2003/310/EC: Commission Decision of 2 October 2002 on the State aid granted by Italy to Iveco SpA (Text with EEA relevance) (notified under document number C(2002) 3580)
Date: 2002-10-02
Institutions: European Commission
Subjects: Italy, State aid, diesel engine, investment aid, merger control, motor vehicle industry

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II

(Acts whose publication is not obligatory)

COMMISSION

COMMISSION DECISION

of 2 October 2002

on the State aid granted by Italy to Iveco SpA

(notified under document number C(2002) 3580)

(Only the Italian text is authentic)

(Text with EEA relevance)

(2003/310/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 those provisions (1),

19 February 2002. On 12 April 2002 the Commission
carried out a visit to the plant in Foggia, Italy, and on 22
April 2002 requested further information, which was
provided by Italy by letter of 11 June, received on 12
June.

(3)

The Commission decision to initiate the procedure was
published in the Official Journal of the European Commu-
nities (2), with an invitation to interested parties to submit
their comments. No comments were received.

Whereas:

II. DETAILED DESCRIPTION OF THE MEASURE

I. PROCEDURE

The project

(1)

(2)

By letter dated 21 June 2001 the Italian authorities noti-
fied a plan to grant regional aid to Iveco SpA (Iveco).
On 27 July the Commission requested further informa-
tion, which the Italian authorities provided by letter
dated 5 October, received on 17 October.

On 19 December 2001 the Commission decided to
initiate the formal enquiry procedure laid down in
Article 88(2) of the Treaty, as it had doubts as to the
compatibility of the measure with the common market.
Italy submitted its comments on the initiation of
proceedings by letter of 12 February 2002, received on

(4)

(5)

The notified project concerns the production of a new
family of diesel engines to be known as the F1, with 2,3-
litre and 3,0-litre versions. Production started in 2001;
the engine replaces the ageing 8140 model, and will
power light commercial vehicles of the Fiat group and
other motor vehicle manufacturers.

The project is taking place at the existing Iveco plant in
Foggia,
in the region of Puglia. Puglia is an Article
87(3)(a) area, with a regional ceiling of 35 % for the
2000 to 2006 period.

(1) OJ C 53, 28.2.2002, p. 2.

(2) See footnote 1.

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(6)

(7)

(8)

(9)

(10)

The project started in August 2000 and is to be
completed by December 2003. The Italian authorities
state that it involves the installation of completely new
lines for the production of the F1 engines, with the
8140 engine being phased out gradually at the same
time. When the project is complete the capacity of the
plant will be 290 000 engines a year, comprising
230 000 F1s and 60 000 8140s. The plant will also be
producing
crankshafts,
about 120 000 stand-alone
mainly to be sold to a competing engine producer.

According to the Italian authorities the project
is a
mobile one. In 1998 a site owned by the Fiat group in
Bielsko-Biała, Poland, was chosen for the same project.
Car assembly at the Polish site had been discontinued,
thus freeing space for a new investment that could have
exploited the existing infrastructure and part of
the
the Foggia site was to be
workforce. Production at
reduced as the 8140 engine was phased out. At the end
of the project Foggia would still be producing 60 000
engines a year of model 8140, to satisfy demand in less
developed markets. A centre for the renovation of old
engines would also be opened in Foggia.

The Italian authorities state that Iveco informed them of
its decision to scale down production in Foggia at the
beginning of 2000. They asked Iveco to reconsider its
choice, offering State aid as partial compensation for the
extra costs in Foggia. Following negotiations with the
Italian authorities, and the approval of the new regional
aid map for Article 87(3)(a) regions in March 2000 (1),
Iveco decided to move the project to Foggia, and work
started during the summer break of August 2000. The
formal application for aid was made in July 2000, and
approved by the Italian authorities in December 2000.

Legal basis and amount of aid

The notified aid is being granted under schemes already
authorised (2), set up by the Act of 19 December 1992,
No 488 (Act No 488/92) (3) and the Act of 23 December
1996, No 662 (Act No 662/96) (4).

Iveco intends to invest a nominal EUR 323 270 000
(EUR 304 600 864 at current values, base year 2000,
discount rate 5,70 %), of which EUR 265 610 000 is
considered eligible by the Italian authorities.

(11)

The planned aid takes the form of an outright grant, and
amounts to a nominal EUR 121 658 000 in gross grant
equivalent (gge), equal to EUR 108 915 621 at current
values. The aid intensity notified by the Italian authori-
ties is 35,76 % gge.

(12) No other aid or Community financing has been allocated

to the project.

Grounds for initiating the procedure

(13)

In its decision to initiate the proceedings, taken on 19
December 2001 (5), the Commission expressed doubts as
to the mobility of the project, and whether it represented
a ‘transformation’; it said it needed to verify that there
was evidence to show that Iveco considered Bielsko-Biała
a viable alternative location.

(14)

The Commission also doubted a number of elements in
the cost-benefit analysis, and particularly:

— the inclusion of ineligible investment costs in the

cost-benefit analysis,

— the justification for the higher investment costs for
machinery and equipment in Foggia as opposed to
Bielsko-Biała,

— whether investment costs for vendor tooling were
provided for in the project, and if so the exact
amount of these investments, the location of the
investments,
suppliers
and the names of
involved,

the

— the exact calculation of outward transport costs,

— the number of workers needed for production at the

two sites,

— labour costs in Foggia.

(1) Commission decision of 1 March 2000 on case N 792/99: OJ C

175, 24.6.2000, p. 11.

(2) Commission decision of 12 July 2000 to raise no objection in case

N 715/99: OJ C 278, 30.10.2000.

(3) Converting into statute, with amendments, the Decree-law of 22
October 1992, No 415, amending the Act of 1 March 1986, No
64, with respect to the organisation of the special measures for the
South and rules for measures to facilitate production activities.

(4) On measures to rationalise public finances.
(5) See footnote 1.

III. COMMENTS FROM ITALY

(15) On 12 February 2002 the Italian authorities sent their
comments on the initiation of proceedings. Additional
information was provided during the visit to Foggia on
12 April 2002, and by letter dated 11 June 2002.

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(16)

In their comments, the Italian authorities first reaffirmed
that
the project was mobile. They provided internal
documents showing that the final decision to carry out
the investment in Foggia was taken in July 2000, and
that the Bielsko-Biała plan was abandoned at the same
time.

(17)

(18)

for

the

this

Iveco

investment

project. Of

Second, the Italian authorities affirmed that the figure of
EUR 323 270 000 nominal
in the cost-
benefit analysis represented all the mobile costs incurred
figure,
by
EUR 265 610 000 was considered eligible under Act No
488/92, which constituted the legal basis for the aid.
According to the Italian authorities, the former figure
gave a better understanding of the economic choice the
company had to make between the chosen location and
the alternative site, and it was for that reason that it had
been referred to in the cost-benefit analysis. But they
supplied detailed information on the nature and timing
of expenses for mobile eligible investment, and for the
depreciation methods used for the eligible investment in
machinery and buildings.

Third, the Italian authorities provided detailed informa-
in
tion and supporting evidence on the investment
machinery and equipment that made the costs in Foggia
higher
than those in Bielsko-Biała. While the work
stations were very similar at both locations, significant
differences were identified in Foggia in the transfer lines,
in the technical solutions selected for the machinery, and
in the adaptation of the site to summer climatic condi-
tions. During the visit of 12 April 2002, the Italian
authorities provided additional evidence supporting their
claims.

(19)

Fourth, the Italian authorities provided clarification of
the difference in vendor tooling investment costs for the
supplier Teksid. The costs of such investment would
have been lower in Poland, they said, owing to lower
prices and a lower degree of automation at the supplier's
plant.

(21)

(22)

(23)

Sixth, the Italian authorities provided detailed evidence
of the number of workers employed in engine produc-
tion, and the number of lost production hours. They also
supplied material confirming the reported labour costs
in Foggia.

Seventh, the Italian authorities provided more detailed
information on the redundancy costs that would have
occurred in Foggia had the project been carried out in
Bielsko-Biała, and on the redundancy costs that did
occur in Bielsko-Biała as a consequence of the choice of
Foggia.

In the case of Foggia, the Italian authorities estimated
that in the absence of the project, taking account of
natural turnover and of requirements for the residual
production of the old engine, 950 workers would have
been made redundant by 2004. Of these, 200 would
have received incentives to leave the job. The remaining
750 could have been transferred at little cost to other
plants operated by Iveco, the Fiat group, or component
suppliers. If necessary, 150 could have qualified for a
special mobility scheme (istituto della mobilità)
for
workers reaching retirement age. The Italian authorities
the redundancies in
estimated that
and
Foggia would
EUR 8 070 000 at current values.

the total cost of

EUR 6 500 000

between

be

(24)

the Italian authorities
In the case of Bielsko-Biała,
confirmed that the redundancy costs reported in the
notification were only those directly and unequivocally
linked to the decision not to carry out the project in
layoff costs
Poland. They also provided evidence of
amounting to EUR 7 230 000 for 1 250 of the 1 600
workers who became redundant in connection with the
project.

(25)

Finally, the Italian authorities supplied data showing that
European production capacity for light commercial vehi-
cles in the segments for which the engines were intended
would remain constant over the lifetime of the project at
the Fiat group level.

IV. ASSESSMENT OF THE AID

(20)

Fifth, the Italian authorities repeated that the engines
produced in Foggia would be shipped to the destination
plants by road; from Bielsko-Biała they would have been
shipped by rail. To substantiate this claim, they provided
documents showing the logistics facilities currently oper-
ating in the departure and destination plants. They also
provided more detailed information on transport routes
and times.

(26)

The measure notified by Italy in favour of Iveco consti-
tutes State aid within the meaning of Article 87(1) of the
Treaty. It would be financed by the State or through
State resources. As it constitutes a significant proportion
of the funding of the project, the aid is liable to distort
competition in the Community by giving Iveco an
advantage over competitors that do not receive aid.
There is extensive trade between Member States in the
automobile market.

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(27) Article 87(2) of the EC Treaty lists certain types of aid
that are compatible with the EC Treaty. In view of the
nature and purpose of the aid, and the geographical
location of the firm, none of its subparagraphs (a), (b) or
(c) applies to the plan in question. Article 87(3) specifies
other forms of aid which may be considered to be
compatible with the common market. The project is
located in the region of Puglia, which qualifies for assis-
tance under Article 87(3)(a), up to a regional ceiling
which for large companies is 35 % net grant equivalent
(nge); this corresponds to 53,50 % gge.

out its project in the sole plant available even in the
absence of aid. Thus no regional aid may be authorised
for a project that is not geographically mobile.

(32) With the help of

its outside automotive expert,

the
Commission has assessed the documentation and infor-
mation provided by Italy, and concluded that the project
is indeed mobile.

(28)

The aid is to be granted to Iveco, which manufactures
and assembles engines,
light commercial vehicles and
lorries.
Iveco therefore operates in the motor vehicle
industry within the meaning of the Community frame-
work on State aid to the motor vehicle industry (the
framework) (1).

(33)

(29)

The framework states that all aid which the public
towards individual project
authorities plan to grant
under an authorised aid scheme to a firm operating in
the motor vehicle industry must be notified before being
granted, in accordance with Article 88(3) of the Treaty,
if either of the following thresholds is reached: (a) the
total cost of the project is no less than EUR 50 million,
and (b) the total gross aid for the project, whether State
aid or aid from Community instruments, is no less than
EUR 5 million. In the case under consideration both the
total cost of the project and the amount of aid exceed
the notification thresholds. By notifying the proposed
aid to Iveco, the Italian authorities have complied with
the requirements of Article 88(3) of the Treaty.

First, the Italian authorities have shown that Bielsko-
Biała was a viable alternative location for the project.
The documents provided demonstrate that Bielsko-Biała
was chosen to host the project in April 1999, and that
preparatory work started at the Polish site in the course
of that year. The preparatory work was suspended in
March 2000, following official contact between Iveco
and the Italian authorities, and pending a final decision
on the location. In March 2000 Iveco held a meeting
with machinery supplier Comau during which the
possible alternatives of Bielsko-Biała and Foggia were
considered. In July 2000 Iveco finally decided to carry
out the investment in Foggia, and at the same aban-
doned the Bielsko-Biała plan. The official application for
aid was submitted to the Italian authorities on 24 July
2000. The aid was approved, subject to the Commis-
sion's authorisation, on 21 December 2000.

(34)

the project

Second, at the visit to the site on 12 April 2002, the
involved the
Commission verified that
complete dismantling of the old production lines, and
the installation of completely new machinery and equip-
ment in an overall production structure that was clearly
different from the previous one. The project therefore
qualifies as a ‘transformation’ under the framework.

(30) According to the framework,

the Commission is to
ensure that the aid granted is both necessary for the
realisation of the project and proportional to the gravity
of the problems it is intended to solve. Both tests, neces-
sity and proportionality, must be satisfied if the Commis-
sion is to authorise State aid in the motor vehicle
industry.

(35)

The Commission concludes that the project is mobile,
and can accordingly be considered eligible for regional
aid, since the aid is necessary to attract the investment
to the assisted region.

(31)

Paragraph 3.2(a) of the framework states that in order to
demonstrate the necessity for regional aid, the aid reci-
pient must clearly prove that it has an economically
viable alternative location for its project. If there were
no other industrial site, whether new or in existence,
capable of receiving the investment in question within
the group, the undertaking would be compelled to carry

(1) OJ C 279, 15.9.1997, p. 1 and OJ C 368, 22.12.2001 p. 10.

(36)

the
Regarding the eligible costs, paragraph 3.2(b) of
framework states that eligibility is defined by the scheme
applicable in the assisted region concerned. The eligible
costs form the basis on which both regional handicaps
and aid intensities are calculated, and are compared with
the regional aid ceiling. In the present case, the eligible
costs as defined by Act No 488/92 amount to a nominal
EUR 265 610 000, corresponding to EUR 247 763 583
in current values, base year 2000 and discount rate
5,70 %. The aid intensity notified by the Italian authori-
ties is 43,96 % gge.

(39)

(40)

(41)

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(37) According to point 3.2(c) of the framework the Commis-
sion has to ensure that the planned aid is proportional
to the regional problems it is intended to solve. The
method used is cost-benefit analysis.

(38) A cost-benefit analysis is made which compares, with
the costs which an
regard to the mobile elements,
investor would bear in order to carry out the project in
the region in question with those it would bear for an
identical project in a different location; this makes it
possible to determine the specific handicaps of
the
assisted region concerned. The Commission authorises
regional aid within the limit of the regional handicaps
resulting from the investment in the comparator plant.

(43) As regards outward transport costs, the Commission has
verified the new information provided by Italy, and
concluded that Iveco had the logistic capability to ship
engines by rail
from Bielsko-Biała to the destination
plants. This would have allowed substantial savings in
transport costs per engine per kilometre as compared
with the road transport to be used in the Foggia solu-
tion. But the greater distance between the Polish site and
the destination plants would have outweighed those
savings. Based on the
the
Commission calculates that Foggia enjoys an advantage
in outward transport costs equal
to EUR 28 000 at
current values in the 2002-2004 period.

information provided,

In accordance with point 3.2(c) of the framework, the
cost-benefit analysis assessed the operating handicaps in
Foggia and Bielsko-Biała over three years, since the
project in question is a transformation, and not a green-
field development. The period covered by the cost-
benefit analysis submitted is 2002-2004, or three years
from the beginning of production, in compliance with
section 3.3 of Annex I to the framework.

(44)

Regarding the forecast employment levels, the additional
Iveco internal documents provided by Italy clearly
demonstrate that the number of workers to be taken on
for the project is indeed as reported in the cost-benefit
analysis. The documents also confirm the relatively high
incidence of lost hours in the total hours necessary for
engine production. Lost hours are due to two main
factors: a high level of absenteeism at the plant, and the
difficult transition between the production of the old
and new engine models. The Commission concludes that
the employment levels have been correctly reported in
the cost-benefit analysis.

The Commission has taken into account the additional
information received from Italy following the initiation
of proceedings. Based on this new information, and with
the help of its external automotive expert, the Commis-
sion has modified some elements of the cost-benefit
analysis, as detailed below.

(45)

Regarding the higher investment costs for machinery
and equipment in Foggia, the information provided by
Italy, and the evidence gathered during the visit to the
site, have demonstrated that
the difference in costs
between Foggia (a nominal EUR 286 650 000) and
Bielsko-Biała (a nominal EUR 241 290 000) is justified.
Although the production process
and production
machines are the same, the installation of transfer lines
is more costly in Foggia, owing to the layout of the
buildings and the lack of available space. In some cases
overhead trolleys had to be installed in Foggia for the
transfer of components between work stations. Addi-
tional though smaller costs arose in Foggia as a result of
the necessity to upgrade the cooling systems for electric
and electronic units.

(42)

Investment costs for vendor tooling were not included in
the nominal EUR 265 610 000 considered eligible by
the Italian authorities. For this reason they do form part
of the basis on which the handicap and aid intensities
are calculated and compared with the regional aid
ceiling.

Regarding labour costs in Foggia, the additional figures
provided by the Italian authorities show that wage costs
in Foggia are in line with those in other Italian plants of
the Fiat group. The Italian authorities state that in recent
years the differential between labour costs in Northern
and in Southern Italy has decreased, owing to the
phasing out of fiscal incentives for employment in the
South. The proportion of specialised, highly skilled
workers is higher in an engine production plant like
Foggia than in car assembly plants. The Commission
concludes that the labour costs reported in the cost-
benefit analysis can be accepted.

(46)

The Commission takes the view that potential redun-
dancy costs in Foggia have to be considered in the cost-
benefit analysis in order to assess the comparative disad-
vantages of Foggia with respect to Bielsko-Biała. The
Commission has verified the figures provided by the
Italian authorities, and it has concluded that figures on
natural turnover, residual workforce needs in Foggia,
and early retirement
through mobility (istituto della
mobilità) can be accepted. However, the Commission
finds that the Italian authorities have not sufficiently
demonstrated that 750 of the workers made redundant
could be easily transferred to other plants belonging to
Iveco, the Fiat group or component suppliers.

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(47)

(48)

To support the claim that workers could have been
transferred to Iveco plants in the north of Italy, the
Italian authorities provided a copy of a 1996 agreement
between the company and the unions, whereby a
number of workers in Foggia were transferred to other
Iveco plants. The Commission however doubts that a
similar agreement could have been reached in connec-
tion with the partial shutdown of the Foggia plant. The
1997 workforce transfer took place at a time when Iveco
was investing heavily at the Foggia plant, but also faced
a temporary drop in demand for the engines produced.
the company would
The agreement
provide incentives for the return of
the transferred
workers to Foggia as the requirements of production
allowed. It is doubtful that the workers' unions would
have agreed to a similar arrangement in the event of a
very important and permanent cut in production at the
plant.

stipulated that

(50) As regards the potential redundancy costs in Bielsko-
Biała, redundancies have in fact taken place as a direct
consequence of Iveco's decision to carry out the project
in Foggia. The downsizing of
the Polish plant has
resulted in several
thousand redundancies in recent
years, and the F1 project would have made it possible to
maintain 1 600. The Commission concludes that
the
redundancy costs relating to these jobs can be imputed
entirely to the decision not to carry out the project in
Poland. The Italian authorities have provided sufficient
documentation to show that the costs related to the
redundancy of 1 250 workers in the years 2000-2001
was EUR 7 230 000, and that a further 350 workers are
being made redundant in the short term. On the basis of
the information in its possession the Commission esti-
mates the total redundancy costs in Bielsko-Biała over
the period 2000-2002 at EUR 9 264 000.

di

To support the claim that workers could have been
transferred to other plants of the Fiat group, the Italian
authorities provided figures for staff recruitment in Fiat
Auto's plants in the region. The figures, however, show
that the great majority of new workers were hired either
on a temporary basis or under contracts designed to
reduce the indirect costs of employing young workers
(contratti
formazione-lavoro). The Commission
considers that no convincing evidence has been provided
to show that these plants would have been ready to hire
workers made redundant in Foggia, who, according to
the Italian authorities, were on average relatively old,
and enjoyed high wage levels. Nor is it clear that these
workers would have accepted a transfer to a new place
of work offering contractual conditions that were not as
good. As for the capacity of component suppliers to hire
workers made redundant in Foggia, the Italian authori-
ties have not provided evidence that would prove this
claim.

(51)

(52)

These changes
to the analysis produce cost-benefit
results different from those initially notified by Italy. The
modified cost-benefit analysis
indicates a net cost
handicap for Foggia of EUR 128 381 000 at 2000
values, as compared with EUR 139 280 000 initially
notified. This brings the handicap ratio of the project to
51,82 %, as compared with 45,72 % initially notified. In
absolute values the regional handicap is lower than that
notified by Italy, but the ratio increases, because the
costs considered eligible under the framework amount
to only EUR 265 610 000.

Finally, the Commission has considered the question of a
‘top-up’, which is an increase in the allowable aid inten-
in the
sity intended as a further incentive to invest
region in question. The documentation provided shows
that European production capacity for light commercial
vehicles in the segments for which the engines are
intended will remain constant over the lifetime of the
project at the Fiat group level. The regional handicap
ratio resulting from the cost-benefit analysis should
accordingly be increased by two percentage points,
giving a final ratio of 53,82 %.

(49)

Based on the information in its possession, in particular
that provided by Italy in response to the initiation of the
inquiry proceedings, the Commission concludes that in
the absence of the project the number of workers made
redundant in Foggia would have been 950. Of these,
150 could have benefited under the special mobility
scheme for workers close to retirement age (istituto della
mobilità). The remaining workers would have had to be
compensated for leaving their jobs. On this basis the
Commission estimates the redundancy costs that would
have arisen in Foggia in the absence of the project over
the period 2002-2004 at EUR 21 870 000.

V. CONCLUSION

(53)

The aid intensity of the project, at 43,96 % gge, is less
than both the disadvantage identified by the cost-benefit/
top-up analysis, which is 53,82 %, and the regional aid
ceiling, which is 35 % in net grant equivalent, a figure
which allows a gross grant equivalent of up to 53,50 %.
The regional aid that the Italy plans to grant to Iveco
therefore can therefore be considered compatible with
the common market under Article 87(3)(a) of the Treaty,

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HAS ADOPTED THIS DECISION:

Article 2

Article 1

This Decision is addressed to the Italian Republic.

The State aid which Italy plans to grant to Iveco SpA in Foggia,
amounting to EUR 121 658 000 gross grant equivalent at
nominal values (corresponding to EUR 108 915 621 at current
towards an
values, base year 2000, discount rate 5,70 %),
terms
eligible investment of EUR 265 610 000 in nominal
(corresponding to EUR 247 763 583 at current values),
is
compatible with the common market within the meaning of
Article 87(3)(a) of the Treaty.

Done at Brussels, 2 October 2002.

For the Commission

Mario MONTI

Member of the Commission