2002/200/EC: Commission Decision of 3 July 2001 on State aid which Spain has implemented and is planning to implement for the restructuring of Babcock Wilcox España SA (Text with EEA relevance) (notified under document number C(2001) 1780)
Date: 2001-07-03
Institutions: European Commission
Subjects: Spain, State aid, aid for restructuring, capital goods, control of State aid, technology

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Official Journal of the European Communities

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II

(Acts whose publication is not obligatory)

COMMISSION

COMMISSION DECISION

of 3 July 2001

on State aid which Spain has implemented and is planning to implement for the restructuring of
Babcock Wilcox España SA

(notified under document number C(2001) 1780)

(Only the Spanish text is authentic)

(Text with EEA relevance)

(2002/200/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

ties (1). The Commission invited interested parties to
submit their comments on the capital

injections.

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 66(1)(a) thereof,

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

Whereas:

I. PROCEDURE

(1)

(2)

By letter of 12 March 1997, Spain notified the Commis-
sion of a capital
injection of ESP 10 000 million
(EUR 60,1 million) which the wholly state-owned
holding company Sociedad Estatal de Participaciones
Industriales (‘SEPI’) planned to make into its subsidiary
Babcock Wilcox España SA (‘BWE’). The notification also
contained information about
increase of
ESP 10 000 million (EUR 60,1 million) that TENEO,
SEPI's predecessor, had made in BWE's capital in 1994.

another

By letter of 2 June 1998, the Commission informed
Spain that it had decided to initiate the procedure laid
down in Article 88(2) of the Treaty in respect of the
above measures.

(4)

(5)

(6)

(7)

(8)

(9)

By letter of 16 June 1999, Spain notified the Commis-
sion of a further capital injection of ESP 41 000 million
(EUR 246,4 million) into BWE.

By letter of 23 July 1999, the Commission informed
Spain that it had decided to extend the Article 88(2)
procedure to include the new capital
increase in the
formal

investigation.

The Commission decision to extend the procedure was
published in the Official Journal of the European Communi-
ties (2). The Commission invited interested parties to
submit their comments on the new measure.

By letter of 25 April 2000, Spain notified the Commis-
sion of the arrangements that had been decided for
privatising BWE.

By letter of 7 July 2000, the Commission informed
Spain that it had decided to extend the Article 88(2)
procedure to the aid elements identified in the privatisa-
tion arrangements.

The Commission decision to extend the procedure was
published in the Official Journal of the European Communi-
ties (3). The Commission invited interested parties to
submit their comments on the aid involved in the priva-
tisation arrangements.

(3)

The Commission decision to initiate the procedure was
published in the Official Journal of the European Communi-

(1) OJ C 249, 8.8.1998, p. 3.
(2) OJ C 280, 2.10.1999, p. 22.
(3) OJ C 232, 12.8.2000, p. 2.

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(10)

regarding the privatisation arrangements.

The Commission received comments from interested
parties
It
forwarded them to the Spanish authorities by letter of 4
October 2000, giving them the opportunity to react.
Spain's comments were received by letter of 31 October
2000.

Commission of its decision to privatise BWE, according
to the plan for the modernisation of the Spanish public
sector. The privatisation process started in the last
quarter of 1997 with the selection by SEPI of an adviser
and the dispatch of invitations to tender to all potential
purchasers.

II. BABCOCK WILCOX ESPAÑA SA

(11)

(12)

Established in 1918, BWE is an engineering and
construction company in the capital goods sector; it is a
wholly owned subsidiary of SEPI. BWE is based in the
Basque Country; its head office is located in Bilbao and
its production plants are in Galindo (Vizcaya) near
Bilbao.

In 1978, in the middle of Spain's transition to democ-
racy, BWE suspended payments and was bought by the
Spanish State with a workforce of 5 600. Under State
ownership, BWE went through a steady restructuring
process that drastically scaled down its activities in an
orderly manner. BWE abandoned the production of
rolling stock, hot-rolled steel, steel castings and large
parts. As a result, its workforce fell from 5 600 in 1978
to 1 512 in 1993. Its turnover halved over the same
falling to ESP 36 966 million (EUR 222,17
period,
million)
in 1993, with ordinary losses of ESP 519
million (EUR 3,12 million) and a net positive income of
ESP 275 million (EUR 1,65 million).

(13) During the first half of the 1990s, the process of restruc-
turing BWE slowed down and the company began to
accumulate debts. The ensuing loss of competitiveness
forced BWE to adopt further restructuring measures, the
estimated costs of which were entered into the 1996
accounts. As a result, the moderate profits recorded by
BWE during the early 1990s gave way to heavy losses.
In 1996 BWE employed 1 516 workers and generated
turnover of ESP 44 009 million (EUR 264,5 million)
losses of ESP 29 030 million (EUR 174,47
with final
million),
of
after
ESP 29 030 million
(EUR 174,43 million). BWE
exported 51 % of its production.

extraordinary

computing

costs

(15)

(16)

(17)

(18)

(19)

Following the payment by SEPI of the notified capital
increase in breach of the prohibition in Article 88(3) of
the Commission decided to initiate the
the Treaty,
Article 88(2) procedure on 7 April 1998.

capital

The procedure was also opened in respect of another
injection of ESP 10 000 million
previous
(EUR 60,1 million) into BWE in 1994 that the Commis-
sion had discovered in the financial statements trans-
mitted with the notification.

b) The 1999 capital injection

Following discussions with the companies that had
expressed an interest in buying BWE, SEPI signed a
Memorandum of Understanding with the Norwegian
group Kvaerner on 2 April 1998. The subsequent nego-
tiations with Kvaerner came to a standstill due to the
serious financial difficulties experienced at the time by
that group. Consequently,
in November 1998 SEPI
decided to close the negotiations with Kvaerner and
reopened the privatisation process.

In December 1998, SEPI shortlisted three other potential
purchasers, to which it supplied the relevant informa-
tion.

By letter of 16 June 1999, the Spanish authorities noti-
fied a further capital injection into BWE of ESP 41 000
million (EUR 246,4 million). These funds were aimed at
increasing BWE's capital, which had been eroded by
losses, and financing a further workforce reduction of
500 people required by the three potential purchasers.

(20) On 8 July 1999 the Commission decided to extend the
Article 88(2) procedure to include this new capital injec-
investigation.
tion in the formal

III. THE AID MEASURES UNDER FORMAL INVEST-

IGATION

(21)

a) The 1994 and 1997 capital injections

(14)

The capital increase of ESP 10 000 million (EUR 60,1
million) notified in 1997 was intended to finance an
early retirement scheme affecting 423 workers. This
workforce reduction formed part of a broad restruc-
turing programme aimed at restoring the viability of
BWE, consolidating its competitive position in the
marketplace and preparing it for privatisation. In this
latter respect, the Spanish Government informed the

SEPI made two illegal partial payments of the notified
capital increase in breach of the provisions of Article
88(3). On 3 June 1999 it injected ESP 10 250 million
(EUR 61,60 million) into BWE, followed by a further
ESP 14 025 million (EUR 84,29 million) on 28
September 2000. These payments brought the equity of
BWE up to the minimum level required under Spanish
law for continuing in business.
commercial

c) The privatisation arrangements

(22) On 9 February 2000 SEPI signed a contract with

Babcock Borsig AG for the sale of BWE.

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9.3.2002

(23)

By letter of 25 April 2000, the Spanish authorities noti-
fied the arrangements for privatising BWE. Under those
arrangements, SEPI is to sell to Babcock Borsig AG (‘BB’)
at a price of EUR 45 million the shares in a new
to which certain
company to be created, NewCo,
selected assets of BWE are to be transferred. BWE is also
to transfer 650 workers to NewCo. Subsequently, BWE
is to be liquidated. The contract was made conditional
on, inter alia, authorisation by the Commission of the aid
previously received by BWE, as well as of any transac-
tion in the privatisation arrangements that could be
regarded as constituting State aid.

(24) On 13 June 2000 the Commission decided to extend the
Article 88(2) procedure for the second time in order to
include in the formal
investigation the following aid
elements identified in the privatisation arrangements:

(a) cash injections into NewCo amounting to EUR 55

million;

(b) the payment to NewCo of EUR 100 million for the
costs of adapting the activities transferred to it;

(c) the payment

to NewCo of EUR 95 million for
investments and training to be carried out according
to the investment plan presented by BB;

(d) the coverage of any losses incurred under pre-
existing contracts transferred to NewCo, at an esti-
mated cost of ESP 8 000 million (EUR 48,1
million);

(e) the coverage of costs incurred through any claims
against NewCo for any harm or economic damage
resulting from events occurring prior to the sale in
relation to environmental,
tax or social
security issues and obligations arising from pension
plans. The maximum liability to be borne by SEPI is
limited to EUR 18 million. However, the Spanish
authorities consider
there will not be any
compensation payable under this heading;

labour,

that

(f) the coverage of the deficit in the liquidation of BWE,
an estimated cost of ESP 35 000 million

at
(EUR 210,4 million), and

(g) any potential aid element involved in the decision to
set the purchase price for the shares in NewCo at
EUR 45 million, that figure being the book value of
the selected assets transferred to it.

IV. COMMENTS FROM INTERESTED PARTIES

(25)

The Commission received observations
from third
parties only with respect to the second extension of the
Article 88(2) procedure.

(26)

(27)

By letter of 12 September 2000, the Provincial Council
of Vizcaya, the province of the Basque Country where
BWE is located, drew the Commission's attention to the
difficult conditions in which business activity is carried
on in the Basque Country as a result of the terrorist
violence. The Provincial Council of Vizcaya claimed that
the prevailing climate was seriously threatening the
industrial base and therefore called on the Commission
to take a favourable view of aid aimed at maintaining
jobs in those exceptional circumstances.

By letter of 12 September 2000, Duro Felguera, a
Spanish competitor of BWE located in Asturias, urged
the Commission to prohibit the aid to BWE on the
grounds that
it created an undue advantage for the
restructuring of one of the largest Spanish producers in
the sector. Duro Felguera stressed in particular the
serious harmful effects of aid intended to help the
restructured company set up a commercial network.

V. COMMENTS FROM SPAIN

(28)

Spain submitted its observations on the formal invest-
igation by letters of 6 October 1998, 17 February 1999,
7 April 1999, 21 September 2000, 25 September 2000,
8 November 2000, 10 November 2000 and 30 January
2001.

a) The 1994 capital injection

(29)

The Spanish authorities claimed that the 1994 capital
injection should be regarded as existing aid within the
meaning of Article 88(1) of the Treaty.

(30) According to the evidence submitted by the Spanish
authorities, that capital injection was intended to offset
the operating deficit of a separate fund used for adminis-
tering the pension rights of workers in early retirement.
The deficit in question related to 1 025 workers that had
left the company over the period 1983 to 1987 under
an early retirement scheme negotiated with the trade
unions in 1983 and signed on 15 February 1984,
almost two years before Spain's accession to the Euro-
pean Communities. The agreement was given prior
authorisation on 14 February 1984 by the Spanish
public holding company Instituto Nacional de Industria
(INI), the predecessor of TENEO and SEPI, which took
responsibility for financing the costs connected with this
specific measure. For that purpose, the INI registered in
its
contribution of
ESP 12 000 million (EUR 72,12 million). At the time,
BWE was virtually insolvent, showing a negative equity
in its balance sheet.

financial planning

an initial

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L 67/53

(31) A separate fund, entrusted to an insurance company,
was created on 14 January 1986 to administer the
pension rights. The INI then contributed to the fund a
sum of ESP 12 559 million (EUR 75,48 million) corre-
sponding to the initial estimate made by the insurer of
the costs of the early retirement scheme agreed in 1984.
That estimate was based on the average circumstances of
the workers that could join the scheme.

(32)

(33)

Later in the year, the insurance company announced
that the final calculation of the contribution necessary to
operate the fund, based on the individual circumstances
of the workers that had joined the scheme, gave a figure
of ESP 19 661 million (EUR 118,16 million). On
account of its financial priorities, the INI decided not to
cover the deficit of ESP 7 102 million (EUR 41,68
million) at that time.

In 1992 the INI was transformed into a public under-
taking and renamed TENEO. In 1993 TENEO clarified a
number of financial commitments entered into by its
predecessor and therefore decided to cover the fund's
deficit that INI had not yet paid. To that end, TENEO
asked the insurance company to recalculate the deficit.
The recalculation for the 1 025 workers covered by the
early retirement scheme agreed in 1984 showed a deficit
of ESP 10 860 million (EUR 65,27 million). The
increase in the deficit was due to changes to the tech-
nical parameters for the operation of pension funds
made by the relevant legislation. In particular, unlike the
original calculation of the deficit in 1986, the recalcula-
tion made use of new mortality tables reflecting longer
life expectancy in Spain and a lower technical interest in
line with the decreasing trend in market rates.

(34)

In order to cover the deficit, on 29 July 1994 TENEO
paid BWE the ESP 10 000 million (EUR 60,1 million)
investigation and BWE
capital
to the
simultaneously transferred the same amount
pension fund.

injection under formal

equipment sector, and concentrate on markets outside
the Community.

(37) On this basis, BWE decided to:

(a) consolidate its position as a turnkey plants supplier,
promoting this activity and reducing its activities in
other traditional areas of the company's business;

(b) refocus its entire manufacturing and commercial
activity towards a new product mix in which the
main activity would be supply on a turnkey basis;

(c) implement immediately a number of drastic meas-
ures and adopt a series of urgent policies in each
area of the company's operations in order to adjust
production capacity to the targets of the strategic
plan, reduce costs and improve competitiveness.

(38)

The restructuring measures involved a large reduction in
production capacity (around 23 %) and a reduction in
the workforce of 28 %. The workforce cutback was
achieved by means of an early retirement
scheme
affecting 423 persons that were laid off between 1997
and 1999. Simultaneous measures to reduce personnel
costs and increase productivity were implemented,
including the freezing of wages, rigorous control of
financial compensations, maintenance of the number of
annual working days, application at every level of the
internal mobility, multiskilling
principles of flexibility,
and retraining, introduction of work based on functional
groups, etc. In addition, BWE adopted a new policy for
the optimisation of procurement processes, developed a
quality plan aimed at introducing total quality manage-
ment (TQM) in the medium term, and set up a specific
department for the financial management of contracts,
with a view to reducing the financial burden associated
with them. BWE also conducted an organic and func-
the
tional
company structure, which was streamlined and rational-
ised.

reorganisation of management

and of

b) The restructuring

(39)

The cost of the workforce reduction was ESP 11 651
million (EUR 70 million) and was partly covered by
the10 000 million (EUR 60,1 million) capital injection.

(35)

(36)

The notification of the 1997 capital injection included
an extensive industrial
restructuring programme for
BWE. According to that programme, BWE has carried
out a new strategic reorientation of its entire manufac-
turing and commercial activity that will lead to its priva-
tisation.

The strategic plan was based on a detailed analysis of the
situation and prospects for the power generation market
and of the outlook for BWE in that context. The stra-
tegic assessment of the future of BWE concluded that
the company should concentrate on supply on a turnkey
basis, positioning itself on the market as an integral
supplier of complex systems essentially for the power

(40) An essential element in the strategic plan for the restruc-
turing of BWE was the privatisation of the company, to
which the Spanish Government had committed itself
when it notified the 1997 capital

injection.

(41)

In accordance with that commitment,
the Spanish
authorities proceeded to privatise BWE in the last
quarter of 1997. However, the privatisation schedule
was substantially delayed following the withdrawal of
the initial candidate for the purchase,
the Kvaerner
group, when the purchase contract was about to be
signed. In April 1998 SEPI had signed a Memorandum
of Understanding with Kvaerner. Following negotiations,

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Official Journal of the European Communities

9.3.2002

the group then agreed to sign the purchase contract in
July 1998. In July, Kvaerner asked for a postponement
until September and then refused to sign. Kvaerner's
financial difficulties did not become clear until April
1999, when the group announced a wide-ranging reor-
ganisation that
from several
involved withdrawals
markets. Faced with this setback, the Spanish authorities
reopened without delay the privatisation process in
November 1998.

(42) According to the Spanish authorities, the further capital
increase of ESP 41 000 million (EUR 246,4 million)
notified in 1999 constitutes an interim measure that
SEPI had to implement to make the privatisation and
restructuring of BWE possible. This measure was
intended to restore BWE's equity, eroded by losses, to
the minimum level required under national commercial
law to continue operating and to finance a further work-
force reduction of 500 workers required by the three
potential purchasers shortlisted after the reopening of
the privatisation process.

(43)

The delay in the privatisation process had weakened
BWE's financial position and the state of its order books
had deteriorated. At the end of 1998, BWE's balance
sheet showed a negative equity of ESP 15 300 million
(EUR 91,95 million) after a provision of ESP 16 509
million (EUR 99,22 million) for extra costs connected
with past labour force reductions had been entered in
the 1998 accounts. For its part, the cost of the new
workforce reduction of 500 workers was estimated at
ESP 24 500 million (EUR 147,25 million).

service and product portfolio and
on a narrower
geographic focus, as well as reducing capacity still
further (4).

(46) NewCo is to be integrated into the global strategy of
Babcock Borsig Power GmbH (BBP), which is
the
subsidiary within the Babcock Borsig group active in the
power generation and environmental equipment busi-
ness. NewCo will operate under the name of Babcock
Borsig Power España (BBPE). BBPE will act as the
Regional Centre of Competence (RCC) for the markets in
the Iberian Peninsula, Latin America and North Africa.

(47)

The Industrial Plan is based on a market survey of
demand from the abovementioned business regions and
a detailed assessment of the competitive position of
BWE/NewCo prior to the acquisition. NewCo/BBPE will
have access to BBP's entire range of products and tech-
nology. To match the local market demand, NewCo/
BBPE will no longer depend on licences from other
companies as hitherto, but will be able to work with and
rely on its own group's technology.

(48)

The new product portfolio will focus on the construc-
tion and management of turnkey projects. The main
products for the RCC in Spain will be:

[…] (*)

Most of these products will be handled on a turnkey
basis, others in joint ventures or under cooperative
agreements.

(49)

BBP has worked out a five-year investment plan for the
relaunch of the business transferred to NewCo. Its total
budget amounts to EUR 135,5 million, broken down
under four main headings: business relaunch, informa-
tion technology, real estate and machinery, and venture
capital

investment (5).

(44)

Following negotiations with the shortlisted bidders, in
February 2000 the Spanish authorities decided to sell
BWE to Babcock Borsig AG (BB). On 9 February 2000
SEPI signed a contract with BB.

(50) According to estimates of the market share attainable
per product line in the regions covered by the RCC in
Spain, NewCo is expected to generate annual turnover of
EUR 250 million in a typical year, broken down as
follows:

(45) As part of its purchase bid, BB presented to the Spanish
authorities an Industrial Plan that supplemented the
restructuring measures undertaken by BWE so far.
the business transferred to
According to this plan,
NewCo would deepen the restructuring by concentrating

[…]

The overall export rate will be 20 %. With this turnover,
NewCo/BBPE will employ 650 workers.

(4) The capacity reduction is described in detail
(*) Business secret.
(5) The Investment Plan is described in detail

in recital 122.

in recital 111.

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L 67/55

(51)

The five-year forecast of order intake and profits and losses for NewCo/BBPE is the following:

Table 1

(EUR million)

1

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

2

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

3

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

4

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

5

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

Year

Order intake

Sales

Changes in inventories

Income from operations

Costs of materials

Personnel costs

Depreciation

Other operating expenses

Operating expenses

EBIT (earnings before interest and taxes)

BEFORE STATE MEASURES

EBITDA (earnings before interest, taxes, deprecia-
tion and amortisation) (operating cash flow)

BEFORE STATE MEASURES

Table 1 shows the EBITDA that NewCo/BBPE is expected to generate before the payments for
adaptation costs and training and investment, respectively of EUR 100 million and EUR 95 million,
committed by SEPI under the privatisation arrangements.

(52)

Table 2 below shows the operating cash flow that NewCo/BBPE is expected to generate before and
after the abovementioned state measures:

Year

EBITDA (operating cash flow)

BEFORE STATE MEASURES

Expenses in the Investment Plan (1)

(Payments by SEPI) (2)

Application of payments from SEPI to results (3)

(Remainder entered in the balance sheet) (4)

Table 2

1

[...]

[...]

[...]

[...]

[...]

2

[...]

[...]

[...]

[...]

[...]

3

[...]

[...]

[...]

[...]

[...]

(EUR million)

4

[...]

5

[...]

[...]

[...]

[...]

[...]

[...]

[...]

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Year

EBITDA (operating cash flow)

AFTER STATE MEASURES

Depreciation

EBIT (operating result)

AFTER STATE MEASURES

Net financial

income

EBT (earnings before tax)

AFTER STATE MEASURES

1

[...]

[...]

[...]

[...]

[...]

2

[...]

[...]

[...]

[...]

[...]

3

[...]

[...]

[...]

[...]

[...]

(EUR million)

5

[...]

[...]

[...]

[...]

[...]

4

[...]

[...]

[...]

[...]

[...]

(1) This reflects the items in the Investment Plan which are operating costs totalling EUR 16,5 million.
(2) This heading is shown here for comparison purposes only. The rows below reflect the actual application of the payments to
results. The sum of the payments adds up to the EUR 195 million that SEPI has undertaken to pay under the privatisation
arrangements, broken down as follows: EUR 95 million to assist the Investment Plan for NewCo totalling EUR 135,5 million
(EUR 119 million off which is investment entered in the balance sheet and the remaining EUR 16,5 million is costs) and
EUR 100 million for offsetting the negative cash flows over the first three years of operations.

(3) The payments for adaptation costs (coverage of negative cash flow) are applied directly in the profit and loss account whereas

the investment grants are applied pro rata with the depreciation of the relevant assets.

(4) This heading is shown here for comparison purposes only.

VI. ASSESSMENT OF THE AID

a) Summary of the measures

(53)

The funds involved in the measures covered by the formal investigation under Article 88(2) of the
Treaty amount to a total of EUR 875,1 million.

Table 3 below summarises these measures, indicating their nature and value and the extent to which
they have been implemented.

Table 3

Measures

Amount
(EUR million)

Amount
(ESP million)

Implementation

Capital injections

366,6

61 000

1994

1997

1999

60,1

60,1

10 000

fully paid

10 000

fully paid

246,4

41 000

ESP 10 250 million paid on
3.6.1999

ESP 14 025 million paid on
28.9.2000

ESP 16 725 million pending

Privatisation
(net of sale price)

arrangements

463,5

77 110

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L 67/57

Measures

Amount
(EUR million)

Amount
(ESP million)

Implementation

Cash payments by SEPI

Investment grants

Price of the shares in NewCo

Net cash payments

Coverage of liquidation deficit

Ultimate loss under contracts
transferred (estimate)

155

95

(45)

205

210,4

48,1

25 790

Not yet implemented

15 807

Not yet implemented

(7 487)

Not yet implemented

34 110

35 000

Not yet implemented

8 000

Not yet implemented

(Potential claims) (1)]

(Max. 18)

(Max. 2 995)

Not yet implemented

Total

830,1

138 110

(1) The maximum risk borne by the State has not been added in total because at present no payment is expected to be made under

this heading.

b) Aid within the meaning of Article 87(1) of the

Treaty

(54)

(55)

The former owner of BWE in 1994, TENEO, and its
subsequent and present shareholder, SEPI, are holding
companies wholly owned by the Spanish State. Their
financial resources are therefore state resources.

The Commission uses the market economy private
investor principle as a benchmark to determine whether
any public funds granted to public undertakings involve
elements of State aid within the meaning of Article 87(1)
of the Treaty and,

if so, to quantify them.

The provision of public funds to companies in the form
of capital injections may involve elements of State aid if
those funds are provided in circumstances that would
not be acceptable to a private investor operating under
normal market conditions. This is the case, among other
things, where the financial position of the company, and
particularly the structure and volume of its debt, is such
that a normal return (in dividends or capital gains)
cannot be expected within a reasonable time from the
capital invested. The Commission set out this position in
its communication of 13 November 1993 (6) on the
application of Articles 92 and 93 of the Treaty and
Article 5 of Commission Directive 80/723/EEC to public
undertakings in the manufacturing sector (7), in which it
reminded Member States of the principles it uses in
determining whether aid is involved in such state meas-
ures.

The Court of Justice of the European Communities has
upheld these principles repeatedly. In order to determine
whether a capital injection is State aid, the Court has
the
held that

is necessary to examine whether

it

(6) OJ C 307, 13.11.1993, p. 3.
(7) OJ L 195, 29.7.1980, p. 35.

company in question could have obtained the finance on
the capital market. Where the evidence suggests that the
beneficiary could not have survived without public funds
because it could not have raised the capital required on
the open market from a private investor, it is right to
conclude that the payment constitutes State aid.

The information in the Commission's possession shows
that the publicly owned holding companies TENEO and
SEPI decided to make the relevant public funds available
to BWE without regard for any prospects of adequate
return and that BWE would have been unable to raise
these funds on the capital market.

The 1994 capital injection was made to finance supple-
mentary costs stemming from a workforce reduction
agreed in 1984 that BWE could not bear on its own
because of
its delicate financial position. A private
investor would not have made these funds available to
BWE in the absence of drastic restructuring measures
capable of restoring its viability. At
time, such
measures had not yet been determined. The decision on
how to restructure BWE was only adopted by its ulti-
mate shareholder, the Spanish State, late in 1997 when
it presented to the Commission a
restructuring
programme involving as a key element the privatisation
of the company.

that

The subsequent capital
injections made in 1997 and
1999, as well as the funds committed under the privati-
sation arrangements, were decided to assist the restruc-
turing of BWE and facilitate its privatisation. These new
measures also deviated from the market investor prin-
ciple because the Spanish State could not expect any
normal return from its new investments in BWE. A
private investor operating under normal market condi-
tions would not have contributed money to a business

(56)

(57)

(58)

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(59)

(60)

(61)

(62)

(63)

intended for sale that, in view of its extreme financial
difficulties, was on the verge of bankruptcy and that,
consequently, was likely to be priced at a negative value
by the market. In these circumstances, a private investor
would have let BWE go into bankruptcy.

In spite of this, on account of the special circumstances
surrounding BWE and with a view to facilitating its sale
and restructuring outside bankruptcy proceedings,
TENEO, SEPI and its ultimate shareholder, the Spanish
State, decided to provide funds to assist its restructuring
and make the privatisation possible. In the absence of
these funds, BWE would have had to bear all the restruc-
turing costs on its own and, in view of its insolvency,
would have gone bankrupt.

In order to determine the aid element involved in the
privatisation arrangements, the Commission notes that
the only return that could be expected from the cash
payments committed by the Spanish State was the offer
presented by the purchaser of NewCo for its share
capital. Both the cash payments by the Spanish State and
the price to be paid by the buyer are thus interrelated.
Babcock Borsig would not have undertaken to pay
EUR 45 million for the shares in NewCo if the Spanish
State had not committed itself
to providing cash
payments to NewCo of EUR 250 million. Consequently,
the price of EUR 45 million for the shares in NewCo
has to be deducted from the higher cash payments that
the Spanish State will make to NewCo after its creation
in order to determine the net aid involved in the privati-
sation arrangements.

Finally, it is to be noted that the Commission cannot
find any further aid element in the setting of a nominal
price of EUR 45 million for the shares in NewCo. The
net price of minus EUR 463,5 million for the ongoing
business of BWE was set in a tender process where no
other party was willing to offer the Spanish State better
conditions in net terms. All other bids for the business
of BWE were costlier for the Spanish State.

Therefore, the aid that Spain has implemented and is
planning to implement for BWE amounts to a total of
EUR 830,1 million.

Competition is strong in the power generation and
environmental equipment sector, notably in the turnkey
project segment, where companies compete worldwide
for large orders. BWE was the largest producer in Spain
in this sector and exported around 50 % of its produc-
tion in competition with other Community producers.
For its part, NewCo, integrated into the Babcock Borsig
group, will continue being a leading producer in Spain
and will also compete in foreign markets where it plans
to export around 20 % of its turnover.

(64) Accordingly, the net state assistance under assessment,
amounting to EUR 830,1 million, constitutes aid within
the meaning of Article 87(1) of the Treaty.

c) The legal status of the 1994 capital injection

(65)

The information supplied by the Spanish authorities
demonstrates that the 1994 capital injection constitutes
a supplementary payment
to honour a commitment
entered into by the INI in 1984, almost two years before
the entry into force of the Treaty in Spain, and only
partially paid in 1986.

(66) Accordingly,

the 1994 capital

injection constitutes
existing aid within the meaning of Article 88(1) of the
Treaty.

(67)

(68)

(69)

(70)

d) The restructuring of BWE: a single prolonged

process

The Commission is assessing in this case a series of state
measures implemented over several years. It is therefore
necessary to determine whether the Commission is faced
with a sequence of independent and separate restruc-
turing measures or,
instead, with a single prolonged
restructuring process. In other words, the Commission
must consider whether to split the assessment or to
assess the state measures globally.

This case originates in the notification by the Spanish
authorities in 1997 of an increase in BWE's capital that
was accompanied by an extensive industrial restruc-
turing programme. Under that programme, BWE was to
its entire
carry out a new strategic reorientation of
manufacturing and commercial activity to concentrate
on the supply of turnkey systems and reduce its activi-
ties in the company's other traditional areas of business.
A series of drastic measures
to adjust production
the strategic plan and to
capacity to the targets of
improve competitiveness were proposed. In addition, as
an essential element in the strategic plan the Commis-
sion was informed of the Spanish Government's formal
decision to privatise BWE in accordance with the Plan
for the Modernisation of the Spanish Public Sector.

In accordance with the notification, the Spanish authori-
ties proceeded to privatise BWE by means of an inter-
national tender. At the same time, BWE implemented a
reorientation of
its activity and reduced its capacity.
the privatisation was substantially delayed
However,
following the unexpected withdrawal of
the bidder
initially selected by the Spanish authorities. Faced with
this setback, the Spanish authorities reopened the priva-
tisation process without delay.

increase

constitutes

an interim
The 1999 capital
measure, only partly paid out to the extent necessary to
restore BWE's equity to the minimum legally required,
that has allowed BWE to continue operating during the
period necessary to find another purchaser and complete
the privatisation.

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(71)

For their part, the aid elements identified in the privati-
sation arrangements constitute the additional assistance
required to privatise BWE and complete its restructuring
according to the original plan notified in 1997. It is to
be noted that the restructuring plan presented by BWE is
in line with and constitutes the continuation of the
preliminary industrial measures implemented by SEPI
since 1997. After
its purchase by Babcock Borsig,
NewCo will concentrate on a narrower product and
service portfolio and geographic focus, as well as
reducing capacity still further.

(72) Accordingly, the Commission finds that the 1997 and
1999 capital
increases and the privatisation arrange-
ments are in line with the concept of industrial restruc-
turing notified in 1997 and form part of a single restruc-
turing process that has lasted longer than originally
expected for reasons beyond the Spanish authorities'
control. Therefore, the compatibility of the abovemen-
tioned State measures that have assisted the same
restructuring process must be assessed globally.

(73)

It is to be noted that the first extension of the procedure
to cover the 1999 capital injection expressly referred to
this overall assessment. In particular, in recital 12 of that
decision the Commission stated:

‘This new aid appears at this stage incompatible with the
common market. Even though the new capital injection
will be used to finance measures designed to adapt
BWE's labour force to levels commensurate with reason-
able prospects for its future reduced market presence,
such measures alone do not appear capable of restoring
its long-term viability. Viability can only be ensured if
complementary measures in the commercial, industrial
and technological fields are taken. These measures are in
the present case dependent upon the restructuring
programme that the purchaser of BWE will put into
place after the sale of the company by the State. Conse-
quently, the ultimate compatibility of this new capital
injection, as well as of the aid already covered by the
initial opening of the procedure, will be assessed in the
light of
restructuring
programme that the purchaser of BWE will implement.’

characteristics of

the

the

(74)

Furthermore, in the second extension of the procedure
in 2000 to cover the privatisation arrangements, the
Commission reiterated its view that the measures had to
be assessed globally. In particular, in the last recital of
the decision the Commission stated:

restructuring programme for BWE's activities that the
purchaser will
implement. Consequently, Spain is
requested to submit to the Commission the final terms
of the restructuring programme that is still under nego-
tiation.’

e) The relevant assessment framework

(75)

(76)

(77)

is intended to assist

The aid under assessment
the
restructuring of a company in difficulty. Its compatibility
must therefore be assessed in the light of the principles
set out in the Community guidelines on State aid for
rescuing and restructuring firms in difficulty.

In October 1999 the Commission published new
rescuing and restructuring aid guidelines (8) replacing the
1994 version (9).

Some of
the state measures under assessment were
adopted before the new guidelines were published. It is
this point which
therefore necessary to establish at
version applies in respect of each of the measures.

The original decision initiating the Article 88(2) proce-
dure in respect of the 1994 and 1997 capital injections
and the first decision extending the procedure to cover
the 1999 capital injection were adopted under the 1994
guidelines. The decision extending the procedure for a
second time to cover the privatisation arrangements was
adopted under the 1999 guidelines, since that version
was already in force when the privatisation arrange-
ments were notified.

(78) Nevertheless, section 7.5, point 101, of the 1999 guide-

lines states that:

‘The Commission will examine the compatibility with
the common market of any rescue and restructuring aid
granted without its authorisation and therefore in breach
of Article 88(3) EC of the Treaty:

(a) on the basis of these guidelines if some or all of the
aid is granted after their publication in the Official
Journal of the European Communities;

(b) on the basis of the guidelines in force at the time the

aid is granted in all other cases.’

(79)

injection was

In the case of BWE, 34 % (ESP 14 025 million) of the
1999 capital
illegally paid on 28
September 2000, that is to say almost a year after the
entry into force of the 1999 guidelines on 9 October
1999. Given that, as found in the previous section, all
the state measures in this case constitute aid for a single
prolonged restructuring process, the partial payment of
the 1999 capital injection after the publication of the
1999 guidelines means that the whole series of state
measures must be assessed under those new guidelines.

‘Spain is reminded that one of the essential elements in
assessing the ultimate compatibility of this aid as well as
of the previous aid covered by the procedure is the

(8) OJ C 288, 9.10.1999, p. 2.
(9) OJ C 368, 23.12.1994, p. 12. Guidelines extended by notices
published in OJ C 74, 10.3.1998, p. 31 and OJ C 67, 10.3.1999,
p. 11.

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(80) Accordingly, the compatibility of the 1997 and 1999
capital increases as well as of the aid elements identified
in the privatisation arrangements must be assessed under
the 1999 guidelines on State aid for rescuing and
restructuring firms in difficulty.

(81) Although the basic compatibility criteria for restruc-
turing aid are the same in both the 1994 and 1999
guidelines, the 1999 version incorporates two new addi-
tional principles that represent a tightening of Commis-
sion policy in this field. These new principles are: the
‘one time, last time’ condition and the ban on restruc-
turing aid for newly created companies.

(82) As the 1999 capital increase is combined with previous
restructuring aid granted in 1997, and the privatisation
arrangements provide for the creation of NewCo and the
grant of further restructuring aid to the company, it is
necessary at this point to examine to what extent the
above new principles apply in this case.

f) The ‘one time, last time’ condition

(83)

Section 3.2.3, point 48, of the 1999 guidelines states
that:

‘Where less than 10 years have elapsed since the restruc-
turing period came to an end or implementation of the
plan has been halted, the Commission will normally
allow further restructuring aid only in exceptional and
unforeseeable circumstances for which the company is
not responsible.’

(84) As previously established in section (d) above, the meas-
ures decided by the Spanish authorities since 1997 form
part of a single prolonged restructuring process. Conse-
quently, the restructuring to which the above condition
refers has not yet come to an end and the ‘one time, last
time’ condition does not apply in the case of BWE.

g) The ban on aid to a new company

(85)

The privatisation arrangements involve the creation of
NewCo, the transfer to it of BWE's assets connected with
its ongoing business and the grant to NewCo of substan-
tial restructuring aid. It is therefore necessary to examine
to what extent the abovementioned prohibition applies
in this case.

(86)

The ban on aid to a newly created company was intro-
duced in the 1999 guidelines, point 7 of which provides
that:

‘For the purposes of these guidelines, a newly created
firm is not eligible for rescue or restructuring aid, even if
its initial financial position is insecure. This is the case,

(87)

(88)

(89)

(90)

(91)

(92)

(93)

for instance, where a new firm emerges from the liqui-
dation of a previous firm or merely takes over such
firm's assets.’

The Commission considers that the above prohibition
does not apply in the present case because the State
measures under assessment and the proposed restruc-
turing constitute elements of a single operation to be
assessed as a whole. The 1997 and 1999 capital
increases as well as the privatisation arrangements are in
line with the concept of industrial restructuring notified
in 1997 and form part of a single restructuring process.
On the other hand, the aid elements identified in the
privatisation arrangements
the additional
assistance required to privatise BWE and complete its
restructuring according to the original plan notified in
1997.

constitute

Furthermore,
the ban on aid to a newly created
company did not appear in the guidelines in force when
the Commission adopted in 1998 the original decision
initiating the Article 88(2) procedure, nor in 1999 when
it extended the procedure for the first time.

The Commission furthermore took this view in the
preparatory instruments prior to this Decision.

In the first extension of the Article 88(2) procedure, the
Commission stated that
the aid
restructuring BWE would be assessed
granted for
globally in the light of the characteristics of the restruc-
turing programme that the purchaser had to present (10).

the compatibility of

In the second extension of the Article 88(2) procedure
the Commission decided to consider that BWE and
NewCo formed a single entity the purposes of assessing
the state aid.

The Commission took this position on account of the
very specific factual and procedural circumstances of this
case.

In particular, in the second extension, in spite of the fact
that the guidelines including the ban on aid to a new
company were already in force, the Commission reit-
erated its position that
the aid
proposed
arrangements,
the
including the restructuring aid to NewCo, was to be
assessed together with the aid previously granted, taking
the restructuring
into account
programme that the purchaser of the ongoing business
of BWE had presented (11).

the compatibility of
privatisation

the characteristics of

under

In addition, the Commission also considered that any
compensation for the potential undue effects of the aid
received in the past by BWE or proposed under the
privatisation arrangements was to be the responsibility
of the ongoing business of BWE. In particular, in recital
16 of its decision, the Commission stated:

‘The Commission must also note at this point of the
assessment that the artificial transfer to NewCo of the
ongoing activities of BWE, which will remain as a shell
liquidation
company with its outstanding debts for
purposes only, should not be used by the Spanish
authorities to circumvent and escape the full application
of the State aid rules. Consequently, NewCo will be

(10) See recital 73.
(11) See recital 74.

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considered to be liable for any recovery order the
Commission might decide in respect of aid covered by
the original Article 88(2) procedure and its first exten-
sion which identified BWE at that moment as its benefi-
ciary. The assessment of the compatibility of this aid
cannot be detached from that of the new aid measures,
all of them having been designed to assist the ongoing
business to be transferred to NewCo.’

(97)

annual sales amount to around EUR 2 500 million and
it employs around 10 000 people.

Following its purchase by BB, NewCo, renamed Babcock
Borsig Power España (BBPE) and backed by the financial
and technological strength of
its parent group, will
progressively regain customer confidence. According to
the Industrial and Business Plan prepared by BB (13),
NewCo's order book will grow from EUR 150 million
during the first year to a level
in a typical year of
EUR 250 million from the third year after privatisation.
Sales will also gradually develop over the restructuring
period from EUR 65 million during the first year to
reach the target volume of EUR 250 million four years
after privatisation. This will allow NewCo/BBPE to break
even from the third year of operations and restore its
financial ratios within a reasonable timescale.

(98) NewCo's restructuring plan is based on a thorough
assessment of its positioning in the sector in which it
will operate. Its forecasts are based on realistic assump-
tions and are reasonably attainable. They are based on a
drastic and immediate scaling-down of the existing busi-
ness of BWE that will substantially reduce production
capacity and consequently former fixed costs. Another
essential target in the short term is commercial. To
become viable, NewCo/BBPE must stabilise the moderate
and diminishing position that BWE has in the Spanish
market (8 %) and continue to develop its presence in
South America and North Africa. The integration of
NewCo within BB does not appear an expansionary
project since it will redistribute production within the
Babcock Borsig Power group that will now serve Spain
through NewCo, freeing production capacity to serve
other non-European markets. The industrial concept
designed by BB for NewCo/BBPE aims at providing
NewCo with the technology offered by its parent group
in order to address the new heat recovery steam genera-
tors segment and to achieve an attractive positioning in
this market which is currently emerging in Spain.

(99) Apart from technological support, the parent group will
provide NewCo/BBPE with the financial means required
to face up to the difficulties inherent in its restructuring
and become viable. In particular, BB has undertaken in
the privatisation arrangements to make any cash contri-
butions that may be necessary for NewCo to maintain,
at all times, over a five-year period the level of equity
required for developing the restructuring programme.
the minimum equity
The arrangements provide that
level to be maintained in NewCo/BBPE shall be EUR 20
million.

(100) The Commission accordingly takes the view that the
restructuring plan for BWE/NewCo satisfies the viability
criterion.

h) Compliance with the general conditions for the

authorisation of restructuring aid

(94)

The Commission considers that restructuring aid contri-
butes to the development of economic activities without
adversely affecting trade to an extent contrary to the
Community interest within the meaning of Article
87(3)(c) of the Treaty where it fulfils the compatibility
conditions set out in the guidelines on state aid for
rescuing and restructuring firms in difficulty. In partic-
ular, the Commission may authorise restructuring aid
only if the following strict criteria are met:

(i) restoration of viability;

(ii) aid limited to the minimum;

(iii) avoidance of undue distortions of competition, and

(iv) significant contribution from the beneficiary.

i) Restoration of viability

(95) According to the 1999 guidelines (12), the aid must be
linked to the implementation by the beneficiary of a
restructuring plan based on realistic assumptions and
capable of restoring viability within a reasonable time-
scale.

(96)

The purchaser selected by the Spanish authorities to take
over the business of BWE is one of the leading engin-
eering and capital goods supplier firms in the world.
Babcock Borsig AG (BB) has annual sales of about
EUR 7 500 million and employs more than 44 000
people. Its shareholders provide this group with a sound
financial base. Preussag AG, one of the largest industrial
and services groups in Germany, owns 33 % of BB's
capital. A further 10 % shareholding is in the hands of
Westdeutsche Landesbank, which also owns 30 % of
Preussag. The power generation and environmental
equipment business is developed within the Babcock
Borsig group by its subsidiary Babcock Borsig Power
GmbH (BBP). Following the acquisition of its former
competitors, Steinmüller (Germany), Austrian Energy
(Austria) and the NEM group (the Netherlands), BBP has
become the fifth largest supplier of generation and
in the world after ABB,
environmental equipment
Its
General Electric, Siemens/Westinghouse and MHI.

(12) See recital 31 to 34.

(13) See recital 51 and 52.

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ii) Aid limited to the minimum

(101) The amount and intensity of the aid must be limited to
the strict minimum needed to enable restructuring to be
undertaken (14).

(102) The open, transparent and unconditional tender proce-
dure followed by the Spanish authorities for selling BWE
has ensured that the aid proposed under the privatisa-
tion arrangements is the minimum cost that could be
incurred by the Spanish State for restructuring BWE. The
information submitted by the Spanish authorities
concerning the tender process demonstrates that all
companies that might have had an interest in buying
BWE were given the opportunity to bid and that BWE
was sold to the highest bidder.

(103) The Commission has also verified that the 1997 and
to the privatisation
injections prior
1999 capital
arrangements have covered or will cover no more costs
than those related to a series of drastic cutbacks in the
BWE workforce without which viability would not be
restored.

(104)

It should lastly be noted in this respect that a large
proportion of the aid under examination in this case is
intended to cover the social costs of restructuring. Of
the EUR 748,56 million that
the Spanish State will
spend from 1997 to assist the restructuring, EUR 306,5
million (40,9 %) has basically financed early retirement
schemes (15).

(105) As set out in the 1999 guidelines (16), the Commission
has a positive approach to aid covering the social costs
of restructuring because it brings economic benefits
above and beyond the interests of the firm concerned, in
particular in respect of
the workers affected by the
restructuring measures. This aid should be disregarded
for the purposes of determining the extent of any meas-
ures that should be adopted for avoiding undue distor-
tions of competition (17).

iii) Avoidance of undue distortions of competition

(106) When assessing the potential compatibility of restruc-
the Commission must carefully examine
is liable to produce adverse effects on

turing aid,
whether
it
competitors (18).

(14) See points 40 and 41 of the 1999 guidelines.
(15) See Table 7 in recital 128.
(16) See points 56 to 63 of the 1999 guidelines.
(17) See point 62 of the 1999 guidelines.
(18) See points 35 to 39 of the 1999 guidelines.

inad-
This examination must consider any potential
missible effects of the aid measures both individually
and in overall terms. Where appropriate, the Commis-
sion may impose measures to mitigate as far as possible
potential undue effects of the aid on competitors.

E f f e c t s o f

t h e i n d i v i d u a l a i d m e a s u r e s

(107) The sale of NewCo to the highest bidder in an open,
transparent and unconditional
tender procedure has
ensured that the aid granted in that framework is limited
to the minimum required to make the privatisation and
restructuring possible. However, such a procedure does
not ensure that the aid does not assist measures with
undue effects when examined individually.

(108) Apart from the capital

injections into BWE totalling
EUR 366,6 million (44,2 % of the overall aid under
assessment) (19) that have basically covered or will cover
the social costs of the restructuring, the Spanish authori-
ties intend to spend EUR 258,5 million (31,1 %)
to
cover the liquidation deficit of BWE and contingencies
related to past contracts. Such aid, intended to offset the
past financial burden of BWE, will be paid either to BWE
in liquidation, which will be a shell company without
operations, or to NewCo on provision of proof of losses
originating in past contracts. In these circumstances, this
individual aid measure does not appear liable to produce
undue collateral effects on competitors.

(109)

In addition, grants of EUR 110 million (13,3 %) will be
paid to NewCo to partly finance the working capital
required to start operations (EUR 10 million) and to
offset its negative operating cash flow during the first
three years of operations (EUR 100 million).

this aid measure having undue
In order to prevent
effects, its effective payment should not exceed the level
of negative operating cash flows actually recorded by
NewCo. Consequently,
the Commission considers it
necessary to make payment of this aid conditional on
the provision by NewCo of proof that the anticipated
negative cash flows have been actually recorded.

(110) Lastly, the privatisation arrangements provide that the
Spanish authorities are to pay EUR 95 million (11,4 %)
in grants to assist investments to be made by NewCo.

(19) See Table 3 in recital 53.

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(111) Table 4 below shows the five-year Investment Plan amounting to EUR 135,5 million that BB has
undertaken to carry out under the privatisation contract, as finally agreed between the parties,
broken down by investment objective:

Table 4

Objective

I. Business relaunch

(all items under this heading are expenses except those marked
with *, which will be entered in NewCo's balance sheet)

Budget
(EUR million)

23,5

[...]

[...]

[...]

[...]

[...]

[...]

[...]

II. Information technology

[...]

[...]

[...]

III. Real estate and machinery

[...]

[...]

[...]

IV. Other investments

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

19,5

[...]

[...]

[...]

43,5

[...]

[...]

[...]

32,5

[...]

135,5

Total

(112) A detailed assessment of the Investment Plan indicates that the assisted expenditure under the
‘Business relaunch’, ‘Information technology’ and ‘Real estate and machinery’ headings is basically
intended to restructure NewCo's industrial base. However, the EUR 32,5 million expenditure under
the ‘Other investments’ heading includes financial investments that NewCo intends to make in equity
to create joint ventures through which it intends to conclude the project contracts that will form its
future turnover.

(113)

In the capital goods sector, the turnkey project business is one of the most dynamic subsectors and
one in which NewCo intends to generate 32 % of its expected turnover. For administering these
projects, contractors normally create joint ventures that carry out multiple functions over the various
phases of the project: negotiations with potential customers, bidding, placing of orders, financing of
the construction, guarantee period, and in some cases, depending on the order type, the maintenance
and operation of the project which is the object of the contract. These joint ventures, which may
take different corporate forms (temporary consortia, commercial
interest groupings, etc.), are
normally established and controlled by the project's main contractor and may count on the
participation of suppliers and subcontractors.

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(114) Unlike the other aided items in the Investment Plan, the expenditure of NewCo in equity of joint
ventures is a disbursement very close to the market. The joint ventures in question form part of the
commercial policy of the company and are designed to acquire business and administer the projects
won. Aid granted by the Spanish State to finance these investments would give NewCo an undue
commercial advantage over its competitors since this aid could easily be used by NewCo to undercut
bids made by its competitors and exclude competition.

(115) Accordingly, the Commission cannot authorise the aid proposed under the privatisation contract for
investments in venture capital in view of the very high risk that it would create a serious distortion
of competition.

(116) The privatisation contract provides that grants amounting to EUR 95 million will be awarded in
respect of the EUR 135,5 million investments scheduled in the Investment Plan. However, this
commitment is made globally and the amount of aid corresponding to each of the items in the
investment plan is not specified.

The Commission must therefore proceed to calculate the aid corresponding to the investments in
venture capital on the basis of the following assumptions.

(117)

In this case, the aid to a specific investment item in the Plan cannot be calculated in proportion to its
budget. Such an approach would implicitly assume that the total aid is distributed evenly amongst all
the items; it would, however, penalise certain items included in the Investment Plan, like training
expenditure, for which the Commission normally allows comparatively higher aid intensities than for
investments.

(118) Under Commission Regulation (EC) No 68/2001 of 12 January 2001 on the application of Articles
87 and 88 of the EC Treaty to training aid (20), the exempted intensity for aid for general training
under schemes for large firms established in areas eligible for regional aid pursuant to Article
82(3)(c), such as the Basque Country, is 55 %. The ‘Business relaunch’ heading of the Investment Plan
includes general training measures totalling EUR […] million in the fields of Technology imple-
mentation, Project management, Certification and Language. Training constitutes a decisive element
for the success of the restructuring in view of the special needs for improvement and updating of the
skills of BWE's workforce. The Commission therefore considers it reasonable in this case to accept
the financing of the costs of the abovementioned general training measures for the 650 workers that
NewCo will re-employ at 100 % in gross terms for the purposes of calculating the incompatible aid.

(119) The Investment Plan also provides for expenditure of EUR […] million on measures aimed at
regaining customer confidence. These include information sessions and workshops with workers,
management, suppliers and subcontractors in which the Babcock Borsig group, its products and
technology will be presented. They also include an advertising campaign in the specialised press
presenting the new company and its projects. The Commission considers that these measures
constitute a prerequisite for the success of the restructuring and can, therefore, also accept that they
are eligible for aid at 100 % in gross terms without producing undue effects on competition.

(120) The remaining measures in the Investment Plan totalling EUR […] million (= […] − […]) constitute
normal investments that will be entered in NewCo's balance sheet. Consequently, the Commission
considers that the remaining proposed aid of EUR 78,5 million (= […] − […]) should be distributed
evenly amongst them in order to calculate the aid corresponding to the EUR 32,5 million invest-
ment in joint ventures.

(121) On the above assumptions, the incompatible aid to venture capital amounts to EUR 21,44 million,

which the Spanish authorities should refrain from paying to NewCo.

(20) OJ L 10, 13.1.2001, p. 20.

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O v e r a l l e f f e c t o f

t h e a s s i s t e d r e s t r u c t u r i n g

(122) Table 5 below summarises the evolution of BWE/NewCo's capacity over the restructuring process

assisted by the Spanish State:

Table 5

As of
31.12.1996

After 1997
workforce
reduction

Reduction
compared with
31.12.1996

NewCo after
completion of
restructuring

Reduction
compared with
31.12.1996

Direct workers

Direct employees

Total direct jobs

Workshop capacity

Engineering capacity

Total capacity (hours)

Indirect jobs
(workers + structure + engi-
neers)

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...] %

[...] %

[...] %

[...] %

[...] %

[...] %

Total jobs

[...]

[...]

[...] %

[...]

[...] %

(123) The workforce reduction and the accompanying industrial measures implemented at BWE in 1997
produced a substantial reduction in its capacity. When compared with the situation as of the end of
1996, these measures reduced its workforce by 27 % and its production capacity by 31 %. For its
part, the industrial concept that BB will implement within NewCo will involve a further reduction in
BWE's workforce and capacity by 41 % and 20 % respectively.

In overall terms, after completion of its Industrial Plan, NewCo will be 57 % smaller than BWE in
terms of employment and 45 % smaller in terms of production capacity.

(124) The above figures reflect the elimination of idle capacity and the abandonment of loss-making
activities in the following fields: desalination, water treatment, equipment for the steel sector, piping,
gearing, cranes, valve components, high-pressure vessels, heat exchangers, pyro-tubular boilers,
medium and low pressure liquid and gas containers, metal structures, light boilers, airport equip-
ment, etc. As a result, a workshop area of 49 700 m2 will be abandoned and the relevant machinery
and equipment will be either scrapped or sold.

(125) NewCo's market presence will also be lower than that of BWE before restructuring. Table 6 below
shows the evolution of BWE's workforce and sales and the forecast turnover of NewCo over its
five-year Industrial Plan:

Table 6

Year

1994

1995

1996

1997

1998

1999

1

2

3

4

5

Income
(EUR million)

332

384

300

201

189

152

100

[...]

[...]

[...]

250

Workforce

1 520 1 503 1 516 1 329 1 187 1 119

650

650

650

650

650

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(126) Accordingly, the Commission finds that the proposed restructuring of BWE/NewCo involves a
substantial reduction of capacity and a limitation of market presence that will mitigate the adverse
effects of the aid on competitors. The Commission therefore considers that there is no need to
impose further specific measures in this respect.

iv) Significant contribution from the beneficiary

(127) Lastly, in accordance with the rescue and restructuring aid guidelines, the aid beneficiary and its
purchaser are expected to make a significant contribution to the restructuring plan from their own
resources (21).

(128) Table 7 below shows the cost of the restructuring measures that have been or will be necessary to
restore BWE's business viability. It also shows the respective contributions that both the Spanish
State/SEPI and Babcock Borsig/NewCo will make to finance these measures.

Table 7

Measures

Cost
(EUR million)

Spanish State

NewCo/BB

Workforce reductions

Initial funds

Negative cash flows

Investments

Liquidation costs

Contracts

Technology

Central services

Creation of
Competence Centre

the Regional

306,5

55

102

135,5

210,4

48,1

40,4

17,3

20

306,5

10

100

45

2

95 – 21,44 = 73,56

40,5 + 21,44 = 61,94

210,4

48,1

40,4

17,3

20

186,64
(19,96 %)

Total

935,2

748,56

(129) The first row of Table 7 represents the costs of the workforce reductions financed by the 1997 and
injections totalling ESP 51 000 million (EUR 306,5 million).

1999 capital

(130) NewCo requires initial funds of EUR 55 million. Under the privatisation arrangements, BB will pay
EUR 45 million for the shares in NewCo. The Spanish State will supplement this amount with a
further EUR 10 million that it will make over to NewCo as initial funds (22).

(131) NewCo will record a total negative cash flow of EUR 102 million during the first three years of
operations that will be covered by the Spanish State by means of EUR 100 million in grants
committed by SEPI under the privatisation arrangements.

(132) The Industrial Plan for NewCo provides for a minimum of EUR 135,5 million in investments, of
which EUR 95 million would be financed by grants from the Spanish State and EUR 40,5 million
by Babcock Borsig. However, the present Decision prohibits the grant of EUR 21,44 million
corresponding to the aid to investments in venture capital. This amount should therefore be
deducted from the state contribution and added to the costs that BB will necessarily have to finance.
It is to be noted that the investments in this field are of vital importance for NewCo since it is the
channel through which it intends to generate its future turnover in its target market segment of
turnkey projects.

(21) See point 40 of the 1999 guidelines.
(22) See recital 60.

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(133) The Spanish State will wholly finance any deficit in the
liquidation of BWE after the transfer to NewCo of the
selected assets and 650 workers. The estimated deficit
excluding the dismissal of the remaining workers already
computed above is EUR 210,4 million.

(134) The Spanish State will also finance any final loss under
the contracts transferred to NewCo, at an initially esti-
mated cost of EUR 48 million (23).

(135) Under the heading of technology, the table reflects the
estimated value in terms of licences and royalties of the
transfer of technology which, according to the privatisa-
tion arrangements, Babcock Borsig will have to make
available to NewCo freely, at least during the first five
years of operations, and which will replace contracts
with other groups that have hitherto provided the tech-
nological knowhow for BWE's production (24).

(136)

In addition, during the same five-year period the central
headquarters of BB in Germany will provide free services
to NewCo, at an estimated cost to itself of EUR 17,3
million. Lastly, the creation of the Regional Competence
Centre in Spain will require investments in NewCo of
EUR 20 million in addition to those originally
committed under the Investment Plan.

(137) The above commitments mean that, in overall terms, the
restructuring of BWE's activities has already required or
will require funds totalling EUR 935,2 million to be
invested in BWE/NewCo, of which EUR 748,56 million
have been or will be borne by the Spanish State and
EUR 186,64 million by Babcock Borsig/NewCo.
In
short, Babcock Borsig will bear 19,96 % of the costs of
restructuring BWE/NewCo.

(138) On top of this, Babcock Borsig has undertaken under
the privatisation arrangements to make any contribution
in cash that may be necessary for NewCo to maintain at
all times the level of equity required for the development
the
of
minimum level of NewCo's equity will be EUR 20
million, which equals its share capital.

it being understood that

the Industrial Plan,

(139) The Commission therefore takes the view that NewCo
and its purchaser, BB, have assumed the risk of the
restructuring and will make a significant contribution to
it from their own resources.

(23) The table does not include any cost linked to contingencies in the
environmental,
fields, which have been
tax and social
limited to EUR 18 million because no disbursements are expected
to be made under this heading.

labour,

(24) The estimate corresponds to the usual market price of 5 % of the

expected turnover during the first five years of operations.

VII. CONCLUSION

(140) Accordingly, in view of the foregoing considerations, the
Commission finds that Spain should refrain from paying
NewCo a grant of EUR 21,4 million corresponding to
the aid for investment in venture capital as this aid
would distort competition and trade to an extent
contrary to the common interest,

HAS ADOPTED THIS DECISION:

Article 1

The ESP 10 000 million (EUR 60,1 million) increase in the
capital of Babcock Wilcox España SA carried out by TENEO in
1994 constitutes existing aid within the meaning of Article
88(1) of the Treaty.

Article 2

The increases in the capital of Babcock Wilcox España SA of
ESP 10 000 million (EUR 60,1 million) and ESP 41 000
in 1997 and
million (EUR 246,4 million) decided by SEPI
1999 respectively constitute aid within the meaning of Article
87(1) of the Treaty. Both increases were unlawfully granted in
breach of Article 88(3)(c) of the Treaty, except for a sum of
ESP 16 725 million (EUR 100,52 million) of
latter
increase which has not yet been disbursed.

the

The said aid nevertheless meets the conditions for exemption
under Article 87(3)(c) of
in the
Community guidelines on State aid for rescuing and restruc-
turing firms in difficulty, and is therefore compatible with the
common market.

the Treaty, as

set out

Article 3

The measures which Spain proposes to implement under the
for privatising Babcock Wilcox España SA,
arrangements
consisting of:

(a) cash injections into NewCo amounting to EUR 55 million;

(b) the payment to NewCo of EUR 100 million for the costs

of adapting the activities transferred to it;

(c) the payment to NewCo of EUR 95 million for investments
and training to be carried out according to the Investment
Plan presented by Babcock Borsig;

(d) the coverage of any ultimate loss under contracts trans-
ferred to NewCo, at an estimated cost of ESP 8 000 million
(EUR 48,1 million);

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(e) the coverage up to a maximum of EUR 18 million of any
cost incurred through claims against NewCo for any harm
or economic damage resulting from events occurring prior
to the sale in relation to environmental, labour, tax and
social security issues and obligations arising from pension
plans, and

(f) the coverage of the deficit in the liquidation of Babcock
Wilcox España SA, at an estimated cost of ESP 35 000
million (EUR 210,4 million),

constitute aid within the meaning of Article 87(1) of
Treaty.

the

(d),

The aid measures under points (a),
(e) and (f), the aid
measure under point (b) up to the limit of the effective negative
cash flows actually recorded by NewCo during the first three
years of operations, and the aid measure under point (c) up to
a maximum amount of EUR 73,56 million meet the condi-
tions for exemption under Article 87(3)(c) of the Treaty, as set
out in the Community guidelines on State aid for rescuing and
restructuring firms in difficulty, and are therefore compatible
with the common market.

Article 4

The aid amounting to EUR 100 million, referred to in Article
3(b),
for the costs of adapting the activities transferred to
NewCo shall be paid only on submission by the beneficiary of
proof that negative operating cash flows have actually been
recorded at the end of each of the first three years of opera-
tions.

Article 5

The aid proposed under the privatisation arrangements for
investments by NewCo in venture capital, amounting to
EUR 21,44 million, does not meet any of the conditions for

exemption under Article 87(2) or (3) of the Treaty. It is there-
fore incompatible with the common market.

Accordingly, this aid may not be implemented and Spain shall
refrain from paying the said amount.

Article 6

The Industrial Plan presented to the Commission must fully be
implemented.

Spain shall submit to the Commission annual reports giving all
the information the Commission needs in order to be able to
monitor the implementation of the Industrial Plan in accord-
ance with point 45 of the Community guidelines on State aid
for rescuing and restructuring firms in difficulty. The first of
these reports shall be submitted not later than six months after
the date of this Decision.

Article 7

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

This Decision is addressed to the Kingdom of Spain.

Article 8

Done at Brussels, 3 July 2001.

For the Commission

Mario MONTI

Member of the Commission