2002/224/EC: Commission Decision of 19 September 2001 on the State aid granted by Italy to Enichem SpA (Text with EEA relevance) (notified under document number C(2001) 2902)
Date: 2001-09-19
Institutions: European Commission
Subjects: Italy, State aid, application of EU law, chemical industry, control of State aid, financial aid

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COMMISSION

COMMISSION DECISION

of 19 September 2001

on the State aid granted by Italy to Enichem SpA

(notified under document number C(2001) 2902)

(Only the Italian text is authentic)

(Text with EEA relevance)

(2002/224/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

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 called on interested parties to submit their comments
pursuant to the provisions cited above (1),

Whereas:

I. PROCEDURE

(1)

(now Article 88(2)) procedure (2)

On 16 March 1994, the Commission decided to open
the Article 93(2)
in
respect of two capital contributions made by ENI SpA
(hereinafter ‘ENI’) to its subsidiary Enichem SpA (herein-
after ‘Enichem’) in October 1992 and December 1993 of
ITL 1 000 billion and ITL 794 billion respectively
(hereinafter ‘the first two injections’). By letter of 16
March 1994,
the Commission informed the Italian
Government of this and requested it to submit its obser-
vations and to furnish all such information as might
help to assess the capital contributions in question.

(2)

the Italian Government
By letter of 18 May 1994,
submitted its observations and at the same time notified
a restructuring plan to be implemented by Enichem over
the period 1994 to 1997. In the context of this plan, the

Italian authorities informed the Commission of a new
capital contribution to be made by ENI to Enichem of
contribution was
ITL 3 000 billion. The
approved by Enichem's shareholders on 29 June 1994
and was to be paid within three months of the Commis-
sion decision (hereinafter ‘the third injection’)

capital

Italian authorities

In further submissions and meetings, representatives of
and Enichem provided the
the
Commission with further details of the 1994 to 1997
restructuring plan, as well as a description of the restruc-
turing actions undertaken by Enichem during the period
1991 to 1993.

On 27 July 1994 the Commission adopted a final
decision (hereinafter ‘decision of 27 July 1994’) closing
the procedure initiated on 16 March 1994. The decision
declared the first two injections to be State aid compat-
ible with the common market and, at the same time,
concluded the examination of the third injection by
finding that it did not constitute State aid.

The Commission decision to close the procedure was
published in the Official Journal of the European Communi-
ties (3).

By application lodged in January 1995, BP Chemicals
Ltd (hereinafter ‘BP’) brought proceedings before the
Court of First Instance of the European Communities
(hereinafter ‘CFI’)
the Commission
for annulment of
decision of 27 July 1994.

(3)

(4)

(5)

(6)

(1) OJ C 245, 28.8.1999, p. 15.
(2) OJ C 151, 2.6.1994, p. 3.

(3) OJ C 330, 26.11.1994, p. 7.

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(7)

(8)

(9)

By judgment of 15 September 1998 in Case T-11/95 (4),
the CFI annulled the decision of 27 July 1994 insofar as
it closed the preliminary examination of the third capital
contribution of ITL 3 000 billion. In particular, the CFI
in closing its initial
concluded that ‘the Commission,
examination of the third capital
injection pursuant to
Article 93(3) of
the Treaty, despite its inability to
surmount the difficulties regarding the question whether
that injection constituted State aid, and without exam-
ining whether the injection was compatible with the
common market, infringed the rights of the applicant as
a party concerned within the meaning of Article 93(2) of
the Treaty’ (5).

The Court, on the other hand, rejected BP's application
against the decision of 27 July 1994 insofar as it found
injections were State aid
that
compatible with the common market pursuant
to
Article 87(3)(c).

two capital

the first

As a result of the judgment, the Commission decided, on
23 June 1999,
to initiate proceedings under Article
88(2) in respect of the third capital contribution. This
decision was communicated to Italy by letter of 19 July
1999. The Commission invited interested parties to
submit their comments on the aid in question.

(10)

(11)

(12)

(13)

The Commission received comments from third parties.
It forwarded them to Italy, which was given the oppor-
tunity to react.

The Italian authorities submitted their observations by
letter of 18 August 1999 and provided information
during a meeting on 18 February 2000.

II. DESCRIPTION OF THE MEASURES

Enichem is ENI's operational subholding company for
the chemical sector. Enichem, at the time of the meas-
ures, produced and marketed a wide range of chemical
products. ENI, in 1994, was a holding company created
in July 1992 when Ente Nazionale Idrocarburi, an Italian
public entity, was
stock
company. At the time when the third capital contribu-
tion was decided, the Italian Government controlled the
entire share capital of ENI through the Treasury Ministry
and appointed the company's Board of Directors (6).

transformed into a joint

Enichem's economic and financial situation deteriorated
rapidly at the end of the 1980s during the downturn of
the chemicals' market in that period. As shown in Table
1,
the drastic reduction in the company's turnover,
mainly due to the reduction in prices of the products,
resulted in a negative net operating margin in 1992 and,
as a consequence,

increased Enichem's net losses.

Table 1: Enichem's economic and financial results 1990 to 1992

Turnover

Net operating margin

Net profit (loss)

Net equity

Net financial debts

1990

1991

1992

(ITL billion)

15 060

13 424

743

(68)

5 179

8 375

77

(722)

4 496

7 908

11 155

(308)

(1 542)

3 935

8 083

(14)

Enichem responded to these market difficulties by putting in place a large restructuring plan, aimed
at redefining its industrial position in the chemicals market after the adverse trend experienced
during the preceding years,

in order to restore a sound financial and industrial situation.

(15) As part of the restructuring measures, ENI decided on 1 October 1992 to provide Enichem with
fresh capital. A first capital contribution of ITL 1 000 billion was granted to Enichem immediately,
while a second of ITL 794 billion was granted in December 1993 (the first two injections). These
two injections, which were not notified to the Commission, were the reason for the Commission
decision of 16 March 1994 to open the formal

investigation procedure.

(16) As the Commission stated in its decision of 27 July 1994, the restructuring measures included a
significant number of plant closures and capacity reductions. The closures are listed in Table 2
below.

(4) [1998] ECR II-3235.
(5) Paragraph 200 of the judgment.

(6) The Italian State currently holds less than 50 % of ENI's capital.

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Table 2: Enichem's plant closures 1991 to 1993

Location

Plant

Capacity (kt/year)

Porto Marghera

Ravenna

Mantova

Assemini

— PVC compound
— Soda concentration
— Trichloroethylene
— Sodium tripolyphosphate

— Acetylene/VCM
— Styrene

— Chlorine caustic soda/EDC
— Maleic anhydride
— Styrene
— SAN
— PST compound

— Polyethylene
— PVC suspension
— VCM/DCE Oxy

Cesano Maderno

Acrylic fibres

Crotone

Villacidro

Priolo

Gela

Phosphorus and derivatives

Acrylic fibres

Ethylene

— Chlorine caustic soda
— EDC

Cengio

Dyestuffs intermediates

Porto Torres

Butadiene

Ivrea

Downstream acrylic fibres

Hythe (UK)

Latex vinylpyridine

33
100
80
82

30/60
43

130/200
11
55
24
60

27
80
88

35

14

48

100

110
143

n.a.

50

17

5

(17)

(18)

These closures, together with other internal restructuring measures, reduced Enichem's workforce by
some 7 000 during the 1991 to 1993 period.

Enichem planned to divest its non-core activities through sale or liquidation with a view to
withdrawing from loss-making production and obtaining divestiture revenues (basically from the
disposal of some big profit-making subsidiaries, mainly in the fibres and detergent sectors) to
part-finance the restructuring plan.

(19) Despite the restructuring, the company faced increasing market difficulties due to the downturn in
the petrochemical business in the period 1992 to 1993. In 1992, the large majority of petrochemical
companies experienced a significant deterioration in their industrial results. As a consequence of the
falling prices, most of the major players posted operating losses in 1992 and 1993.

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(20) As the market situation in the petrochemical business worsened compared to the forecasts in its
plans, Enichem developed, in line with the restructuring measures already undertaken, an additional
industrial plan for the period 1994 to 1997, including more radical cost-cutting actions to restore
sound viability and a healthy financial situation.

(21)

(22)

(23)

(24)

The Italian authorities, as part of the proceedings, presented Enichem's additional industrial plan to
the Commission and informed it by letter of 6 June 1994 of the financial details of the plan. These
included an ITL 3 000 billion capital contribution (the third injection).

The new plan focused on three main objectives: to re-balance the financial structure, to concentrate
on pure ‘core’ activities and to improve the cost structure of its operations.

Enichem decided to concentrate its business on base chemicals, polymers and elastomers, all of them
strategically linked to the energy business of ENI, and drastically improve its cost structure by
optimising production and logistics, reducing surplus capacity and rationalising organisational and
commercial structures.

In the context of the additional plan, Enichem planned additional divestments amounting to some
ITL 2 500 over the period 1994 to 1995, a reduction in working capital of ITL 1 142 billion, a
reduction in investments of some ITL 170 billion a year (or about 30 % less than 1993) and in R&D
expenditure of some ITL 76 billion a year. Additional rationalisations and shutdowns were intended
to reduce the company's fixed costs by ITL 1 384 billion by the end of 1997. At the same time,
Enichem's workforce was eventually to be cut by around 16 000 units to further reduce its costs.

(25) As regards its core activities, Enichem would concentrate predominantly on base chemicals, poly-
mers and elastomers. Divestments were to include polyethylene and other plastic downstream
activities, PET, fine chemicals, some minor elastomer activities (mainly nitrile and polychloroprene),
fibres (acrylic, polyester and thermo-bonded) and detergents.

(26)

These new measures were intended to reduce Enichem's fixed costs and working capital levels, their
respective ratio going from 32,6 % and 25,2 % in 1994 to 22,9 % and 16,8 % in 1997. As a result,
Enichem was expected to show a profit as of 1997 and then reach levels of indebtedness, financial
charges and profitability similar to those of its main competitors.

(27)

These further divestments and plant shutdowns were intended to provide for an additional and
significant reduction in Enichem's production capacity, in that all the plants listed in Table 3 were to
be sold or closed down.

Table 3: Enichem restructuring divestments 1997 to 1997

Location

Plant

Capacity (kt/year)

Porto Marghera

— Hydrocyanic acid
— Acetonecyanhydrine

Ravenna

— Additives
— Elastomers

Carling

LDPE

Pedrengo

Intermediate products

Villadossola

Fine chemicals

30
70

n.a.
80

200

n.a.

n.a.

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Location

Plant

Capacity (kt/year)

Pisticci

Pisticci

Terbond

PET

Ottana, Acerra, P. Marghera

Fibres (all business)

Pieve
Madone, Assemini, etc.

Vergonte,

Trissino,

Fine chemicals (all business)

Augusta, Sarroch, etc.

Detergents (all business)

n.a.

102

447

n.a.

962

Various

Various

PVC (all business)

50 % joint venture

Downstream polymers (all business)

192

(28) Overall, the planned restructuring measures linked to the additional plan were to provide an
estimated additional reduction in capacity of at least 2 083 kt/year (7), compared to the 1 152 kt
obtained over the period 1991 to 1993 (Table 2). As regards the identified ‘core business’ the plan
referred to the need to establish forms of collaboration with other producers in order to fill the
technological gap that Enichem was experiencing in some sectors. Eventually Enichem sold 50 % of
its polymers' business to Union Carbide, developing a joint venture with the latter, in order to
reposition this business on the market.

(29)

These measures enabled Enichem to restructure in order to restore sound profitability, starting from
1997, and to achieve a positive operational cash flow already in 1995, according to the estimates
reported in Table 4.

Table 4: Enichem's forecast economic results 1994 to 1997

1994

1995

1996

1997

(ITL billion)

Turnover

9 917

8 504

7 550

8 043

Operating result

723

818

912

1 095

Net profit (loss)

(1 700)

(912)

(219)

7

Operational cash flow

(47)

355

586

780

III. COMMENTS FROM THIRD PARTIES

(30)

BP, in its observations, argued that the Commission did not have valid reasons for separating the
third capital injection from the first two and that therefore the three measures must be considered as
a whole. In particular,
it argued that the third operation was necessary to make the company
attractive to private operators and that it was too close to the first two injections to be possibly
considered as a separate operation. Once the three injections are taken together, the return on the
total investment would not be sufficient for a private investor and the three injections as a whole
would therefore have to be regarded as State aid.

(7) This figure does not include reduced capacity in additives (Ravenna), intermediate products (Pedrengo), fine chemicals

(Villadossola), Terbond (Pisticci) and the 50 % of the PVC joint venture.

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(31) Moreover, BP argues that, even if the third operation were to be considered a stand-alone trans-
action, the return on the investment was not sufficient to make it profitable. BP challenged some of
the assumptions and calculations used by the Commission, both in its decision of 27 July 1994 and
in its submissions to the Court. First, BP questioned the claim that the method of discounting profits
(hereinafter ‘DNP’) is a generally accepted one. Second, it challenged some of the assumptions used
by the Commission in its calculation of the return, as regards both the DNP and the discounted cash
flow (hereinafter ‘DCF’) methodologies.

(32)

(33)

(34)

In particular, BP argues that: (i) the Commission wrongly calculated the effects of debt repayment, in
that it considered the cash flow for repaying Enichem's debts also as a return; (ii) the Commission
included in the calculation of the return the initial book value of Enichem, which would be
inconsistent with the DCF method used and, finally (iii) the residual value attributed to Enichem is
excessive.

BP then argued that, if the third capital injection is regarded as State aid, it should be assessed under
the guidelines for restructuring aid with particular regard to the reduction of capacity, which should
be in proportion to the amount of aid.

The United Kingdom Government, in its comments, argued that: (i) the third capital injection could
not be separated from the first two injections, as it was put in place soon after the first two, the three
together forming part of a single ongoing restructuring since Enichem could not survive without the
third injection. Moreover, the United Kingdom argued that (ii) even if the third injection were
regarded as a stand-alone, this would not satisfy the market economy investor test.

(35) According to the United Kingdom authorities, Enichem's financial situation at the time of the third
injection was not sound, as demonstrated by the fact that the only alternative to the injection was
the company's bankruptcy.
In addition, the injection was not linked solely to the firm's new
investment needs but was needed to meet the restructuring costs incurred by Enichem.

(36)

The United Kingdom Government therefore supported BP's view that the third injection should be
regarded as State aid — like the first two injections — and should be assessed under the relevant
guidelines.

IV. COMMENT FROM ITALY

(37)

The Italian Government, in its reply, argued that, as regards the third injection: (i) the funds provided
by ENI to Enichem should not be considered State resources as they were funds generated by the
company's activities and not granted by the State, (ii) the funds were granted in circumstances that
would have been acceptable to a private investor operating under normal market conditions, (iii) in
any event, should the funds be regarded as State aid, such aid would be compatible with the
common market under Article 87(3)(c).

(38) As far as point (i) is concerned, according to the Italian authorities the funds granted by ENI to
Enichem are not State resources. The authorities stated that ENI received the last capital contribution
increase has been granted to ENI by the State since then.
from the State in 1985. No capital

(39)

ENI granted the capital contribution to Enichem using the resources generated by its profitable
activities, e.g. oil production and distribution. The contested funds do not therefore constitute State
resources on that account under Article 87.

(40) As regards point (ii), the Italian authorities claimed that ENI, in granting the third injection, acted as a
normal private investor would have acted in similar circumstances. In fact, according to the Italian
authorities, the projected operation was designed to provide a sufficient return on the investment.
The Italian authorities also noted that the projections proved conservative, on analysing the results
actually obtained by Enichem in the period covered by the plan.

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(41) Moreover, the Italian authorities argued that ENI provided the funds to Enichem in order to
safeguard the value of its stake in its subsidiary and to maximise the value of the company prior to
the first step of its privatisation (which took place in November 1995).

(42) As regards (iii), the Italian authorities argued that, should the Commission regard these measures as
State aid, they should qualify for exemption under Article 87(3)(c) as they were aimed at restruc-
turing a firm in difficulty.

(43) According to the Italian authorities, the restructuring plan presented to the Commission fulfilled the
conditions required for the aid to be compatible with the common market. In particular, it was
evident that the plan guaranteed Enichem's return to profitability on the basis of conservative market
assumptions, that it was based on internal restructuring measures and that it was proportionate to
the aims pursued. The Italian authorities also noted that the financial and economic projections in
the plan were largely exceeded by the actual results, which proved much better than expected.

V. ASSESSMENT OF THE MEASURES AS STATE AID

(44)

In order to ascertain whether a State measure constitutes aid within the meaning of Article 87(1), the
Commission determines whether it:

— is granted by the State or through State resources,

— distorts or threatens to distort competition by favouring certain undertakings,

— affects trade between Member States.

Presence of public resources

(45)

The Commission considers that the argument of the Italian authorities that the funds granted to
Enichem were not State funds as they were provided by ENI from its own resources must be rejected.

(46)

The Commission notes that the capital contribution under examination was granted by ENI, an
undertaking which, at the time of the measure, was wholly owned by the Treasury. The Government
had appointed ENI's Board of Directors, which in turn appointed the management of Enichem.

(47) According to the case-law of the Court of Justice,

‘in order to determine whether aid may be
regarded as State aid within the meaning of Article 92(1) (now Article 87(1)) of the Treaty, no
distinction should be drawn between cases where aid is granted directly by the State and cases where
it is granted by public or private bodies established or appointed by the State’ (8).

(48)

Furthermore, a lower return on ENI's investments in Enichem would have meant a lower return on
the State's investment in ENI. As a result, even though the funds granted by ENI to Enichem did not
derive directly from the State budget, the public nature of the funds can be assumed as the State
would forego income or value if it accepted that one of its controlled undertakings, ENI, failed to
secure a proper return on its investment in a subsidiary, Enichem.

(49)

The Commission therefore considers that the funds referred to in this Decision constitute State aid
within the meaning of Article 87(1) of the Treaty.

Favouring certain undertakings

(50)

The Commission considers that any financial measure granted by the State to an undertaking which,
in various forms, reduces the charges normally borne by the undertaking, must be considered State
aid within the meaning of Article 87.

(8) Case C-305/89, [1991] ECR I-1603.

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(51)

In the case of capital contributions, the Commission must ascertain whether the State is providing
the funds in accordance with the behaviour of a private investor under market economy conditions.
If they were granted under conditions other than those under which a private investor operating in a
market economy would grant them, they would provide an economic advantage to the recipient. The
recipient may, in fact, use these resources to finance its expenditure and investments without the
need to get loans from financial institutions or to remunerate adequately the resources received.

(52)

Capital increases are normal events during the life of a company, as they can be used to finance the
growth and the investments of the company itself. Therefore, to assume that any capital increase in a
public undertaking involves State aid would put public undertakings in a less favourable competitive
position vis-à-vis private ones. This would be contrary to Article 295 of the Treaty.

(53) However, the principle of equal treatment for public and private undertakings might be infringed in
cases where public undertakings receive capital provisions on more favourable terms compared to
private ones. For this reason, the Commission has developed the principle of the private investor
operating in a market economy which allows it to determine whether the State provides financial
resources to undertakings under conditions which would not be acceptable to a private investor (9).
That assessment has to be made on the basis of the information available to the Commission at the
moment when the transaction takes place.

(54)

(55)

(56)

Before carrying out this assessment it must be stressed that in its judgment of 15 September 1998
the CFI concluded that ‘there were serious grounds for believing that the three injections in question
… had to be considered as, in reality, a series of related capital contributions, granted as part of a
continuing restructuring process begun in 1992’ (paragraph 179). Moreover the Commission was
unable to produce the calculations that it made with a view to concluding that the third capital
injection complied with the market economy investor principle (paragraphs 191 to 193). As a
consequence ‘the Commission was not in a position at the end of the initial examination … to
overcome all the difficulties raised by the question whether the third injection constituted’ State aid
(paragraph 197).

In the present case there is no doubt as to the aid nature of the first two injections, whose
compatibility with the common market was assessed in the decision of 27 July 1994. The return on
the investment for these two outlays was not sufficient to satisfy the market economy investor test.
However,
in the decision, the Commission held those measures to be aid compatible with the
common market in the light of the restructuring measures carried out in the period 1991 to 1993.
The Court did not annul this part of the decision and thus the Commission need not and must not
review that assessment.

In the particular circumstances of the present case the Commission, in line with what the Court has
said, may assume that the third injection was granted as part of a continuing restructuring process.
According to this line of reasoning the Commission has to appraise the third capital contribution in
the light of the same criteria applied to the assessment of the first two injections. This means that the
Commission must verify whether the restructuring measures, which were not taken into account in
the examination of the first two injections, are such that Article 87(3)(c) is applicable to the third
injection.

Effect on Community trade

(57)

There is considerable trade between Member States in chemical products. At the time of the third
injection, in 1994, Enichem was the largest Italian chemical producer. It ranked among the 10 major
European chemical producers and led the west European market in several chemical products. In
1992 its consolidated figures show that 43,1 % of total output, worth ITL 4 300 billion, was
exported to other European countries.

(9) Communication to the Member States on the application of Articles 92 and 93 of the EEC Treaty and of Article 5 of
Commission Directive 80/723/EEC to public undertakings in the manufacturing sector, OJ C 307, 13.11.1993.

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(58) Given the size of the company and the extent of the trade in chemical products between Member

States,

it can be concluded that the measure affects trade between Member States (10).

VI. COMPATIBILITY WITH THE COMMON MARKET

(59)

In order to assess the third capital contribution under Article 87(3)(c), as part of a general
restructuring programme aimed at restoring Enichem's viability, the Commission has to make
reference to the criteria on restructuring aid which were in force at the time of the notification of the
in 1994 (11). The criteria are those contained in the Community
third capital contribution,
guidelines on State aid for rescuing and restructuring firms in difficulty (12). According to the
guidelines, if the Commission is to approve measures to restructure a firm in difficulty, the following
conditions must be satisfied:

i.e.

(i) the measures must restore the long-term viability of the firm;

(ii) they must avoid undue distortion of competition;

(iii) they must be proportional to the costs and benefits of restructuring; they must be limited to the

strict minimum needed;

(iv) the restructuring plan should be fully implemented;

(v) the implementation of the restructuring plan should be monitored by the Commission.

(60) Only if all of these conditions are fulfilled can the Commission take the view that the aid is not
contrary to the Community interest and approve it under Article 87(3)(c). In particular, the United
Kingdom Government and BP, in their comments, argued that the assessment of condition (ii) should
be particularly stringent as regards the question of counterparts.

(61) As regards condition (i), the 1994 additional plan was clearly capable of restoring the long-term
economic and financial viability of Enichem within a reasonable time. The 1994 restructuring plan
was based on a thorough assessment of the position of Enichem on the market and in the ENI group
as well as a careful consideration of Enichem's strengths and weaknesses in different productive
sectors. As stated above, the improvement in viability was mainly to be the result of internal
restructuring measures, namely: drastic scaling down of Enichem production capacity (through plant
closures, disposal of controlled undertakings, concentration exclusively on profitable core activities),
strong reduction in variable and fixed costs (following drastic workforce cuts, reduction in the
number of production sites, simplification of the internal organisational structure, etc.) and re-
balancing the financial structure of the company. Moreover, as already noted in the opening
decision (13), the Commission has checked the estimates on which Enichem's 1994 restructuring
plan was based against the market development forecasts at the time and has concluded that they
were conservative, realistic, and reasonable. Assumptions concerning external factors influencing the
restructuring were generally acknowledged and within the average market expectations.

(10) See the Decision of 16 March 1994 initiating the procedure under former Article 93(2) (see footnote 2).
(11) See paragraph 100 of Community guidelines on State aid for rescuing and restructuring firms in difficulty, OJ C
288, 9.10.1999, p. 2.
the Commission
referred to restructuring guidelines in general, citing those published in 1997 (which do not change the policy set
out in the 1994 guidelines save for the agricultural sector) and those of 1999. However, according to paragraph 100
of the guidelines published in 1999, there is no doubt that the only relevant text in the present case is that for
1994.

the decision opening proceedings (see footnote 1),

In paragraph 15 of

(12) OJ C 368, 23.12.1994, p. 12.
(13) See footnote 1.

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(62)

The restructuring, based on particularly prudent assumptions, was aimed at restoring sound profit-
ability as from 1997, while maintaining a sound economic and financial situation from then
onwards. By 1997 Enichem was to have shown profits for the first time. The operating result was to
increase from ITL 500 billion at the end of 1993 to some 1 100 billion at the end of 1997. Fixed
costs were to decrease from ITL 3 229 billion at the end of 1993 to some ITL 1 845 billion at the
end of 1997. Operational cash flow and cash flow were to increase from minus ITL 836 billion and
minus ITL 1 636 billion respectively at the end of 1993 to ITL 780 billion and ITL 404 billion in
1997. The net financial debt and the debt/equity ratio were to fall from ITL 8 578 billion and 2,9 at
the end of 1993 to ITL 3 492 billion and 1,3 respectively in 1997. It is important to note that the
planned results were to be achieved as part of a reduction in Enichem's turnover. This confirms that
the restructuring was predominantly based on internal measures and did not provide Enichem with
artificial means for conducting an aggressive expansionist policy. Lastly, reasonably favourable
forecasting submitted to the Commission showed that Enichem would return to economic and
financial viability in the years following 1997.

(63) As stated above, the economic forecasts underlying the estimates were generally accepted and even
more conservative. This was confirmed by the fact that when the market conditions improved in
1995 the restructuring turned out to be more effective than expected, Enichem having achieved
better results than forecast by the plan. Although these elements were not known at the time of the
planned restructuring and should not be used to assess whether the plan would have been capable of
restoring the viability of Enichem, they nevertheless confirm that the plan was based on reasonable
market assumptions and that the restructuring was substantially and effectively carried out by
Enichem. On the other hand, in the light of the restructuring actions undertaken by Enichem and its
economic results following those actions, it could not be said that the restructuring of Enichem was
not intended to restore its long term economic and financial viability.

(64) Neither the United Kingdom Government nor BP, which presented observations in the course of
these proceedings, have substantially disputed that the restructuring process was designed to restore
Enichem's long-term financial and economic viability but have stressed that the process should be
linked to a reduction in capacity.

(65)

It can thus be concluded that the restructuring measures and the capital injections could reasonably
have been expected to restore Enichem's economic and financial viability and that this in fact
occurred. Accordingly, condition (i) of the Commission guidelines is fulfilled.

(66)

Condition (ii) requires the avoidance of undue distortion of competition. In principle, any aid granted
by a State to a firm causes undue distortion of free competition since it puts that firm in a more
favourable economic situation compared with its competitors. In this connection it is of particular
relevance if the granting of the aid is counterbalanced by reduction in capacity.

(67)

Both the United Kingdom Government and BP argue that, if the third capital injection constitutes
State aid, the capacity reductions on which the Commission based the decision of 27 July 1994
would no longer satisfy the (ii) test. As suggested by BP, as the third injection was almost twice as
large as the first two, the benefits of the restructuring should also be almost doubled. In fact, in the
decision of 27 July 1994 the Commission based its assessment on the hypothesis that only the first
two injections constituted aid and considered that the capacity reductions were proportionate to the
amount of aid contained in the injections. If the third injection was also deemed to be aid, the
closures indicated by Enichem in its restructuring plan would no longer be sufficient to satisfy the
test.

(68)

In the present case, as explained in the decision, the first two injections were to be used to remove
capacity and close down the plant identified in the original restructuring plan, as stated in the
decision and listed in Table 2 of this Decision.

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(69)

(70)

The Commission considered the capacity reduction resulting from the closures as in proportion to
the aid granted to Enichem in the form of two capital injections. The Commission considered that an
overall capacity reduction of some 1 152 kt/year, as indicated in Table 2, together with workforce
cuts totalling some 7 000 units (of which 2 100 directly related to planned plant closures) was
sufficient for the first two injections to fulfil test (ii) of the guidelines. It should also be noted that the
proportionality of the capacity reduction with the amount of the aid granted through the first two
injections was not contested by any of the parties concerned.

The Commission noted that the third capital injection was linked to comparable restructuring action
to be taken by Enichem in terms of capacity reduction and cost-cutting measures. This is evident if
one compares the capacity reduction and closures linked to the restructuring measures to be carried
out between 1991 and 1993 in connection with the first two capital injections (Table 2) with the
reduction in capacity and plant closures in the period 1994 to 1997 in connection with the third
capital injection (Table 3). Indeed in the first case, against an overall injection of ITL 1 794 billion,
Enichem was to reduce its capacity by some 1 152 kt/year. In the second case, against an injection
of ITL 3 000 billion (less than twice the amount of the first two injections), Enichem was to achieve
a capacity reduction which was likely to be more than twice the reduction planned for the first two
injections.

(71) As stated above, the 1994 to 1997 plan was aimed at divesting its PET and fine chemicals business,
some minor elastomer activities (mainly nitrile and polychloroprene), fibres (acrylic, polyester and
thermo-bonded) and detergents from the polyethylene downstream activities. Overall, the divest-
ments were to provide a reduction in Enichem capacity of at least 2 083 kt/year, that is to say,
slightly less than twice the reduction linked to the first two injections. However, this figure does not
include the plants to be closed for which the production capacity was not known to the Commission
(Table 3). If the closure of these plants is taken into account it is most likely that the total capacity
reduction would be considerably more than twice the one in the first plan.

(72)

The same applies to the measures to be taken to reduce fixed costs, especially labour costs. These
measures can also be regarded as proportionate to the amount of the new recapitalisation. The first
two injections were to be accompanied by a reduction in the Enichem workforce of about 7 000
units. The third injection was linked to a reduction of about 16 000 units, notwithstanding the fact
that the third injection was less than twice the total amount of the first two taken together.

(73)

Taking this into account the Commission concludes that the restructuring of Enichem did not
produce undue distortions of competition and therefore satisfies condition (ii) of the guidelines for
restructuring aid.

(74)

Condition (iii) requires that aid be in proportion to costs and benefits: if State aid is to be declared
compatible, it must be limited to the strict minimum needed to finance the return to viability and
must not be used to expand production, except to the extent necessary to restore the firm's
profitability.

(75) According to the restructuring plan submitted, the third capital increase was intended to improve the
financial situation of Enichem and to reduce its debt/equity ratio. If the amount of capital provided
was excessive, Enichem would have been in the position to finance aggressive commercial policies,
thanks to excess resources received from its shareholder. It is pointed out, however, that, according
to the plan, Enichem's financial debts would not be reduced to nil over the period covered by the
plan, which would have been excessive. Instead, the plan provided for Enichem's indebtedness to be
cut from ITL 8 600 billion in 1993 to ITL 3 500 billion at the end of 1997, with a debt/equity ratio
of 0,57.

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(76)

(77)

The debt reduction was to be achieved through the capital increase and also through the divestiture
revenues, already amounting to some ITL 2 500 billion at the end of 1995, and internally generated
cash flow. All these resources together were intended to bring Enichem's debt/equity ratio to 0,57,
which can be considered a normal and safe ratio for the sector in which the company operates. This
level cannot be regarded as too low, as it has left Enichem with an important amount of financial
charges to pay.

The Commission takes the view, therefore, that the aid granted did not bring Enichem any excess
liquidity which was unrelated to the process of restructuring and might have helped to finance
aggressive commercial or investment operations not necessary to the restructuring. On the contrary,
the plan provided for a reduction in turnover, production capacity, investment and R&D expendi-
ture. This conclusion is also implicit in BP's observation that all cash flow generated by Enichem over
the period 1994 to 1998 was to be used to reduce debt and not to finance other investments. From
this observation it is clear that, according to the economic analysis it carried out, BP must have been
aware that the capital injection could not have given Enichem the financial means to engage in
expansionist commercial policies.

(78) As regards BP's claim that, soon after the aid was approved, Enichem set up a joint venture with
Union Carbide, thus contravening the condition in paragraph (iii), the Commission notes that the
joint venture concerned the polymers business, which was precisely one of Enichem's core activities
identified in the restructuring plan. The joint venture should therefore be regarded as an intrinsic
part of the restructuring plan itself and not as a means of increasing capacity. As Enichem regards
polymers as core business, it selected an appropriate strategy to increase its efficiency by forming the
joint venture with a partner able to provide significant technological benefits, without thereby
increasing its overall capacity and yet consolidating its viability.

(79)

The setting-up of the joint venture is not therefore contrary to condition (iii).

(80)

Condition (iii) also requires the recipient to make a significant contribution to the financing of the
restructuring operation. As stated in Part II, the restructuring plan tied to the third injection involved
significant plant closures and divestments amounting to some ITL 2 500 billion in the period 1994
to 1995, i.e. over 80 % of the amount of the capital injection itself. Moreover, Enichem would also
have financed its restructuring from its operational cash flow which, as shown above, was expected
to be significant. In the light of the foregoing the Commission takes the view that Enichem's
restructuring plan included a significant contribution from the company to the costs of its own
restructuring,

in line with the relevant Community guidelines.

(81)

The Commission concludes that Enichem's restructuring plan included a contribution from the
company to the costs of its own restructuring, in accordance with condition (iii) of the Community
guidelines on restructuring aid.

(82) As far as conditions (iv) and (v) are concerned, they are not decisive in the present case since the
Commission analysis takes place at a time when the restructuring operations are already completed.
It is then sufficient for the Commission to check that the restructuring plan has been effectively
implemented. From the information at its disposal the Commission concludes that the 1994
restructuring plan was substantially implemented within the times specified, as Enichem's actual
results and its current economic situation show.

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(83)

The Commission therefore considers that, since all the conditions set out in the restructuring
guidelines are fulfilled, the State aid elements of the Enichem restructuring are compatible with the
common market pursuant to Article 87(3)(c).

(84)

The Commission, on the basis of the foregoing assessment, concludes that the capital of ITL 3 000
billion injected by ENI into Enichem is compatible with the common market under Article 87(3)(c),

VII. CONCLUSION

HAS ADOPTED THIS DECISION:

Article 1

The State aid contained in the capital of ITL 3 000 billion injected in 1994 by ENI into Enichem SpA is
compatible with the common market under Article 87(3)(c) of the Treaty.

This Decision is addressed to the Republic of Italy.

Article 2

Done at Brussels, 19 September 2001.

For the Commission

Mario MONTI

Member of the Commission