra
supposedly entering the market to provide services comparable to those of Tirrenia, with the results
the public operator actually recorded.

The tables below show the various cost elements taken into consideration to calculate the annual
compensation, both for Tirrenia and for Azzurra, using 1999 as a reference year in both cases (26).
Table I shows the costs and revenue actually recorded by the public operator on all the routes
referred to in the agreement, whether or not they are subject to competition; Table II gives an
estimate of the costs and revenue of a fictitious operator providing comparable services all year
round on all the routes operated by Tirrenia, in a situation of competition or de facto monopoly,
with the exception of the international segment of the Cagliari/Trapani/Tunis route.

(24) Analisi della redditività di alcune linee di cabotaggio italiane, June 2000.
(25) Analisi comparativa dei conti economici gestionali di Tirrenia di Navigazione e Azzurra di Navigazione, PriceWaterhouseCoo-

pers, December 2000.

(26) 1999 is

the reference year both for

the comparative study performed by the
Commission's consultant. It is also the first year in which the Italian cabotage market was open to the free provision
of services and the year in which the private operators stepped up their presence compared with previous years.
1999 is also the last year for which the Commission has all the relevant economic data.

the Azzurra study and for

4.12.2001

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L 318/21

Table I

(in million ITL)

Tirrenia
Economic accounts 1999

Winter season
(a)

Summer season
(b)

Annual total
(a + b)

Cost elements

(i) Agency fees/acquisition expenses

(ii)

Port taxes/port transit expenses and other

(iii) Operating costs

(iv) Depreciation

(v) Net financial charges

(vi) Administration

(vii) Other costs

Total costs

Operating revenue

Result (costs — income)

Return on capital employed

Annual subsidy

[...]

[...]

[...]

[...]

[...]

[...]

Table II (1)

Azzurra
Economic accounts 1999

Operating income

Cost elements:

— Agency fees

— Cost of operating vessels (*)

— Depreciation of vessels

— Structural costs

— Financial management

Result before taxation

Net result (income – costs)

Total costs

[...]

[...]

[...]

[...]

[...]

(in million ITL)

Annual total

468 434

(28 501)

(235 398)

(70 833)

(40 550)

(49 185)

(424 467)

43 967

21 722

(1) Table taken from the abovementioned study Analisi della redditività di alcune linee di cabotaggio italiane.
(*) Fuels, mineral oils, staff, ship maintenance, supplies and services, insurance, port and other taxes, decommissioning costs).

The fact that the Commission's consultant pinpointed the main sources of the discrepancies between
Azzurra's and Tirrenia's results in terms of costs and revenue makes it possible to rule out the theory
that Tirrenia's costs were overestimated, both on certain routes and in general. Indeed, the study
shows that:
— Azzurra's service offer for the reference year 1999 proves insufficient to meet traffic demand,
particularly during the high season, as demonstrated by the underestimation of the cost of hiring
ships (put at ITL 23 billion),

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— the cost of the fuel and mineral oils needed for Azzurra's fleet was underestimated by ITL 16

billion,

— Azzurra's personnel costs were calculated net of the reliefs provided for by Law No 522/
1999 (27), whereas for Tirrenia these reliefs were accounted for in the year 2000. According to
the Commission's consultant, these reliefs may be estimated at ITL 30 billion.

In economic terms, the overall
reduction in Azzurra's operating costs of around ITL 69 billion for the reference year 1999.

impact of the calculation discrepancies referred to above is a

The Commission also notes that, in the case in question, the cost of the public service was not
determined in the context of a public procurement procedure; which would have allowed an
assessment to be made of the additional cost deriving from the public service. In the circumstances,
the Commission needs to determine which costs are to be taken into consideration for calculating
the concession-holder's costs which are directly
the compensation,
connected to and strictly necessary for the provision of public services. The Commission notes in
this respect that, as the tables below show, the various cost elements taken into account for Tirrenia
on the one hand and for Azzurra on the other are essentially the same, albeit accounted for in a
different way.

in other words those of

The structure of the costs borne by the two companies is therefore comparable. The same may be
said for the overall level of those costs, taking account of the explanations provided above regarding
the divergent results obtained by the two companies. For 1999, the Commission deduces that
Tirrenia is meeting reasonable profitability criteria, corresponding to those of the market. Given that,
and seeing that the losses (confined essentially to the winter) are compensated for by profits (made
essentially in the summer) and that Tirrenia's profitability, compared with Azzurra's, corresponds to
the profitability of the market, the excess cost to be compensated may be considered to correspond
to Tirrenia's net losses.

With reference to earlier years, seeing that the cost structure of the two companies Tirrenia and
Azzurra is comparable, as is the level of such costs at a given moment, the Commission notes that
changes in external factors over time (inflation, interest rate movements, taxes, fuel prices and so on)
would have a comparable impact on both companies' costs.

The following table shows the evolution of Tirrenia's costs (28):

Cost elements
(see Table I, recital 38)

1992

1993

1994

1995

1996

1997

1998

1999

(i) Agency fees etc.

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

(ii)

Port taxes etc.

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

(iii) Operating costs

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

(iv) Depreciation

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

(v) Net financial charges

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

(vi) Administration

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

(vii) Other costs

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

(27) Reliefs authorised by the Commission by letter SG/D6875 of 18 August 1999 (N 396/1999).
(28) Data taken from the abovementioned study by PriceWaterhouseCoopers.

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Information from the Italian authorities shows that changes over time in Tirrenia's individual cost
elements are due, above all, to external factors such as inflation and changes in interest rates, as seen
from the data in the two tables below:

Year

1992

1993

1994

1995

1996

1997

1998

1999

(1) ISTAT official

index.

Year

1992

1993

1994

1995

1996

1997

1998

1999

Costs

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

Variation
(%)

Variation in inflation rate (1)

0

4,3

3,5

5,9

4

1,9

– 1,7

0,6

4,2

3,9

5,4

3,9

1,7

1,8

1,6

Short-term rates

Medium- and long-term rates

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

The change over time in the compensation awarded to Tirrenia relates directly to changes in the
company's costs (see table) and income (see recital 11, Table I). These in turn reflect factors external
to the company (e.g. inflation) and the upgrading of the Tirrenia fleet, which led to a more rational
use of the same. The Commission would point out here that this upgrading is directly linked to the
obligation imposed on Tirrenia by the agreement to use vessels less than 20 years old on its public
service routes. This trend over time in costs and income explains the parallel course followed by the
compensation awarded to Tirrenia di Navigazione. Under these circumstances and given the consid-
erations outlined above, the Commission considers that, as in 1999, Tirrenia's total net loss in
previous years corresponds to the amount to be compensated. Consequently, the compensation paid
to Tirrenia, corresponding to the company's net loss plus a reasonable return on capital invested, is
strictly proportional to the additional cost entailed by the public service task entrusted to the
concession-holder.

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Effect of the aid on trade — Commitments entered into by the Italian authorities for the period
2000 to 2004

(39)

The Commission notes that Article 4(3) of Regulation (EEC) No 3577/92 (maritime cabotage) states
in this instance 31
that a public service contract may remain in force up to the expiry date,
December 2008. The Commission also notes that the agreement covers the main sea connections to
and from Sicily and Sardinia, i.e. the greater part of the cabotage with the Italian islands of the
Mediterranean and a large part of the cabotage with all the island regions of the Western Mediterra-
nean. Under these circumstances, and given that the Italian cabotage market has been open without
restrictions since 1 January 1999, the Commission considers that the payment of the balancing
subsidy to Tirrenia di Navigazione provided for by the 1991 agreement could affect the development
of trade to an extent contrary to the interests of the Community if the subsidy had the effect of
strengthening the position of the company in the market in question by enabling it to eliminate
current or potential competition in that market. The Commission believes this would be the case if
the application of the agreement in the future and particularly in the new 2000 to 2004 five-year
period were to lead to an increase in the capacity offered by Tirrenia di Navigazione as part of the
public service agreement scheme on profitable lines where competition from private operators is
concentrated. The data forwarded by the Italian authorities indeed show that, at the present time, the
overall capacity offered on the market, i.e. by Tirrenia plus the private operators, is sufficient to
satisfy the overall demand for transport, including seasonal peaks, in both the passenger and goods
segments.

(40)

In response to the concerns expressed on this topic by the Commission, by letters dated 13 and 19
March 2001 the Italian authorities forwarded a draft regulatory framework concerning the routes
Tirrenia is required to serve and the services it must provide for the 2000 to 2004 five-year period. It
includes the routes, frequencies, types of vessel and capacities offered by the public operator in both
the high and the low season under the agreement. The draft shows that these are the only services
which may be taken into consideration for the purpose of calculating the annual balancing subsidy.
The Italian authorities have undertaken to formalise their commitment in a ministerial decree which
will approve the 2000 to 2004 five-year plan. It is clear from this draft decree that Tirrenia's service
offer will be lower than at present.

The Commission notes, in particular, that the Italian authorities have undertaken to reduce the
overall offer of the public operator's services on the main routes where competition from private
operators is focused in order to leave more room for the other operators. This undertaking is of
particular significance on the Genoa/Porto Torres and Civitavecchia/Olbia routes, where the capacity
reduction, concentrated on the high season, will represent around 30 % of the overall capacity
Tirrenia di Navigazione currently offers on these two lines. The new configuration of services offered
by Tirrenia di Navigazione on these two lines thus provides primarily for maintaining a daily
night-time sailing in each direction all year round and, secondly, an additional activity, strictly
defined in advance, from the beginning of June until the end of September, to meet on a continuous
and regular basis the additional needs resulting from tourism in the regions concerned.

The Commission also notes that the capacity reduction proposed by the Italian authorities will lead
to a fall in the public operator's overall offer, all routes taken together, to a level which is as a whole
lower than the service offer provided for by the first five-year plan which, when the 1991 agreement
was concluded, constituted the reference framework for services which could be subsidised.

With more particular regard to the routes where there is competition, this capacity reduction will
have the effect of stabilising the overall offer at its 1994 level, i.e. before private operators appeared
on the long- and medium-distance cabotage market.

The Italian authorities' commitment needs to be appraised with reference to market trends on the
main routes subject to competition. Data communicated by the Italian authorities shows that
between 1992 and 2000 demand evolved as follows:

Genoa/Porto Torres

+ 16 % in high season

+ 18 % over the year

Genoa/Olbia/Arbatax

Civitavecchia/Olbia

+ 48 %

+ 33 %

+ 33 %

+ 21 %

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Most of this increase in overall demand on these routes was met by private operators taking
advantage of this trend to enter the market or to step up their offer of services, particularly in the
high season. The reduction in the public operator's service offer over the period 2000 to 2004 will
increase this favourable trend for competition.

As far as the Genoa/Olbia/Arbatax route is concerned, the Commission notes that the Italian
authorities plan to maintain Tirrenia's offer for the 2000 to 2004 period at more or less the current
level. On the other hand, they have undertaken to end the parallel La Spezia/Golfo Aranci summer
sailings, thus bringing the overall offer of services between Liguria and northern Sardinia back down
to a level equal to that of the first five-year period.

The Commission also notes that the commitments entered into by the Italian authorities for the
2000 to 2004 period remove the margin of discretion the company previously enjoyed regarding
the level of services offered on certain routes, and that they provide a full and accurate picture of the
network of services the public operator is required to supply during the new five-year period under
the terms of the agreement. Consequently, the Commission considers that the new reference
framework for subsidised services will help make the agreement scheme more transparent for all
operators in the market. It is important, however, to guarantee the permanency of this framework
throughout the whole period under consideration. To this end, the Commission considers that any
new adaptation of the offer of subsidised services during the said period should be notified to it in
advance in order that it may examine the need for such an adaptation, particularly in relation to an
insufficient supply of services available from the other operators in the event of an increase in overall
demand.

5.2. INVESTMENTS SCHEDULED IN THE FIVE-YEAR PLANS AND THE BUSINESS PLAN

(41) With regard to the investments scheduled in the five-year plans, the Commission had, in its decision
initiating the investigation procedure, expressed doubts regarding the arrangements for financing the
investments needed to provide the subsidised services under the 1991 agreement. In particular, it
wanted to check the extent to which the costs of ship acquisition and depreciation entered into the
calculation of the annual compensation. In addition, the fact that Tirrenia was guaranteed a subsidy
which included the cost of depreciation of its fleet until 2008 could, according to the Commission,
be assimilated to an implicit guarantee on the part of the Italian State, enabling the public operator
not to shoulder the economic risk inherent in any investment.

The first point to be borne in mind is that Tirrenia is obliged under the agreement to use vessels less
than 20 years old on its subsidised routes and that it must normally own these vessels unless an
exemption is expressly granted by the public authorities. This obligation, which constitutes a public
service obligation, has led Tirrenia to renew a substantial part of its fleet in the last few years, given
the age reached by the vessels used on the routes referred to in the first five-year plan (1990 to
1994). In addition, the type of vessels to be used on each of the different routes served by Tirrenia is
laid down by a ministerial decree approving or amending each five-year plan. The acquisition of any
new ship, just like the transfer or decommissioning of the oldest ships, has to be authorised by
ministerial decree, which also specifies the service to which the vessel is to be assigned. Tirrenia's
investments must also be in line with its strategy to develop the services provided by the public
operator during the five-year reference period, a strategy provided for in the five-year plan approved
by the public authority.

Given this legal context, the Commission has checked whether, during the 1990 to 1994 and 1995
to 1999 five-year periods, the costs of acquiring new ships and the depreciation costs of the vessels
used by Tirrenia di Navigazione on the public service lines (a) fulfilled the requirements set by the
Italian authorities and (b) were taken into account in a proportionate manner when calculating the
annual compensation.

The Commission observes that, when Tirrenia introduced new vessels, older vessels were at the same
time decommissioned, with the result that there was no overall increase in capacity linked to the
renewal of the public operator's fleet.

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As far as the cost of acquiring the new vessels is concerned, information provided by the Italian
authorities shows that these purchases were made partly with the company's own resources and
partly by means of bank loans. It also appears that the rates charged by the credit institutions
involved are in line with rates enjoyed during the same period by companies of comparable size and
turnover in other sectors of the economy (29). It appears, moreover, that Tirrenia di Navigazione did
not enjoy any direct guarantee from the Italian authorities regarding the repayment of these loans.
The Commission acknowledges that the very existence of an agreement with the State assured
investors that their commitments would be honoured and enabled Tirrenia to modernise its fleet
without bearing the economic risks which would have been borne by a commercial operator. This
advantage, which could be assimilated to an implicit guarantee (30) and thus constitute State aid
within the meaning of Article 87(1) of the Treaty, is, however, intrinsic to the agreement, concluded
for a duration of 20 years before the entry into force of Regulation (EEC) No 3577/92 and the
Community guidelines on State aid to maritime transport (OJ C 207, 5.7.1997). In addition, as
already noted, the new vessels acquired by Tirrenia pursuant to the agreement are assigned exclu-
sively to the line services provided for under the five-year plans. Consequently, this advantage, which
is an integral part of the public service agreement, qualifies for the exemption referred to in Article
86(2) of the Treaty.

Regarding the depreciation costs of ships used by Tirrenia on the routes referred to in the five-year
plans, the Commission notes that these are one of the cost elements which, under the terms of
Article 5 of the agreement, enter into the calculation of the annual subsidy. Depreciation is
calculated linearly over a 20-year period, with the exception of ultra-high-speed vessels, for which
the duration is limited to 15 years. As the depreciation of vessels used to serve connections
recognised as being of general interest by the Italian authorities is calculated according to criteria laid
down in the agreement, and as examination of the analytical accounts of these routes has revealed
no element of overcompensation in this respect in the two five-year periods considered, the
Commission believes that the mechanism the agreement introduced to take vessel depreciation into
account when calculating the annual compensation may be authorised under Article 86(2) of the
Treaty. The provision of services recognised as being of general interest presupposes the use of
vessels of a type and capacity predetermined by the public authorities and whose depreciation may
thus be taken into account when calculating the annual compensation provided the vessels in
question were acquired by the company under normal market conditions and in order to meet the
obligations placed on it and are used exclusively for regular transport services on the routes covered
by the agreement. In the case of Tirrenia di Navigazione, the Commission notes that all the vessels in
question are used exclusively for services on routes recognised as being of general interest and that,
as a result, their depreciation may be taken into account in its totality when the annual subsidy is
calculated. The same is true for the investments needed to provide the services prescribed by the
Italian authorities for the 2000 to 2004 five-year period and which correspond, in terms of type and
capacity, to the commitments entered into by these same authorities concerning the requisite service
level.

(42)

Regarding the additional investments scheduled in the business plan for 1999 to 2002, it must be
pointed out that implementation of this plan was suspended following the initiation of the proce-
dure. The Commission notes that the commitments entered into by the Italian authorities for the
2000 to 2004 period exclude, for Tirrenia di Navigazione, the additional investments provided for
under the plan, with the exception of two new vessels which will replace old ones on the routes
covered by the agreement scheme. The information forwarded by the Italian authorities shows that
these ships are being purchased under conditions similar to those described in the previous
paragraph concerning investments set out in the 1990 to 1994 and 1995 to 1999 five-year plans
and, since they are intended exclusively for services on a route acknowledged as being of general
interest, their depreciation may be taken into account in its totality when calculating the annual
subsidy.

(29) For instance, the recent acquisition of two high-speed vessels was financed via a loan taken out with the Banco di
in 1999 for ITL 160 billion at a variable rate equal to the six-month Euribor rate, raised by 0,40 % and
Information forwarded by the Italian authorities shows that the same credit institution

Napoli
repayable over 10 years.
granted loans at the same time to other large companies under very similar conditions.

(30) See Commission notice on the application of Articles 87 and 88 of the EC Treaty to State aid in the form of

guarantees (OJ C 71, 11.3.2000).

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(43) On the basis of the foregoing, the Commission notes that there are no further doubts regarding the
compatibility of the aid awarded to Tirrenia di Navigazione under the 1991 agreement,

6. CONCLUSION

HAS ADOPTED THIS DECISION:

Article 1

The aid awarded by Italy to Tirrenia di Navigazione between 1 January 1990 and 31 December 2000 as
compensation for providing a public service is compatible with the common market.

Article 2

Between 1 January 2001 and 31 December 2004, the aid awarded by Italy to Tirrenia di Navigazione shall
be limited to covering the additional costs arising from the loss incurred during the provision of services
corresponding to the commitments entered into by Italy for the abovementioned period.

Italy shall notify the Commission in advance of any change to the level of these services during the
abovementioned period.

The public service obligations imposed on Tirrenia di Navigazione for the 2005 to 2008 five-year period
must be notified to the Commission in advance.

Article 3

Article 4

As from 1 January 2001, the additional costs deriving from the loss incurred during the provision of
services imposed by Italy on Tirrenia di Navigazione must be the subject of separate accounts for each of
the lines concerned.

Italy shall inform the Commission, within three months of the date of notification of this Decision, of the
measures taken to comply therewith.

Article 5

This Decision is addressed to the Italian Republic.

Article 6

Done at Brussels, 21 June 2001.

For the Commission

Loyola DE PALACIO

Vice-President