2003/45/EC: Commission Decision of 5 June 2002 on the measures to restructure and privatise Koninklijke Schelde Groep implemented by the Netherlands (Text with EEA relevance) (notified under document number C(2002) 2007)
Date: 2002-06-05
Institutions: European Commission
Subjects: Netherlands, aid for restructuring, aid to undertakings, economic concentration, industrial restructuring, merger control, privatisation

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II

(Acts whose publication is not obligatory)

COMMISSION

COMMISSION DECISION
of 5 June 2002
on the measures to restructure and privatise Koninklijke Schelde Groep implemented by the
Netherlands

(notified under document number C(2002) 2007)

(Only the Dutch version is authentic)

(Text with EEA relevance)

(2003/45/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Commu-
nity, 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) and having regard to
their comments,

Whereas:

1. PROCEDURE

(1)

(2)

In May and June 2000 the Commission received two
letters from third parties on alleged aid to Koninklijke
Schelde Groep BV (hereinafter KSG) in connection with
the sale of the company to Damen Shipyards Group
(hereinafter Damen).
It requested information on this
matter by letter dated 30 May 2000 (D/53220).

the EC Treaty applied to all

By letter of 6 July 2000 (registered under A/35591 on 7
July) the Dutch authorities informed the Commission of
the planned measures in favour of KSG. They stated that
Article 296 of
these
measures; however, if that proved not to be the case, the
letter should be considered as notification pursuant to
Article 88(3). The Minister
for Economic Affairs
provided further explanations on the ‘conditional notifi-
cation’
in a meeting with Mr Monti on 4 September
2000. The Commission requested information by letters

(1) OJ C 254, 13.9.2001, p. 6.

(3)

(4)

dated 8 September 2000 (D/54316) and 1 March 2001
(D/50927). By letter dated 12 March 2001 (registered
under A/32227 on 15 March), the Dutch authorities
asked for time in which to reply to the letter of 1 March
and this request was granted by letter dated 23 March
2001 (D/51254). They replied by letters dated 5 October
2000 (registered under A/38308 on 11 October) and 11
July 2001 (registered under A/35724 on 16 July).

As early as 1998 the Dutch Minister for Economic
Affairs informed Mr Van Miert of measures taken at that
time (letter of 4 December 1998,
registered on 8
December under C/06585). The Commission subse-
quently requested information by letters dated 7 January
1999 (D/50038) and 26 February 1999 (D/50890). The
Dutch authorities replied by letters dated 2 February
1999 (registered under A/30915 on 4 February) and 23
March 1999 (registered under A/32377 on 25 March).

requests

By decision of 25 July 2001 the Commission initiated
the Article 88(2) procedure in respect of these measures,
informing the Netherlands by letter dated 30 July 2001
(D/290603). Two further
from the Dutch
authorities for time in which to reply (letters dated 31
August and 27 September 2001, registered under A/
36875 on 31 August and A/37626 on 1 October
respectively) were granted by letters dated 11 September
2001 (D/53695) and 5 October 2001 (D/54096). The
Dutch authorities responded to the decision by letter
dated 15 October 2001 (registered under A/38035 that
same day).

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The decision was published in the Official Journal of the
European Communities (2).
Interested third parties were
invited to submit
their comments on the aid. The
Commission received four replies. The Dutch authorities
were asked to react by letter dated 25 October 2001 (D/
54431). The Commission raised further questions by
letters dated 6 November 2001 (D/54572), 24 January
2002 (D/50281) and 4 March 2002 (D/50919). After
requesting time in which to reply by letter dated 29
November 2001 (registered under A/39352 on 3
December), a request which was granted by letter dated
11 December 2001 (D/55144), the Dutch authorities
gave their reactions to the interested parties' comments
and answers to the aforementioned questions by letters
dated 14 December 2001 (registered on the same day
under A/39978), 7 February 2002 (registered on 13
February under A/31096) and 25 March 2002 (regis-
tered on 2 April under A/32413). Damen sent its own
comments, answers and further information by letters
dated 17 December 2001 (registered on the same day
under A/39992) and 17 April 2002 (registered on the
same day under A/32876). Meetings between representa-
tives of the Commission, Damen and the Dutch authori-
ties took place on 3 and 15 April 2002.

the questions

One of
raised by the Commission
concerned the price paid by Damen for KSG. The Dutch
authorities submitted a consultant's report on KSG's
the time of privatisation. The Commission
value at
instructed an independent expert to prepare a second
expert opinion on the methodology and financial details
of this report. The expert started working in January
2002 and submitted the final report in March of that
year.

2. DETAILED DESCRIPTION OF THE MEASURES

subsidiaries involved in these activities formed an inte-
gral part of the KSG holding company, while others
were only partly owned by KSG. The company's struc-
ture was frequently changed. An overview of the legal
entities and the corresponding activities in 1999 is set
out below.

Schelde Maritiem BV (marine division):

— Schelde Scheepsnieuwbouw: naval and commer-

cial shipbuilding

— Scheldepoort: ship repairs

— Schelde Offshore: offshore activities

Schelde
products division):

Industriële Productiebedrijven BV (industrial

— Schelde Machinefabriek BV: machine working of
intermediate and finished parts, assembly of
machines and machine structures, trade in spare
parts for marine engines (later Schelde Marine
Services BV)

— Schelde Gears: gear transmissions for ships and

industrial applications

— Schelde Technology Services BV: consultancy
and technical services in the field of material and
welding technology

— Schelde Exotech: specialist equipment and high-
grade repair work for the processing industry
and power stations (among others)

— Rederij ‘De Schelde BV’: management of vessels

built by KSG

— Schelde Onroerend goed BV: ownership and

management of real estate

2.1. Koninklijke Schelde Groep

KSG Deelnemingen BV (shareholdings):

(5)

(6)

(7)

(hereinafter KMS).

KSG was founded in 1875 as Koninklijke Maatschappij
‘De Schelde’
Its main shipbuilding
location has always been Flushing in the province of
Zeeland. Following several mergers in the 1960s and
early 1970s, KMS became part of Rijn-Schelde-Verolme
Scheepswerven en Machinefabrieken N.V. When this
company went bankrupt in 1983, central government
and the province of Zeeland acquired 90 % and 10 %
respectively of KMS shares. In 1992 KMS was renamed
KSG (3).

(8)

Ever since it was founded, KMS, and later KSG, has
supplied vessels for the Dutch Navy, but it has also built
commercial vessels. Over the last 40 years or so it has
developed various other industrial activities. Some of the

(2) See footnote 1.
(3) http://www.schelde.com.

— Fabricom Installation Technology (45 %): indus-

trial construction

— Schelde

Industrial Engineers & Contractors
(100 %): boiler construction, energy-conversion
systems, thermal waste-processing installations

— Schelde Heron (60 %):

turbines for combined

heat and power generation

— Polymarin BV (100 %): high-grade,

fibre-rein-
forced composite structures for aerospace, ship-
building, etc.; mouldings in thermoplastic and
thermosetting resins

— KNM Steel Construction SDN BHD (36 %):
combined heat and power installations, waste
incinerators and industrial construction in South-
East Asia

— (until 1998) Schelde Apparaten- en Ketelfabriek

(AKF): machine engineering

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(9)

turnover

in 1999 amounted to EUR 226,7
Total
million, 64 % of which concerned shipbuilding and ship
repairs. The Royal Dutch Navy is KSG's main customer.
Construction of its most important order, four frigates,
started in 1998 (negotiations started as early as 1992).
In April 2000 the first frigate was launched; the last one
is to be delivered in 2004. Their total value is roughly
EUR 1,5 billion; KSG's share of the contract is worth
about EUR 540 million. Many of the parts are supplied
direct to the navy but are then fitted into the vessels by
KSG. On account of the workload represented by these
frigates, commercial shipbuilding declined to zero in
2000/2001.
In the past, however, KSG built various
commercial vessels which were caught by Council Regu-
lation (EC) No 1540/98 of 29 June 1998 establishing
new rules on aid to shipbuilding (4) (hereinafter the Ship-
building Regulation).

2.2. Damen Shipyards Group

(10) Damen was founded by two brothers in Hardinxveld-
Giessendam in 1927. In 1970 the company was split
and the site in Beneden-Hardinxveld was taken over by
the son of one of the two brothers. The main customers
at that time were large dredging companies. By the early
1980s Damen had developed into a specialist in tugs
and small utility vessels.
In subsequent years several
other companies merged with the group, including two
large ship-repair yards and a yard specialising in large
luxury yachts. Control of Damen is still in the hands of
Mr Damen, who owns the company together with his
children. The consolidated turnover of Damen, including
KSG, currently amounts to about EUR 680 million; the
group had about 7 000 employees in 2000 (5).

2.3. Measures taken by the Netherlands

(11) During 1998 KSG got into serious financial difficulties,
particularly as a result of its non-shipbuilding activities.
In order to avoid immediate bankruptcy and to tide KSG
over until privatisation, the Dutch authorities provided
in January 1999 a convertible subordinated loan of
NLG 35 million (EUR 15,9 million) (6) and an additional
advance payment of NLG 15 million (EUR 6,8 million)
for the frigates. It was also agreed that, subject to further
conditions, the Dutch navy would buy from KSG an
additional amphibious transport ship that was to be
completed in 2007 (7). The measures were conditional
on a sound business plan and cooperation in finding a
private party for KSG's privatisation.

(4) OJ L 202, 18.7.1998, p. 1.
(5) http://www.damen.nl.
(6) The loan was provided by Nederlandse Investeringsbank and was
financed in part by the Ministry of Economic Affairs (NLG 25
million (EUR 11,3 million)) and the Ministry of Defence (NLG 10
million (EUR 4,5 million)).

(7) Delay has occurred owing to the uncertainty surrounding the navy's
equipment policy. In the summer of 1998 the new government
decided on a substantial cut in the defence budget. It was decided to
prepare a Cabinet paper setting out a framework within which this
cut could be achieved. The paper was finalised in January 1999 and
forms the basis of the navy's equipment policy until 2010.

(12)

(13)

(14)

The loan and advance payment were provided to KSG
Maritiem en Industriële Bedrijven, within which one -
month deposits plus 175 base points; KSG paid a provi-
sion of NLG 175 000 (EUR 79 000). The loan was to
be repaid by 1 October 1999, or earlier in the event of
the Dutch authorities taking a final decision on a capital
injection. As privatisation negotiations took longer than
expected, repayment was postponed.

The additional advance payment concerned profits that
otherwise would have been paid in two equal amounts
in 2002 and 2003. Accordingly, the interest subsidy for
the advance payment amounts to EUR 1,41 million
(discounted to end-2000 value).

The Dutch authorities held talks with several candidates
with a view to privatising KSG. In the end, Damen was
the only company that wanted to buy KSG. Negotiations
continued during 1999. In February 2000 the Dutch
State and Damen reached agreement on the basic princi-
ples of the takeover. After a due-diligence investigation,
negotiations were concluded on 14 July 2000.

(15)

The privatisation consisted of the following measures:

The Dutch authorities provided a new convertible subor-
dinated loan of NLG 70 million (EUR 31,8 million) (8)
to KSG.

The Ministry of Defence agreed to provide an interest-
free loan of NLG 45 million (EUR 20,4 million) for the
relocation of the military activities from the current loca-
tion in the centre of Flushing to KSGs site some 10 km
further east, which was deemed necessary in view of the
limited size of the sluices providing access to the current
site. The loan is conditional on the construction of the
new location, which is to be completed in five years at a
total cost of NLG 125 million (EUR 56,7 million). If
after five years the cost turns out to be lower, Damen
will pay back the corresponding part of the loan in the
sixth year. The remainder is to be paid back in 10
annual instalments. The loan will be paid out in 2002
and 2003. The current estimated cost of the relocation
remains limited to EUR 45,4 million (9), and so the
interest subsidy amounts to EUR 6,0 million (discounted
to end-2000 value).

(16) Apart

from the amphibious

ship already
announced in 1998, the government has indicated that
it plans to buy some additional naval vessels from KSG.

transport

(8) This is the net value of the loan. The gross value was EUR 38,2
million, which was partially offset by a related corporate tax claim
of EUR 6,4 million.

(9) An independent expert has confirmed that the figure of NLG 100

million is the most realistic.

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(17) Having taken these measures, the Dutch authorities on
29 September 2000 transferred the new loan, the 1998
subordinated loan and the shares in KSG to Damen for
the symbolic price of NLG 4. Damen has undertaken to
complete the four
in accordance with the
existing contracts.

frigates

3. GROUNDS FOR INITIATING THE ARTICLE 88(2)

PROCEDURE

(18) When the Commission initiated the Article 88(2) proce-
dure,
it explained that the measures concerned KSG's
military and commercial activities alike but that, on the
basis of the information available, it was unable to deter-
mine whether the measures were caught by Article 296
of the Treaty. In addition, it could not rule out the possi-
bility that state aid was involved and it had doubts as to
whether the measures complied with the rules laid down
in the Community guidelines on State aid for rescuing
and restructuring firms in difficulty (10) (hereinafter the
rescue and restructuring aid guidelines) and with the
Shipbuilding Regulation. These doubts concerned in
particular the relationship between the measures and the
restructuring plan, the abandonment of structurally loss-
making activities,
the restructuring on
competitors and whether the aid was limited to the
minimum.

the effects of

(19)

In addition, the Commission could not be sure that
Damen had paid a market price for KSG, in particular
for tender
because there had not been an open call
placing all
footing and
competitors on an equal
providing them with the same information and access to
a transparent procedure at the same moment in time.

this does not fall entirely within the scope of Article 296
of the Treaty as it clearly involves commercial ship-
building.

(22)

The United Kingdom has little confidence in the claim
that all interested companies were aware of the efforts of
the Dutch authorities to find a candidate with a view to
selling the KSG shares, as they would have expected
United Kingdom companies to show interest.

4.2. Comments by Spain

(23)

Spain takes the view that the measures fall completely
outside the scope of the Treaty because (i) KSG's main
customer is the Dutch navy, (ii) most of its activities
concern defence, (iii) the four frigates will form the back-
bone of the Dutch navy and (iv) the only requirement of
privatisation was that military capacity should be safe-
guarded. Moreover,
in the event of doubts as to the
applicability of Article 296 of the Treaty, the Commis-
sion should, pursuant to Article 298, have examined,
together with the Netherlands, whether the aid affected
the production of or trade in products not intended for
specific military uses and how the aid measures could be
adjusted to comply with the rules laid down in the
Treaty. In any case, the Article 88(2) procedure should
have been restricted to KSG's commercial production,
i.e. products not intended for specific military purposes.

(24)

Lastly, Spain questions whether Regulation (EC) No
1540/98 applies, given that the measures concern the
period 1998-2000 and that no new contracts
for
commercial vessels were won by KSG during this period.

4. COMMENTS FROM INTERESTED PARTIES

4.3. Comments by a competing ship-repair yard

(20)

Following the publication of the decision to initiate the
procedure (11), the Commission received comments from
the United Kingdom and Spain, a competing ship-repair
yard and the recipient. The recipient's comments largely
coincide with those of the Netherlands. Both sets of
comments are summarised in Section 5.

(25) A competing ship-repair yard takes the view that the
measures distort competition and allow KSG to compete
in the ship-repair market on unfair terms and on the
basis of unrealistically low prices. Any aid would directly
harm this competitor's competitive position.

4.1. Comments by the United Kingdom authorities

(21)

The United Kingdom shares the Commission's concerns
and notes that both KSG and Damen are direct competi-
tors of United Kingdom shipyards. It seems clear that
the aid involves support for commercial shipbuilding.
Mega yachts are a growing market for several United
Kingdom shipyards and any aid given to competitor
yards in the Netherlands is likely to distort competition.
In the case of a mixed yard being bought by a commer-
cial shipbuilder, the United Kingdom takes the view that

(26)

(27)

(10) OJ C 288, 9.10.1999, p. 2.
(11) See footnote 1.

5. COMMENTS FROM THE NETHERLANDS AND FROM

DAMEN

The comments from Damen and the Netherlands coin-
cide as regards the main conclusions and reinforce each
other as regards the details. They are therefore presented
together.

The Netherlands makes the general comment that
it
informed the Commission of the measures in 1998 and
2000. It regrets that the Commission did not express its
doubts at an earlier stage.

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5.1. On the application of Article 296 of the Treaty

(35)

The relocation to Flushing East and access to a covered
dock of an appropriate size are essential for naval ship-
building. The interest-free loan must be considered
within the context of defence and security policy.

(28)

The Netherlands takes the view that Article 296 of the
Treaty applies in view of the short-term importance of
having the four frigates delivered on time and of the
military and strategic importance of safeguarding naval
shipbuilding in the Netherlands over the medium and
long term. Maintaining a sufficient contribution from
the Dutch defence industry should be seen in the context
of other aspects of security policy.

(29) Dutch security policy is described in the Hoofdlijnennotitie
of
January 1999 and the Defensienota of November
2000 (12). It is deemed essential to maintain a specific
industrial capacity for fundamental military technology
in the field of naval vessels with a view to protecting
essential interests of national security. This is the case
for most NATO members. Taking account of the provi-
sions of Article 296 of the Treaty, military equipment is
normally procured from Dutch suppliers. Several further
arguments were put forward, including the following.

The Dutch navy must be operationally independent, e.g.
for military and other assistance in the Netherlands or in
its overseas territories. The capacity for and intensity of
cooperation with other NATO members and EU Member
States is another important aspect.

5.2. The State acted as a private company would

have done

(36)

The Dutch authorities agree that private companies are
not responsible for defence and security policy. Never-
theless,
they took the same actions that a private
company would have taken.

(37) As a shareholder, the State had no influence on KSG
until 1998. KSG was a company under the structuur-
regime (structural scheme). Under Dutch law this means
that the board of directors is subject to the supervision
of the Board of Commissioners. The latter consisted of
five persons, two of whom were appointed by the State.
However,
the law requires the commissioners to act
solely in the interests of the company, without instruc-
tions or consultation. Only in 1998, when the financial
situation deteriorated, could the State set conditions
before providing new capital.

The four LCF frigates form the backbone of the navy
and are deemed essential
its
duties. If they are not delivered on time, the navy will
not be able to provide an adequate command platform
and sufficient air defence capacity for its task groups.

for the performance of

(38)

international

Intensive
cooperation takes place on
sensor, weapon and command systems. If delivery of the
LCFs is delayed and/or disrupted, this cooperation would
be jeopardised. In that case the assumptions on which
defence and security policy is based would be directly
compromised.

its non-core business,

The State did set such conditions. First, KSG had to shed
retaining only naval and
all
commercial shipbuilding. Second,
it had to cooperate
with the State to find a strategic partner for the takeover.
Third, it had to cooperate with a potential candidate on
a common business plan. The measures decided on in
December 1998 constituted an interim solution, also
with a view to the awaited Cabinet paper on defence
policy. Suspension of payments was unacceptable in
view of the risks associated with completion of the LCFs
and uncertainty surrounding naval shipbuilding in the
Netherlands.

(33) Apart from the LCFs, the navy also needs a second
landing platform dock (hereinafter LPD). Like the first
LPD, the intention is that the second should be built by
KSG. It is increasingly important to have direct access to
transport capacity, as illustrated by recent crises in, for
example,
the former Yugoslavia and Ethiopia/Eritrea.
The Helsinki European Council of December 1999
underlined the need for transport capacity and laid down
specific objectives. The second LPD is very important if
these objectives are to be achieved.

(34)

Intensive technical cooperation takes place between the
navy and KSG. Continuity is essential to this coopera-
tion.

(12) Defensienota 2000, Lower House of the Dutch Parliament, 1999-

2000, 26900, Nos 1-2.

(39)

In addition, finishing the LCFs in a bankruptcy situation
would have involved much higher costs, even on the
basis of ‘business-like’ costs only (13). These were esti-
mated at a minimum of EUR 123 million, while guaran-
tees to suppliers were estimated at a further EUR 131
million. As the financial problems were concentrated in
the area of non-shipbuilding activities, the Netherlands
the possibility of splitting the company.
looked at
However, that would have infringed the legal rights of
creditors. As such, any buyer of KSG would have to take
over the whole company.

(13) These additional costs are caused by (i) creditors who are prepared
to deliver basic products for the frigates only on condition that the
government also pays the debts on other contracts; (ii) increased
personnel costs to prevent employees from leaving; (iii) additional
costs after delivery of the frigates; (iv) a bankruptcy scenario, which
would entail at least one year's delay, resulting in additional costs
in related supply contracts for the frigates and higher maintenance
costs for the old frigates.

(30)

(31)

(32)

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(40) At

the start of

the 1990s the Netherlands started
proceedings with a view to selling its shares in KSG.
With the help of an investment bank, several candidates
were approached. In the second half of the 1990s the
State made renewed efforts. Efforts to find a buyer for
In addition,
KSG were widely reported in the press.
companies in this particular market are well aware of
what is going on in Europe. One of the candidates was a
German industrial group. The State did not rule out any
company in advance. However, in the end only Damen
remained. The only condition for privatisation was that
military interests had to be safeguarded; no other non-
commercial conditions were imposed.

(41)

Lastly, the relationship between the Dutch navy and
KSG has always been businesslike. The fact that the State
was a shareholder was of no relevance when orders were
placed with KSG.
In 1992, when the process was
launched to place the LCF order with KSG, it could not
have been foreseen that the company would run into
difficulties eight years later.

5.3. No undue distortion of competition

(42)

The Dutch authorities do not accept that the rescue and
restructuring aid guidelines are applicable, but confirm
that they acted in the spirit of those guidelines. An initial
indication of this is the fact that the measures taken in
1998 were strictly necessary for KSG's continued exis-
tence and included a subordinated loan at a market rate.

(43) According to the Dutch authorities, undue distortion of
competition was
avoided by terminating activities
between 1998 and 2000. Staff cuts concerned around
500 jobs, i.e. 30 % of the total workforce. Damen's busi-
ness plan provides for further concentration on core
business: naval shipbuilding, mega yachts, ship repairs
and the associated engineering works. The outlook for
these activities is favourable.

(44) Aid would be limited to the minimum and the causes of
the losses have been dealt with. KSG's restructuring
entailed high costs, mainly in connection with the
closure of the boiler construction plant, reorganisations
and the finalisation of a foreign defence contract. Lack
of experience with large projects abroad gave rise to
enormous losses and high risks. The losses in commer-
cial shipbuilding are a result of the strategy followed
since the mid-1990s of building new types of ship with
which KSG had insufficient experience. KSG recorded
significant losses in the gas turbines sector as well. All
these activities have been closed down and/or sold or, as
regards production of gas turbines, are to be closed
down/sold in the short term. Ship-repair activities will
be brought in line with the Damen group's other activ-
ities. Naval shipbuilding will be continued and yacht
construction has been started. From this the Netherlands
concludes that the business plan will enable KSG's viabi-
lity to be restored without spillover effects and at a
minimum cost to the State.

(45)

the State's contribution
The Netherlands states that
corresponds to the negative value of KSG at the time of
privatisation. This contribution has enabled Damen to
restore KSG's viability without spillover effects. The State
has not provided funds in excess of what was strictly
necessary for privatisation. According to Damen the
agreement reached between it and the Dutch Govern-
ment was essentially that Damen would ensure the long-
term profitability of KSG's shipbuilding and ship-repair
activities (in synergy with its own activities in these
sectors), while the Dutch Government would bear the
financial costs of closing down KSG's unprofitable non-
shipbuilding activities. Damen explained that KSG had
used the 1998 loan in full prior to privatisation and that
it used the new loan purely to settle KSG's outstanding
debts. It subsequently emerged that the capital injection
was insufficient to cover all the debts for which Damen
had assumed liability.

5.4. Damen's restructuring plan for KSG

(46) Damen referred to the business plan which it had drawn
up for KSG and which had been submitted at an earlier
stage, and commented on the ongoing implementation
of the restructuring plan. The details are provided in the
next section.

(47)

(48)

5.5. Market price

The Netherlands and Damen submitted a consultant's
report containing an assessment of KSG's value at the
time when the shares were sold to Damen. This report
concludes that the value of the KSG shares at the time
was negative to the tune of between EUR […] (*) million
and EUR […] million. While core activities showed a
slightly positive result, the negative value resulted, inter
alia, from high financial claims and risks, low capacity
utilisation and uncertainty surrounding future orders for
operational activities. Accordingly, the report concluded
that the sale would not entail any advantage for the
buyer, Damen.

5.6. Observations on third-party comments

In general, the Netherlands refers to the comments by
Damen. Damen welcomes and endorses the comments
made by Spain; the Netherlands refers to its previous
positions. Damen confirms the remark by the United
Kingdom to the effect that the market for mega yachts is
surprised by the United Kingdom's
growing.
comment
interested
parties were aware of the Dutch Government's plan to
privatise KSG. Not only was this widely reported at the
time in both the national and international press, but
other non-Dutch shipbuilders showed they were aware
of it by requesting from the Dutch authorities further

it does not believe that all

It
is
that

(*) Business secret.

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the possibility of acquiring KSG.
information about
Damen asked an independent British yacht dealer for his
comments. The dealer mentioned five United Kingdom
shipyards which had recently expressed an interest in
building large motor yachts or sailing yachts, three of
which were basically sailing yacht builders as opposed to
motor yacht builders. He
identify any
company in the United Kingdom at the time that could
be compared or could compete with Dutch yacht
builders such as Amels.

could not

(52) An important feature of the business plan is the reloca-
tion of the military activities from the centre of Flushing
to Flushing East, some eight kilometres away. Relocation
is necessary because of the small size of the sluice, which
limits the maximum size of naval vessels that can be
built there. Production facilities will be constructed on
two existing docks in Flushing East and the welding
shop, the blocks factory and section building will be
relocated.

(49) With regard to the comments by the competing ship-
repair yard, the Netherlands and Damen note that KSG's
ship-repair activities are subsidiary to its (naval) ship-
building activities. None of the aid has benefited KSG's
ship-repair activities or has been used for that purpose.

(53)

for

the

restructuring measures

Specific
ongoing
construction of four frigates were not deemed necessary.
Damen found in its due-diligence investigation that work
on the frigates was on schedule. Although some risks
were identified, there was no reason to expect them to
jeopardise the company's expected profits on the order.
Negotiations are currently under way with the Dutch
navy on two hydrographic registration vessels, an
amphibious transport vessel and unmanned mineswee-
pers. Apart from the relocation, no further restructuring
measures are necessary for naval activities.

6. THE RESTRUCTURING PLAN

(50) During negotiations with the Netherlands, Damen
carried out a due-diligence investigation and devised a
restructuring plan. The main components of the restruc-
turing plan are (i) concentrating on core business and
developing the construction of mega yachts, (ii) termi-
nating or selling off most of KSG's non-core business,
(iii)
shipbuilding activities on the
segments for which KSG is best equipped, and (iv)
streamlining the management structure and simplifying
the legal structure. As indicated above, the closure of
loss-making non-core business was imposed as a condi-
tion for the 1998 measures. Consequently, restructuring
started even before the privatisation agreement had been
finalised.

focusing future

6.1. Concentrating on core business and developing

the construction of mega yachts

(54)

KSG's plans to start yacht construction form an impor-
tant part of the restructuring plan. Damen is already
engaged in building mega yachts with Amels
in
Makkum, and one of the […] motivations for the take-
over of KSG was the need to acquire additional capacity
for yacht construction with a view to meeting demand.
The restructuring plan assumes that at least one yacht
with a value of between EUR […] million and EUR […]
million will be built each year. Current orders total
EUR […] million for 2003, rising to EUR […] million
for 2006. KSG's facilities could be adapted relatively
easily for yacht construction. The relocation of some
activities to Flushing East has permitted the refurbish-
ment of a former dock that was filled with sand. The
construction of private yachts does not fall within the
scope of the Shipbuilding Regulation, which applies to
commercial vessels only (14).

(51) Naval shipbuilding will remain KSG's core activity. Being
the Dutch navy's preferred supplier is, of course, a major
asset and the outlook for future orders is relatively
healthy. In addition, shipbuilding is expected to benefit
from Damen's sales organisation and from the way in
which the company wins orders and follows through the
building process. The product range will be geared
towards patrol tasks. Military vessels will be smaller and
less complicated than was the case in the 1970s and
1980s. With a view to achieving full capacity utilisation,
particularly after the frigates are completed in 2003/
2004, marketing efforts will focus on emerging econo-
mies such as India and Malaysia. Shipbuilding may
increasingly be located in those countries.

(55) According to Damen, the market for mega yachts (i.e.
custom-designed motor yachts with a steel hull and an
aluminium structure of more than 40 metres in length)
is global and booming. More than 80 such yachts were
being built around the world in 2000, compared with
25 in 1995. Damen's main competitors are Feadship
(the Netherlands), Lürssen (Germany) and Benetti (Italy).
This is an extremely specialised market comparable to
the market for racing cars. The customer selects the yard
on the basis of specific design requirements and tech-
nical expertise rather than price. According to Damen,

(14) Article 1 of Council Regulation (EC) No 1540/98 of 29 June 1998.

21.1.2003

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Official Journal of the European Communities

L 14/63

there is no question of any surplus capacity: Amels'
current order-book is the best in the company's history.
Its competitors' order books are believed to be similar or
even healthier in terms of total length being built. Apart
from these four yards, there is a large number of smaller
mega yacht builders with a production capacity of
around one yacht every two years.

6.2. Closing down or selling off most of KSG's non-

core business

(56)

(57)

The restructuring plan provides for the continuation of
three activities which are related to shipbuilding but do
not constitute shipbuilding itself: process technology
(Exotech), the engineering works and trade in machine
spare parts. […].

By far the most significant losses occurred in non-ship-
building activities, notably boiler construction and, to a
lesser extent, gas turbines. The main reasons for these
losses were a lack of experience when entering new
markets,
insufficient hedging against technical risks in
large individual projects and insufficient size to benefit
scale and to gain experience.
from economies of
Another major
concerned the
construction of a […] for […].

loss-making project

(58) Almost all these activities have now been terminated or
sold off and the main outstanding claims have been
settled. SIEC (boiler construction) went bankrupt
in
1999, NEM-Schelde (industrial engineering) and Schelde-
Heron (gas turbines) were wound up in 2000/2001.
Other non-core activities have been hived off: activities
in process management and technology (Franken &
Goes) and equipment technology (Fabricom Installatie-
techniek) were sold in 1999. Activities in steel construc-
tion (KNM Steel Construction) and, after restructuring,
plastic products (Polymarin) were sold off in 2000. A
start was recently made on winding up […].

European shipbuilding industry operates at present is
one of them. In addition, as a result of the limited orders
from the Dutch navy and the relatively small size of the
yard, KSG is
faced with a structural difficulty in
achieving full capacity utilisation by booking appropriate
orders that can be fitted in between military orders. To
cover at least the fixed costs, any owner will be tempted
to accept low profit margins or even small
losses on
‘topping-up orders’. The problem is exacerbated by the
fact that KSG's workforce is generally highly skilled and
specialises in naval shipbuilding. That means that they
may either lack experience or simply be overqualified
for work on other types of ship. As a result, KSG's
management has accepted orders with expected low
profit margins and high risks. In addition, KSG has had
to cope with difficult market conditions for carriers as a
result of the strength of the United States dollar.

restructuring plan provides

(61) Damen's approach is to focus on building ships for
which KSG is best suited, which correspond to the skills
of KSG's workforce and for which there is no surplus
for
capacity. The
the
complete
construction
because Damen is convinced that, in the current circum-
stances, KSG will never be able to make a profit on these
Instead, KSG will concentrate on building
activities.
naval vessels for third countries and special, highly
specialised utility vessels, such as buoy handling and
maintenance vessels and R&D ships (15).

termination of

cargo vessel

(62) Damen already has a strong market position in the
special utility vessels segment. In addition, its sales orga-
nisation is particularly large by shipbuilding standards. It
is difficult to predict how the market for special utility
vessels will evolve. These vessels are not used intensively
and, as such, their lifetime is quite long.

(59)

in view of

There has been no need to restructure Exotech or
in ship diesel engine spare parts.
trading activities
However,
the persistently bleak market
outlook, the engineering works was restructured. It was
halved in size in 1999. A reasonable degree of capacity
utilisation is expected for 2001, and the works should
break even. […].

(63)

6.3. Refocusing future shipbuilding activities

(60)

Compared with non-shipbuilding activities,
losses in
commercial shipbuilding have remained relatively small.
Although it is possible to attribute losses on individual
orders to specific causes, more general factors are at
in which the
play. Of course,

the difficult market

Losses in the ship repairs segment resulted from difficult
market conditions and a number of ill-judged projects
(two in 1999). Again, the problems are due partly to
large conversion projects […]. Damen intends to put a
stop to projects of this kind and in 2000 the organisa-
tion was thoroughly restructured. Damen expects Schel-
depoort to benefit from the synergy with its ship-repair
activities, in particular for ‘distant’ markets, and possibly
to take over its ship-repair activities for which it is best
equipped. Damen does not expect market conditions for
ship repairs to improve in the near future, but Schelde-
poort has a strategic location on the busy River Schelde
and may benefit from the increasingly strict safety stan-
dards for ships. Damen therefore expects that KSG's
ship-repair activities can be maintained more or less at
the current level, which is significantly below that at the
end of the 1990s.

(15) Yacht construction will not be able to absorb capacity available
is a separate business requiring

elsewhere in KSG because it
different skills and facilities.

L 14/64

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Official Journal of the European Communities

21.1.2003

(64)

The following table summarises developments:

Employment

31.12.1998

25.2.2000

29.9.2000

Future

755

—

155

39

132

109

0

134

77

6

638

—

154

46

108

96

0

91

73

5

590

—

145

51

84

0

0

86

0

5

-

+

=/-

[...]

[...]

0

0

[...]

0

0

New shipbuilding

Yachts

Ship repair

Gear wheel transmission

Engineering works/naval
services

Boiler construction

Industrial construction

Process management and tech-
nology

Synthetic products

Gas turbines

(0:
+:
-:
=:

(no activities),
(increase),
(decrease),
(stable)).

(EUR million)

Turnover
September
2000

Turnover
1998

171,1

123

25,4

10,4

14,5

35,4

22,7

15,0

7,7

17,2

14,5

13,2

0

0

8,2

0

6.4. Simplifying the legal structure, reducing overheads and new ICT infrastructure

(65)

(66)

Immediately after the takeover, Damen simplified the company's legal and management structure
and reduced KSG's overheads. The relocation will result in further savings in management costs.

Lastly, the ICT infrastructure is too extensive and cumbersome for KSG's activities. Investments in
new ICT infrastructure are planned.

6.5. Restructuring costs, financing and planned financial situation

(67)

The following restructuring costs have been identified.

(68)

(69)

Privatisation negotiations started in 1999. At the same time, KSG started restructuring but also
incurred further losses. Those losses can be regarded as restructuring costs given that they were
unavoidable and necessary to restore profitability. The 1999 loss was huge: NLG 137 million
EUR 62,2 million), of which NLG 43 million (EUR 19,5 million) was due to operational losses,
interest and taxation. The remaining losses, NLG 94 million, represent one-off costs relating to the
winding-up of SIEC and NEM, reorganisations and the write-down of shareholdings. Only a small
amount, NLG 15 million (EUR 6,8 million), was incurred in 1999, the remainder being set aside as
provisions for later years. Since Damen has provided figures on restructuring costs for later years,
the relevant figure for 1999 is the sum of NLG 43 million and NLG 15 million, i.e. NLG 58
million (EUR 26,3 million). Discounted to end-2000, this amounts to EUR 27,8 million.

From the point at which it was privatised until December 2001, Damen incurred costs for closing
down loss-making activities totalling EUR 71,7 million (see following table). Further costs are likely
to be incurred for some items; however, the Commission takes the view that they cannot be consid-
ered as relating directly to the restructuring plan but should be treated as normal business costs. The
same applies to the minor costs relating to the construction of the frigates and to the unspecified
provision that must be created to cover claims by former employees who have come into contact
with asbestos.

21.1.2003

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Official Journal of the European Communities

L 14/65

Restructuring measure

Realised costs until December 2001

(EUR million)

SIEC (boiler construction):

— bank loans and guarantees

— various projects

— payment to receiver

— claims for damages

SIEC total

NEM (industrial engineering)

Heron (gas turbines)

Schelde gears (16)

[…] project (17)

Reorganisation costs (including redundancy costs,
accountancy costs and legal costs) (18)

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

Total

71,7

(16) Costs up to April 2002.
(17) Costs up to April 2002.
(18) Estimate: up to April 2002 EUR […] million had been spent.

(70)

(71)

(72)

In 2000 the total cost of relocating naval shipbuilding to Flushing East was estimated at about
EUR 56,7 million, but the current estimate is EUR 45,4 million. Discounted to end-2000, this
amounts to EUR 38,8 million (19).

Investments in mega yacht construction amounted to EUR 5,4 million. The expected investment in
ICT infrastructure amounts to EUR 2,3 million. Discounted to end-2000, this amounts to EUR 2,1
million.

The restructuring has been financed by aid measures, the proceeds of divestments, the proceeds of
the sale of surplus land in the centre of Flushing and additional own resources from KSG and banks.
A complete financial overview is provided in the following table:

Restructuring costs

Financing

1999 losses

2000-01 closure of non-core business
and claims

27,8

71,7

1998 Subordinated loans

1998 Additional advance payment

Relocation

38,8

2000 Subordinated loan

Investments in yacht construction

5,4

Interest-free loan

ICT infrastructure

2,1

Divestments

Total aid:

Land sales (20)

Other contributions from KSG/Damen
(including increase in bank financing)

Investor contribution

Total

145,8

(20) Estimated value in 1999/2000.

(EUR million)

15,9

1,4

31,8

6,0

55,1

22,1

19,3

43,5

90,7

145,8

(19) This is based on the assumption that costs are evenly spread over the 2002-2007 period. Neither Damen nor the

Netherlands has provided a detailed schedule.

L 14/66

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Official Journal of the European Communities

21.1.2003

(73)

The financial figures in the plan concern the period 2000-2005. The restructuring plan is based on
the following balance-sheet forecasts:

Adjusted 1999 balance

Takeover balance

(NLG million)

Forecast balance
31.12.2000

ASSETS

Fixed assets

Raw materials and consumables

Work in progress less instal-
ments

Finished products and trading
stock

Debts

Cash

120,6

7,7

- 80,2

9,9

74,4

42,0

LIABILITIES

Own funds

Provisions

Subordinated loans

Long-term liabilities

Short-term liabilities

Total

174,3

- 47,1

81,0

39,5

100,9

Total

174,3

156,6

7,7

- 82,3

9,9

59,2

110,2

261,2

- 30,2

66,9

119,0

4,5

101,0

261,2

151,6

7,7

- 17,7

9,9

39,2

1,4

192,0

- 28,1

30,9

119,0

4,2

66,0

192,0

(21) Adjusted for the purpose of comparison. Changes with the original figures are due to the application of Damen's valuation

methods.

(74) Under the plan, the company was to be restored to modest profit levels in 2001. The following table
shows the main indicators for all shipbuilding and ship-repair activities. The original plan assumed
that at least one yacht would be built per year. Since then, forecasts have been adjusted to reflect a
higher level of yacht construction activity. As regards yacht construction, the current order book is
very much in line with that scenario.

Low level of yacht construction activity

Forecast turnover

Results on orders

Operating results

High level of yacht construction activity

Forecast turnover

Results on orders

Operating results

2000

2001

2002

2003

2004

2005

(EUR million)

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

21.1.2003

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Official Journal of the European Communities

L 14/67

7. ASSESSMENT

7.1. Application of Article 296

(75) Article 296(1)(b) stipulates that: ‘any Member State may take such measures as it considers necessary
for the protection of the essential interests of its security which are connected with the production
of or trade in arms, munitions and war material; such measures shall not adversely affect the condi-
tions of competition in the common market regarding products which are not intended for specifi-
cally military purposes.’ Conversely, where a measure caught by the definition of state aid within the
meaning of Article 87(1) affects military production as well as commercial or dual-use production,
it cannot be fully justified on the basis of Article 296. The Commission does not share the viewpoint
of the Dutch and Spanish authorities to the effect that, by virtue of the military aspects, the whole
measure is caught by Article 296, even if there is a clear effect on competition in non-military
sectors. That interpretation clearly conflicts with the wording of the Article.

(76)

The Netherlands has provided information regarding the essential security interests involved in this
case. The Commission cannot deny that such interests exist. At the same time, it is clear that the
Netherlands has rescued and restructured the whole company and not just the military part. First,
the financial resources provided to KSG have not been used for its military activities, but for its
commercial activities. It is therefore clear that the measures have indeed affected the conditions of
competition as regards commercial products. Therefore, in accordance with its standard practice, the
Commission must assess the measures in the light of the State aid rules in so far as they distort, or
threaten to distort, competition in markets for products that are not caught by Article 296.

7.2. The business-like behaviour of the Netherlands

(77)

The Commission does not dispute that the sale of KSG to Damen was perhaps the least costly way
of safeguarding the State's interest as a customer (22) and that a private customer in the same situa-
tion would have tried to minimise its losses in a similar way. The Dutch authorities do not refer
explicitly to the Court decision in Joined Cases C-278/92, C-279/92 and C-280/92 (Hytasa) (23), but
their reasoning is similar in some respects. In paragraphs 21 and 22 of that judgment the Court
states:

‘In order to determine whether such measures are in the nature of state aid, it is necessary to
consider whether in similar circumstances a private investor of a size comparable to that of the
bodies administering the public sector might have provided capital of such an amount […]. In
that respect a distinction must be drawn between the obligations which the State must assume as
owner of the share capital of a company and its obligations as a public authority.’

The reasoning of the Dutch authorities is based on the distinction that must be made between the
State's obligations as a customer with a contract for four frigates and its obligations as a public
authority.

(78) However, a private customer would never find itself in that situation. The State was placed in this
unfortunate position not as a result of normal, competitive (business-like) procurement, but in
connection with procurement of military vessels, which is not organised on a ‘business-like’ basis.
As is common in national defence policy throughout the European Union, the Netherlands reserved
the order in principle for its own industry, in this case KSG. There was no open competitive tender
procedure. This political decision does not become a commercial one when the shipyard gets into
difficulties and needs state support in order to survive and ensure that the frigates are finished. In
other words, given that this is a political decision which must be safeguarded, the State cannot claim
that the aid for the yard is justified because a private company would have done the same in similar
circumstances. Given the original political decision and the intent to safeguard its implementation,
the State always acts in its capacity as a public authority. It is not appropriate therefore to distin-
guish between the obligations which the State must assume as a customer with a contract for four
frigates and its obligations as a public authority. Accordingly, the measures cannot avoid being
assessed in the light of Articles 87 and 296 of the Treaty.

(22) The Commission would, however, not take into account the guarantees that the government would have to provide
to suppliers. Being the customer, such guarantees do not constitute a cost that would be additional to signing the
original contract. Nevertheless, it is clear that the cost of privatisation was below the cost of bankruptcy.

(23) Joined Cases C-278/92, C-279/92 and C-280/92 Spain v Commission [1994] ECR 4103.

L 14/68

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Official Journal of the European Communities

21.1.2003

7.3. Privatisation: potential aid to Damen

(79)

(80)

(81)

The Commission acknowledges that the Netherlands has followed relatively open procedures and
that competitors may well have been aware of the plan to privatise KSG and may have had an
opportunity to express an interest. The consultant's report submitted by the Netherlands confirmed
that Damen paid (more than) KSG's market value. It found a negative value of between NLG 150
million and NLG 200 million, which is significantly below the negative price. The Commission
asked an independent expert to prepare a second expert opinion on the report. That expert criticised
various elements of the calculation of KSG's value in the original report. However, when these
various criticisms are considered, the effect on the final result is largely neutral, with the result that
the expert's value calculation is more or less the same. The Commission therefore takes the view that
the price for which KSG was sold to Damen did not contain an element of State aid in the buyer's
favour.

7.4. Assessment in the light of the rescue and restructuring aid guidelines

There is no doubt that the measures taken by the Netherlands have been financed though state
resources and that they favour certain undertakings, namely KSG and — indirectly — its new share-
holder, Damen. Nor is there any doubt that the measures affect trade between Member States since
the types of product that KSG manufactures are widely traded. The measures are therefore caught
by the definition of State aid within the meaning of Article 87(1) of the Treaty.

The Commission has examined whether the exemptions set out in Article 87(2) and (3) of the EC
Treaty apply. The exemptions in Article 87(2) should be able to serve as a basis for declaring the aid
compatible with the common market. However, the aid measures (a) do not have a social character
and are not granted to individual consumers, (b) are not designed to make good the damage caused
by natural disasters or exceptional occurrences and (c) are not required in order to compensate for
the economic disadvantages caused by the division of Germany. The exemptions in Article 87(3)(a),
(b) and (d) of the EC Treaty do not apply either in that the measures are not designed to promote
the economic development of areas where the standard of living is abnormally low or where there
is serious underemployment. Nor are the measures designed to promote the execution of projects of
common European interest, culture or heritage conservation.

(82)

Indeed, the Dutch authorities did not attempt to justify the aid on the grounds specified in the
preceding paragraph.

(83) As far as the first part of the exemption in Article 87(3)(c) is concerned, namely aid to facilitate the
development of certain economic activities, the Commission notes that the aid did not relate to
R&D, environmental objectives or investment by SMEs. It is clear that the purpose of the aid was to
rescue and restructure KSG. Consequently, the Commission has assessed the aid in the light of the
rescue and restructuring aid guidelines and, in part, the Shipbuilding Regulation.

(84)

The Netherlands rescued the whole company and the restructuring plan concerned all its activities.
In addition, the activities caught by the Shipbuilding Regulation are inextricably linked to naval ship-
building because they have common facilities and, to some extent, a common workforce and a
common legal structure. Accordingly, the following assessment also concerns KSG's military activ-
ities. In fact, except for the assessment of rescue aid, there is no need to make a distinction between
the measures justified under Article 296 and those affecting commercial and dual-use production.
However, as explained below,
it was necessary to determine the extent to which restructuring
measures had affected commercial shipbuilding within the scope of the Shipbuilding Regulation.
Under Article 5 of that Regulation, the Commission may exceptionally consider rescue and restruc-
turing aid compatible with the common market provided that it complies with the rescue and
restructuring aid guidelines. However, that Article lays down a number of additional conditions that
must also be complied with. In this section, the measures are assessed in the light of the rescue and
restructuring aid guidelines. The assessment in the light of the Shipbuilding Regulation is carried out
in Section 7.5.

21.1.2003

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L 14/69

Firm in difficulty

(85)

From 1998 until it was privatised in 2000, KSG can properly be considered as a firm in difficulty. It
was unable, using its own resources or funds obtained from its creditors, to stem losses which would
almost certainly have put it out of business in the short term had the authorities not intervened. The
figures in the annual accounts show beyond doubt that the threat of bankruptcy was real. As
explained above, the measures taken by the State in 1998 cannot be compared to a capital injection
on commercial terms.

Rescue aid

(86)

(87)

(88)

(89)

(90)

(91)

(92)

The measures taken at the end of 1998 have the effect of rescue aid to their full nominal value of
EUR 22,7 million. They enabled KSG to stay afloat for the time needed to find a buyer and work
out a restructuring plan. The rescue and restructuring aid guidelines (24) set out clear conditions for
such aid.

First, the aid must consist of liquidity help in the form of loan guarantees or loans bearing normal
commercial
interest rates. The subordinated loans comply with this requirement. The additional
advance payment serves the same purpose as a loan, but no interest is charged on it.

Second, the aid must be restricted to the amount needed to keep a firm in business. In the Commis-
sion's view, this condition is fulfilled. A larger amount was allocated to the restructuring measures
taken prior to privatisation. In addition, the 1999 annual report refers to the difficult financial situa-
tion, notwithstanding the aid provided.

Third, the aid must be paid only for the time needed to devise the necessary and feasible recovery
plan. This should generally not exceed six months, but in this case the final privatisation, which was
an absolute condition for the recovery plan, was not carried out until September 2000. To a certain
extent, the delay resulted from the fact that the Cabinet had agreed a substantial reduction in the
defence budget, creating uncertainty for future naval procurement policy. Further delay was caused
by the difficulties encountered in concluding the privatisation agreement, while the situation of KSG
deteriorated significantly. In this particular case the Commission can accept the longer period.

The subordinated loans were originally granted for a period of less than twelve months. When it
was realised that privatisation would not be possible within that period, reimbursement was tacitly
postponed until the privatisation agreement had been finalised. In contrast, the advance payment's
effect extends over a longer period since those payments were originally scheduled for 2002 and
2003.

Lastly, the aid must be warranted on grounds of serious social difficulties and have no undue adverse
effects on the industrial situation in other Member States. Besides the military argument, the
Commission can also take account of the fact that KSG is the largest employer in the province of
Zeeland. Immediate, uncontrolled bankruptcy without any social plan would result in serious social
difficulties. For the bridging period, the Commission regards the adverse effects on the industrial
situation in other Member States as limited and not undue. Indeed, the aid has been used to settle
claims on various projects, most of which were carried out for foreign customers.

In conclusion, the subordinated loan meets the criteria set out in the guidelines, but the additional
advance payment fails to meet those criteria as regards its form and the period during which it has
effect. However, it represents only 30 % of total rescue aid, which corresponds to the share of naval
activities in total turnover. Accordingly, it can be justified under Article 296 of the Treaty. In so far
as the rescue aid does not affect the conditions of competition in the common market for products
which are not intended for specifically military purposes, the Commission concludes that the rescue
aid decided in December 1998 is compatible with the common market.

(24) Since the rescue aid was granted in full in the period before the entry into force of the 1999 rescue and restructuring
guidelines, the Commission has assessed it in the light of the 1994 Community guidelines for rescuing and restruc-
turing firms in difficulty (OJ C 368, 23.12.1994, p. 12). The extension of those guidelines until the entry in force of
the new guidelines was published in 1998 (OJ C 74, 10.3.1998, p. 31).

L 14/70

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Official Journal of the European Communities

21.1.2003

Restructuring aid

(93)

The following aid components, discounted to end-2000, are caught by the definition of restructuring
aid within the meaning of point 11 of the rescue and restructuring aid guidelines. In the first place,
with the new subordinated loan KSG obtained resources that it would not have been able to obtain
under market conditions. The loan formed part of the privatisation agreement between central
government, the province of Zeeland and Damen, which, as explained in Section 7.2, cannot be
justified on the basis of private investor or private customer behaviour. The aid component therefore
consists of the nominal value of NLG 70 million (EUR 31,8 million). The same applies to the
original subordinated loan of NLG 35 million (EUR 15,9 million) granted in 1998 (25). These points
are confirmed by the fact that Damen converted NLG 100 million (EUR 45,4 million) of the loans
into equity capital. Second, the aid component of the advance payment — EUR 1,41 million —
must also be considered as restructuring aid since it was used for that purpose over a period
extending beyond the completion of privatisation. Lastly, as described in paragraph 15 above, the
It has to be
expected aid component of the interest-free loan amounts to EUR 6,0 million.
concluded that KSG benefited from restructuring aid totalling EUR 55,1 million.

(94)

Below the Commission assesses the aid in the light of the criteria set out in Section 3.2.2 of the
rescue and restructuring aid guidelines.

Eligibility of the firm

(95) As explained in paragraph 85 above, KSG constitutes a firm in difficulty within the meaning of the

guidelines.

Restoration of viability

(96) As indicated in points 31-34 of the rescue and restructuring aid guidelines, the Commission can find
restructuring aid compatible with the common market only where there is a restructuring plan that
restores the viability of the firm. First and foremost, in the Commission's view, the fact that Damen
was willing to buy the company and invest significant amounts in it is a strong indication of the
viability of KSG's remaining activities.

(97)

The restructuring plan provides for the closure or sale of most of KSG's non-core activities. For the
remaining parts, as described in Section 6, Damen has tackled the underlying causes of losses over
the last few years and has established a sound basis for a return to profitability. The Commission
regards the outlook for shipbuilding for the Dutch navy, yacht construction and ship repairs as
good. It notes that none of the third parties has argued that the market segments for mega yachts
and the construction of special utility vessels would encounter difficulties. On the contrary, the
United Kingdom stated in its comments that the market for mega yachts is growing. As regards ship
repairs, Damen's restructuring plan is based on a careful assessment of the relevant market.

(98)

The greatest uncertainty surrounds future shipbuilding activities. As already stated, KSG has a struc-
tural problem with achieving full capacity utilisation by obtaining appropriate orders that can be
fitted in between military orders. Since the Dutch navy has no specific plans for orders, the outlook
is uncertain, especially from 2007 onwards.

(99) Whether Damen will be successful in attracting naval shipbuilding orders for third countries remains
to be seen: the conclusion of contracts is normally preceded by five years of contacts and negotia-
tions. The Commission notes that there is fierce competition in this segment but, at the same time,
it realises that a relatively small number of orders may suffice for the purpose of ‘topping up’ capa-
city and, in any case, it has no evidence to suggest that Damen's plans in this area would fail. It also
points out that Damen already has a strong market position in the special utility vessels segment
and that its sales organisation is exceptionally large by shipbuilding standards. Clearly, Damen might

(25) Since a commercial interest rate applied to the 1998 loan, the aid component on the occasion of the transfer to

Damen still amounted to its nominal value.

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be forced to accept lower profit margins on commercial shipbuilding, and the possibility of its incur-
ring incidental losses cannot be ruled out, but it would be unduly pessimistic to regard its commer-
cial shipbuilding as ‘structurally loss-making’ within the meaning of rescue and restructuring aid
guidelines.

(100) The Commission concludes that the assumptions as to future operating conditions must be regarded
as reasonable and realistic. Damen's restructuring plan provides the Commission with the requisite
confidence that KSG's viability will be restored.

Avoidance of undue distortions of competition

(101) According to points 35–39 of the guidelines, measures must be taken to mitigate as far as possible
any adverse effects of the aid on competitors. In this case, KSG and Damen limited the adverse
effects to a great extent by closing down/selling off most of their non-core business and by
switching commercial shipbuilding to the more dynamic market segments of mega yachts and
specialised utility vessels. In terms of employment and turnover, production levels decreased signifi-
cantly. Between 1994 and September 2000 employment fell by 2309 full-time equivalents. Turnover
declined by 50 %.

(102) The Commission concludes that the capacity reductions made in non-core business are sufficient to
mitigate the adverse effect of the aid and that undue distortions of competition as regards non-core
business have been avoided. The assessment of shipbuilding and ship repairs in the light of the Ship-
building Regulation is set out in Section 7.5.

Aid limited to the minimum

(103) The amount and intensity of the aid must be limited to the strict minimum needed to enable restruc-
turing to be undertaken in the light of the existing financial resources of the company, its share-
holders or the business group to which it belongs (point 40 of the guidelines). In this case, however,
the amount of the aid corresponds to the ‘negative price’ which Damen was willing to pay for KSG,
including all its liabilities and outstanding contracts (26). This implies that the aid was expected not
only to cover the cost of restructuring in so far as KSG's own resources were inadequate, but also to
enable a sufficient profit to be realised on the capital invested in the remaining activities. From this
perspective, the profit forecasts contained in the restructuring plan do not seem disproportionately
high.

(104) The Commission has investigated the level of KSG's liabilities and notes that there were persistent
financing difficulties prior to privatisation in spite of the rescue aid. The banks had significantly
reduced their credit facilities and the State did not want to provide additional capital before a privati-
sation agreement was signed. Following privatisation, the net cash flow moved sharply into the
black. The balance sheet as per 31 December 2000 showed a cash position of EUR […] million
instead of the planned EUR […] million. This corresponds, however, to the payment of instalments
on the frigates (the balance-sheet item ‘work in progress less instalments’ amounted to -EUR […]
million instead of the planned -EUR 8,0 million) and the to financial requirements resulting from
the […] project and relocation. There was no surplus cash for aggressive, market-distorting activities
not linked to the restructuring process.

(105) Damen's contribution consists firstly of the substantial risks it took by guaranteeing to finish the
frigates under construction. Secondly, as indicated above, Damen converted NLG 100 million
(EUR 45,4 million) of the subordinated loans into equity capital.

(106) From the above the Commission concludes that the aid is limited to the minimum as required by

the rescue and restructuring aid guidelines.

(26) Section 6.6 assesses whether or not the negotiations between the Netherlands and Damen have ensured a proper

‘market price’.

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Further conditions

(107) As indicated in point 43 of the rescue and restructuring aid guidelines, the Commission regards any
failure to implement the plan as misuse of aid. Pursuant to points 45 and 46 of the guidelines, it will
require an annual report on the restructuring.

(108)

In conclusion, the Commission finds that the conditions laid down in the rescue and restructuring
aid guidelines have been complied with.

7.5. Assessment in the light of the Shipbuilding Regulation

(109)

In view of the structural difficulties in the shipbuilding sector, the Commission has a strict policy on
restructuring aid for companies active in that sector. That policy is set out in particular in Article 5
of the Shipbuilding Regulation, which concerns restructuring aid. Such aid must comply not only
with the rescue and restructuring aid guidelines but also with a set of additional specific conditions.

(110) The restructuring measures affect commercial shipbuilding caught by the Shipbuilding Regulation in

the following way:

— of the 1999 losses, EUR 7,1 million is caused by or attributable to commercial shipbuilding (27),

— all costs associated with the closure of non-core business and the settlement of outstanding
claims concern non-shipbuilding sectors and the […] project. They bear no relation to commer-
cial shipbuilding activities,

— the relocation affects military shipbuilding, commercial shipbuilding caught by the Shipbuilding
Regulation and some of the yacht construction activities. On the basis of turnover forecasts for
these activities, the Commission attributes 8 % of the cost, i.e. EUR 3,1 million, to activities
caught by the Shipbuilding Regulation (28),

— the investments in yacht construction do not affect commercial shipbuilding caught by the Ship-

building Regulation,

— the expected investment in ICT infrastructure will benefit all shipbuilding activities, including
yacht construction and ship repairs. On the basis of a calculation comparable to the one effected
for the relocation, the Commission arrives at a figure equal to 11,9 % of the costs, i.e. EUR 0,3
million.

(27) (EUR 4,9 million is directly attributable to commercial shipbuilding activities. An amount of EUR 9 million
concerns both commercial and military activities. The share attributed to commercial shipbuilding was calculated on
the basis of commercial production as a percentage of total production over the period 1995-1999. The amount of
(EUR 7,1 million is discounted to end-2000.

(28) Turnover forecasts were included in the comments by the Netherlands and by Damen since they had been incorpo-
rated into the expert's study on the value of KSG at the time of privatisation. The figures are based on Damen's
expectations at the time of the due-diligence investigation. The Commission considers the scenario of intensive yacht
construction to be the most appropriate for this calculation, something which has been confirmed by Damen. In the
Commission's view, the period 2002-2007 is the most appropriate: although the relocation began as early as 2000,
its effects in terms of capacity utilisation were not felt until 2002. Figures for the post-2007 period are not available
and would not in any case be reliable. The relocation affects yacht construction only to the extent that the workload
exceeds the capacity of the dock refurbished for this purpose (the corresponding turnover is estimated at NLG […]
million, which is the figure in the order book for that year and which will be realised in full in the refurbished dock,
whereas the somewhat higher 2004 figure will partly be realised in the ‘old’ military dock). On the basis of those
assumptions, it is calculated that ‘topping-up orders’ constitute […] % of total expected turnover that is affected by
the relocation. It is true that such orders may also comprise naval shipbuilding for third countries, which implies
that, as a percentage of total turnover affected by the relocation, commercial shipbuilding caught by the Ship-
building Regulation should be lower. The current order book also suggests that commercial shipbuilding activities
were more limited than expected at the time of privatisation. On the other hand, after 2007, commercial ship-
building caught by the Shipbuilding Regulation may increase, in particular when military orders are limited. The
Commission therefore regards 8 % as the best estimate available.

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It must be concluded that some EUR 10,5 million (7,2 %) of total restructuring costs can be
regarded as destined for shipbuilding activities caught by the Shipbuilding Regulation. Consequently,
7,2 % of the total aid, or EUR 4 million, can be regarded as favouring those activities. In order to
determine whether that part of the aid is compatible with the common market, the Commission
must ascertain whether the conditions set out in the Shipbuilding Regulation have been met.

(111) The first condition (Article 5(1), first indent) has been met, given that KSG has not been granted
rescue or restructuring aid pursuant to Council Regulation (EC) No 1013/97 of 2 June 1997 on aid
to certain shipyards under restructuring (29).

(112) As required by the second indent of Article 5(1), the Netherlands has not given clear and unequi-
vocal undertakings that no further rescue or restructuring aid will be granted to the firm or its legal
successors in the future.

(113) The third indent of Article 5(1) requires there to be a genuine and irreversible reduction in the ship-
building, ship repair or ship conversion capacity of the firm concerned commensurate with the level
of aid involved. However, the restructuring actually increased capacity. The following effects have
been identified:

— the relocation of military activities to the Flushing East site entails a significant reduction in the
surface area used for assembly, panel building, steel welding, piping and various other activities.
However, the overall effect is an increase in efficiency and capacity due to the new hall on the
docks. The main dock in Flushing centre, currently used for the military frigates, is not to be
closed. The fact that it may be used principally for shipbuilding not caught by Shipbuilding
Regulation does not constitute closure: it may be used for commercial shipbuilding caught by
the Regulation for a period of ten years and use of the dock for the stated purposes is not inde-
pendent of Damen (fifth and sixth indents of Article 5(1)),

— part of the site in the centre of Flushing, including 500 metres of quay, will be sold. However,
alongside the main dock, KSG will construct a new, 200-metre-long quay on the site. In Flushing
East a quay has been extended by a 66-metre-long pier so that two frigates can be finished
together. As a result, the overall length of the quays and piers has been reduced by 234 metres.
However, it appears that the length of piers and quays did not represent a bottleneck as regards
production in the period preceding the aid measures. Damen has demonstrated that all the quays
and piers have been usable to date and that they may all have been used in the recent past.
However, it has not been demonstrated that the reduction would entail a capacity reduction in
relation to the level of actual production in the preceding five years,

— as regards ship repairs, the restructuring has entailed a reduction in the workforce from 155 in
1998 to 139 in 2000 (down 10 %). Damen and KSG have not made any significant investments
in the ship-repair yard. The value of production is estimated at EUR […] million per annum,
significantly below the corresponding levels in 1998 and 1999. However, neither Damen nor
the Netherlands has undertaken to limit production in the event of demand trends proving more
favourable than expected.

(114) The Commission's requests notwithstanding, neither Damen nor the Netherlands has submitted an
acceptable proposal for a capacity reduction within the meaning of the Shipbuilding Regulation. On
the basis of all the aforementioned effects, the Commission concludes that there is no capacity
reduction commensurate with the aid within the meaning of the third to sixth indents of Article
5(1) of the Shipbuilding Regulation. Accordingly, the aid allocated to commercial shipbuilding
caught by this Regulation, i.e. EUR 4 million, is not compatible with the common market.

8. CONCLUSIONS

(115) The 1998 subordinated loan and the additional advance payment constitute state aid within the
meaning of Article 87(1) of the Treaty. They constitute rescue aid. The part not caught by Article
296 is compatible with the common market pursuant to the rescue and restructuring aid guidelines.

(29) OJ L 148, 6.6.1997, p. 3.

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(116) The privatisation agreement whereby both the KSG shares and the subordinated loans were trans-

ferred to Damen for a symbolic price does not contain a State aid component in favour of Damen.

(117) The 1998 subordinated loan, the interest on the additional advance, the new subordinated loan and
the interest-free loan constitute State aid within the meaning of Article 87(1) of the Treaty in favour
of KSG. The fact that KSG's bankruptcy would have increased the cost of the frigates by a greater
amount than the aid in question does not affect this analysis. The Netherlands has invoked Article
296 of the Treaty, but this is not relevant since most of the aid can be regarded as compatible with
the common market pursuant to the rescue and restructuring aid guidelines. The Commission has
established that the restructuring plan provides a sound basis for restoring viability and that the aid
is limited to the minimum. Undue distortion of competition has been avoided in so far as activities
not caught by the Shipbuilding Regulation are concerned. However, the aid attributable to activities
that are caught by that Regulation, i.e. EUR 4 million, is not compatible with the common market
since there is no capacity reduction commensurate with it. This part of the aid should be recovered
from the recipient,

HAS ADOPTED THIS DECISION:

Article 1

The privatisation agreement between the Netherlands and Damen Shipyards Group (Damen) does not
contain State aid pursuant to Article 87(1) of the EC Treaty and Article 61(1) of the EEA Agreement in
favour of Damen.

The measures in support of the restructuring of Koninklijke Schelde Groep (‘KSG’) constitute State aid
pursuant to Article 87(1) of the EC Treaty and Article 61(1) of the EEA Agreement in favour of KSG.

The State aid which the Netherlands has implemented in favour of KSG, in so far as it can be attributed to
activities that are not caught by the Shipbuilding Regulation, is compatible with the common market.

Article 2

Article 3

The State aid of EUR 4 million which the Netherlands has implemented in favour of KSG, in so far as it
can be attributed to activities not caught by Regulation (EC) No 1540/98,
is incompatible with the
common market.

Article 4

The Netherlands shall take all necessary measures to recover from the recipient the aid referred to in

1.
Article 3 and unlawfully made available to the recipient.

2.
Recovery shall be effected without delay and in accordance with the procedures of national law
provided that they allow the immediate and effective execution of the Decision. The aid to be recovered
shall include interest from the date on which it was at the disposal of the recipient until the date of its
recovery. Interest shall be calculated on the basis of the reference rate used for calculating the grant equiva-
lent of regional aid.

The Netherlands shall submit an annual report on implementation of the restructuring plan for the period
until 2007, or until a later date if the implementation of the restructuring is delayed.

Article 5

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

Article 6

This Decision is addressed to Kingdom of the Netherlands.

Article 7

Done at Brussels, 5 June 2002.

For the Commission
Mario MONTI
Member of the Commission