2003/687/EC: Commission Decision of 19 March 2003 on State aid granted by Germany to Linde AG (Saxony-Anhalt) (Text with EEA relevance) (notified under document number C(2003) 647)
Date: 2003-03-19
Institutions: European Commission
Subjects: Germany, State aid, chemical industry, control of State aid, oxide

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COMMISSION

COMMISSION DECISION

of 19 March 2003

on State aid granted by Germany to Linde AG (Saxony-Anhalt)

(notified under document number C(2003) 647)

(Only the German text is authentic)

(Text with EEA relevance)

(2003/687/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

(3)

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,

Whereas:

I. PROCEDURE

(1)

(2)

On 17 October 2002, the Court of First Instance (CFI)
annulled Commission Decision 2000/524/EC (1)
in
which the Commission declared aid granted to Linde AG
(Linde)
incompatible with the common market. The
Court thus agreed with the application brought by Linde
insofar as the Commission had refused a substantial part
of an investment subsidy (the subsidy) as aid to Linde.

In May 1998,
in the course of its contacts with the
German authorities, the Commission became aware of
the existence of several transactions involving the Treu-
handanstalt (THA),
its successor, the Bundesanstalt für
vereinigungsbedingte Sonderaufgaben (BvS), and the
companies UCB Chemie GmbH (UCB) and Linde. These
transactions basically concerned the conditions under
which carbon monoxide was to be supplied to an amine
production site acquired by UCB from Leuna Werke
GmbH (LWG) after a privatisation procedure.

(4)

(5)

(6)

(7)

(8)

Subsequently, by letter dated 7 August 1998, Germany
informed the Commission of the background to these
transactions and the aid measures involved. By letter
dated 18 September 1998, the Commission requested
further information, which was provided by letter dated
3 December 1998. The case was registered as NN 16/99
on 3 February 1999.

By letter dated 30 March 1999,
the Commission
informed Germany that it had decided to initiate the
procedure laid down in Article 88(2) of the EC Treaty in
respect of a DEM 9 million grant
to Linde for the
construction of a new carbon monoxide production
plant and the conditions under which carbon monoxide
was currently being supplied to UCB (SG(99)D/2353) (2).

By letter dated 25 May 1999, Germany submitted its
comments. The Commission received no comments
from other interested parties.

On 18 January 2000,
partially negative Decision 2000/524/EC.

the Commission adopted its

By application lodged at the Registry of the Court of
First Instance on 21 April 2000, Linde (supported by
Germany) brought an action for annulment of Articles 2
and 3 of Decision 2000/524/EC. The Commission
contended that the Court should dismiss the action as
unfounded. In its judgment of 17 October 2002 in Case
T-98/00 (3), after an oral procedure, the Court upheld
Linde's application.

Pursuant to Article 233 of the EC Treaty, the Commis-
sion must take the necessary measures to comply with
the judgment of the Court, i.e. it must adopt a new Deci-
sion that meets the requirements of the judgment.

(1) OJ L 211, 22.8.2000, p. 7.
(2) OJ C 194, 10.7.1999, p. 14.

(3) Not yet reported.

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II. DESCRIPTION OF THE MEASURES

1. The recipient

been prepared to establish themselves at the location
concerned and consequently the THA would not have
been able to fulfil its privatisation task.

(9)

(10)

Linde is a subsidiary of the international technology-
oriented Linde Group. In 2001, the Linde Group had a
turnover of EUR 9,076 billion, with a workforce of
46 400 employees, of which 18 176 were employed in
Germany and 28 387 abroad. Net profit amounted to
three business
EUR 289 million in 2001. Linde's
segments, gas and engineering, material handling and
refrigeration have established leading positions in their
markets, according to Linde Group (1).

2. The privatisation of amine production and the

taking-over of carbon monoxide production

and

chemicals

In 1993 the THA sold the Leuna-based amine produc-
tion operation (the privatisation contract)
to UCB, a
subsidiary of Union Chimique Belge, which is a world-
wide industrial group, active in three industrial sectors:
pharmaceuticals,
film. The parent
company, UCB SA, comprises about 130 subsidiaries
and affiliates worldwide, mainly in Western Europe, but
also in the Americas and Asia.
the group
employed about 10 000 people, of whom around half
are in the pharmaceutical sector and the rest in the
chemical and film sectors. Nearly one third of those
employed work in Belgium, where several of the most
important production units are located, as well as the
general management of each of the three sectors and the
research and development centres in the pharmaceutical
and chemical fields. The group turnover in 2001 totalled
EUR 2,475 billion (2).

In 2001,

(11) According to the information provided by Germany, the
amine production was sold after an open, unconditional
and transparent tender procedure in which UCB was the
only bidder.

(12)

Since carbon monoxide is required for amine produc-
tion, UCB made the purchase conditional upon the
THA's undertaking to guarantee the supply of carbon
monoxide for its amine production at the acquired site
in Leuna. The THA undertook to provide carbon
monoxide for a fixed price agreed for a 10-year period
provided that UCB did not conclude a contract for the
supply of carbon monoxide with another producer or
did not decide to build a carbon monoxide production
facility for its own use. However, the THA would make
a grant of DEM 5 million available for this eventuality
under the privatisation contract.

(13) No information was provided on how this fixed price
was determined. However, it should be noted that at the
time the THA was concluding such long-term supply
contracts on a regular basis with new investors because
the supply situation for the chemical sector was rather
uncertain. According to the German authorities, without
such supply guarantees most producers would not have

(1) http://www.linde.com/en/en.jsp, 3 December 2002.
(2) http://www.ucb-group.com/corp/default.htm, 3 December 2002.

(14) When it concluded the privatisation contract with UCB
on the amine production plant,
the THA was also
hoping to find an investor to take over the carbon
monoxide production plant. This hope was disappointed.
Since the carbon monoxide production plant had been
neither restructured nor modernised, production costs
were far above the expected level. The supply obligation
caused the THA losses of approximately DEM 3,5 to 5
million per year, since the fixed price was calculated on
the basis of erroneous assumptions and did not even
cover
the outdated facility.
the privatisation contract had been
Accordingly,
if
performed until
its date of expiry, namely 30 April
2003, the THA would have suffered aggregate losses of
more than DEM 15 million in the period after October
1998 alone.

the production costs at

(15)

for

the loss-making
In 1996, the BvS decided to cancel
contract
the supply of carbon monoxide and
proposed that UCB should itself produce the carbon
monoxide it required for its amine production. In accor-
dance with the privatisation contract, UCB would receive
a grant of DEM 5 million for this.

(16) However, since UCB rejected the proposal, the BvS was

forced to look for another investor.

(17)

(18)

(19)

The only investor interested in and objectively capable
of taking over the carbon monoxide delivery obligation
was Linde, since it had been producing gas at the Leuna
site since 1994. In June 1997, an agreement (the 1997
agreement) was concluded between the BvS, LWG, UCB
and Linde for the supply of carbon monoxide. Accord-
ingly, Linde would build a new carbon monoxide
production plant within 18 months. The new plant
would be incorporated into Linde's existing facilities in
Leuna. The building cost would be DEM 12,5 million,
to which Linde would contribute DEM 3,5 million from
its own funds and the BvS the remaining DEM 9 million
(the subsidy).

that
Since the Commission had serious misgivings
elements of State aid might be included in:
the
(i)
DEM 9 million grant awarded to Linde AG for carbon
monoxide production and (ii)
the fixed price agreed
between UCB and Linde, it decided to initiate the proce-
dure laid down in Article 88(2) of the EC Treaty in
respect of these measures.

By letter dated 25 May 1999, Germany pointed out that,
due to the specific chemical nature of carbon monoxide,
it must be produced at the place where it is used. There-
fore, such a product could not affect
trade in the
Community. Since there was no carbon monoxide
market in the customary sense, the purchase price could
only be based on current costs at the existing facilities.

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(20) An entirely new carbon monoxide plant would have
been much more costly than the modifications by Linde
to its existing gas production site — DEM 20 million
instead of DEM 12,5 million. There was no obligation
to call for tenders since the likely providers of carbon
monoxide had been contacted and there was no other
interested company. Only Linde responded positively.
Linde's prices were based on investment costs plus an
adequate return.

(21)

(22)

(23)

(24)

LWG examined the possibility of producing carbon
monoxide itself, but the investment costs were too high.
Carbon monoxide is produced on the basis of a synthesis
gas that has to be purified in a steam reformer. The only
alternative to LWG's own production was to utilise a
steam reformer available in the vicinity. Since Linde had
previously acquired a steam reformer from LWG, Linde
proposed to the BvS and to UCB that it should become
UCB's carbon monoxide supplier. Carbon monoxide
would then be supplied to UCB at a newly negotiated
higher price.

By letter dated 25 May 1999, Germany stated that UCB
had decided to accept Linde's offer, even though the
carbon monoxide price was higher, because Linde
offered some favourable conditions over the existing
THA obligation. Through the new production site, Linde
was able to supply more carbon monoxide than LWG
over an extended period of
time. This possibility of
increasing its amine production in the future was an
important consideration for UCB in accepting the 1997
agreement.

3. Decision 2000/524/EC

The Commission initiated formal investigation proceed-
ings in July 1999 as it believed that the DEM 9 million
subsidy awarded to Linde could constitute aid. No inter-
ested party except Germany responded to the publica-
tion of the Commission's initiation of proceedings. In
January 2000 the Commission terminated proceedings
with the partially negative Decision 2000/524/EC.

In the Decision, the Commission found that the subsidy
of DEM 9 million constituted aid. In accordance with
the guidelines on national regional aid (1), the portion
exceeding 35 % of the eligible investment costs of the
facility, i.e. DEM 4,4 million, was incompatible with the
Treaty and had to be reimbursed.

(25)

The main argument for considering the measure aid was
that the subsidy allowed Linde to add a new production
costs.
installation without having to bear all

the

(1) OJ C 74, 10.3.1998, p. 9.

According to the Commission, the fact that for certain
reasons it was preferable to produce carbon monoxide
in the place of consumption did not alter this assess-
ment. Linde had a pre-existing advantage over its poten-
tial competitors because it was already on the site and
had thus better investment conditions for setting up the
new facility.

(26)

The Commission assumed that the subsidy could have
an effect on other producers end products for which
carbon monoxide is an intermediary. These end products
are traded in the Community.

(27) Moreover, although UCB was the only buyer of carbon
monoxide at the site, it could not be excluded that in
future Linde would also supply to other companies
based in the same area.

(28)

Finally, Germany did not submit sufficient evidence
showing that no other company than Linde would have
been prepared to take over supplying UCB. They merely
claimed that Linde was the only interested investor
without having conducted a tender procedure.

(29)

In April 2000, Linde, supported by Germany, appealed
against Decision 2000/524/EC to the Court of First
Instance.

4. The judgment of the Court of First Instance

(30)

The Court based its decision largely on the following
facts:

‘42.
It is apparent from the documents before the
Court that in 1996 the BvS, which is the successor to
the THA and which owned the carbon monoxide
production plant operated by LWG at Leuna, was faced
with a financial problem owing to the combination of
the following circumstances:

— in the supply agreement of 22 April 1993, the THA
and LWG undertook to supply specific quantities of
carbon monoxide to UCB, at a price equivalent to
the market price, for a period of 10 years, renewable
for an indefinite period;

— it later became apparent, however, that the supply
price would not cover the cost of production of
carbon monoxide by LWG;

— the particularly high costs were occasioned by the
obsolescence of the plant and technology used by
LWG;

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— in addition, the supply price had been fixed in the
ultimately unrealised expectation that a second
purchaser of carbon monoxide would set up business
at the Leuna site, which would have enabled the
LWG production unit to be operated more profit-
ably;

— as a result of performance of that supply agreement,
the BvS and LWG incurred losses of approximately
DEM 3,5 million per year which, from 1998, would
have increased to DEM 5 million per year;

— accordingly, if that agreement had been performed
until its date of expiry, namely 30 April 2003, rather
than being terminated in October 1998, the BvS and
LWG would have suffered aggregate losses of more
than DEM 15 million in the period after October
1998;

— LWG was not entitled to terminate the supply agree-
ment of 22 April 1993 under Article 6(4) (see para-
graph 3 above) since neither of the two conditions
set out in that provision were met in the present
case;

— that was because, first, UCB had ruled out the possi-
bility of building and operating its own carbon
monoxide production facility;

— second,

there was no other

carbon monoxide
producer on the Leuna site which UCB could have
used as a supplier;

— UCB could not have used a supplier who was not
based on the site, since carbon monoxide must be
produced near
the
contested Decision).’

(see recital 22 of

the user

(31) Another

important

the new Linde plant

factor was the planned capacity
restriction of
to the needs of
UCB (1). Delivery of carbon monoxide to third parties
was excluded because of the small production reserve.
There are no other potential buyers of carbon monoxide
at the Leuna site and transport to the nearest chemical
production sites at Bitterfeld or Buna was impossible due
to the technical characteristics of carbon monoxide.

III. ASSESSMENT OF THE MEASURE

1. The relevant market

2. Existence of aid

(34)

The subsidy of DEM 9 million did not constitute aid
within the meaning of Article 87(1) of the EC Treaty
since it appears that the measure did not distort compe-
tition and had no effect on trade.

(35) Owing to the specifics of the relevant product market
and the context of privatisation efforts in the new Länder
in the early 1990s,
the subsidy affected neither the
competitive situation in the production of carbon
monoxide nor the further use of it in the production of
amine.

(36)

(37)

(38)

the background of

The specific economic and legal facts of this case must
the industrial
be seen against
‘Kombinat’ system of the former German Democratic
Republic (GDR). The idea of bundling a whole industry
at one or two sites culminated in the two major GDR
chemical production sites of Leuna and Bitterfeld. After
German reunification, these complexes proved unma-
nageable under market economy conditions. The proce-
dures developed for the privatisation of these industrial
sites took account of the specifics of the former system
of economy.

the privatisation of

In the course of
the chemical
industry at the Leuna site in 1993, Germany entered into
a commitment to supply carbon monoxide to UCB for a
fixed price over a fairly long period of time. Without this
supply commitment, UCB would not have taken over
the amine production at Leuna (2).

In the course of
loss-making carbon
fulfilling its
monoxide delivery obligation, Germany tried to mini-
mise its financial burden by finding a more economical
solution, while honouring its contractual commitment to
UCB. The decision by the THA/BvS to choose Linde for
that purpose was, in that specific situation, objectively
the most economical solution for the State, since Linde
already had a chemical production plant at the Leuna
site. In 1994, Linde had inaugurated the world's largest
industrial gases centre in Leuna, and in 1998 it took
over the entire supply of industrial gases for the Mittel-
deutsche Erdoelraffinerie (MIDER)
It was
possible to incorporate the new carbon monoxide
production facility into the existing structure instead of
building a completely new complex, thereby reducing
the investment costs significantly.

in Leuna.

(32)

The relevant product market is the market for carbon
monoxide, which is a toxic gas used in the chemical
industry. Since its transport is expensive and dangerous,
production must be located near the purchaser.

(33)

The relevant geographic market is always a local market,
since due to the transport costs and risks, production
and consumption have to be in the same location.

(1) Cited by Linde in its application to the Court of First Instance, dated
19 April 2000, paragraph 21. Not contested by the Commission.

(39)

Since no other company located at
the Leuna site
presented such an objective structural advantage or even
showed any interest in building a production facility for
taking over the supply of carbon monoxide, Linde had
an important cost advantage in building the new facility.

(2) The fact that the purchase price UCB paid to the THA/BvS for the
carbon monoxide did not even cover the production costs may indi-
cate that an aid element was involved. However, since it was most
probably covered by the approved derogation scheme (Treuhandre-
gime), the Commission did not investigate this point any further.

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(40)

(41)

(42)

Linde received the subsidy for the construction of the
carbon monoxide production plant. Without the subsidy,
Linde would not have made the investment. The amount
of the subsidy was negotiated as being the minimum
necessary for building the facility. Since Linde, as the
only company in Leuna, already had an operating
chemical gas plant, no other company could have built
the facility with this amount. The DEM 9 million
subsidy constituted the best, most economical, deal for
the State because a completely new plant would have
cost up to DEM 20 million,
instead of DEM 12,5
million in the case of Linde. In order to compensate for
the higher building costs, any other company would
either have asked for a substantially higher subsidy or
would have been forced to increase the prices charged to
UCB considerably. This would have been refused by
UCB, which could rely on its delivery right under the
original privatisation contract and the whole deal would
have fallen apart.

This exceptional position of Linde as the best-suited
potential supplier of carbon monoxide to UCB was
further reinforced by the fact that there was no reaction
from any competitor or third party other than Germany
during the Commission's entire investigation procedure.
Taken together, all this provides sufficient evidence that
another selection procedure would not have led to a
lower level of subsidy than the one laid down in the
1997 agreement.

The subsidy did not have an effect on the carbon
monoxide market since the technological characteristics
of the plant and the production capacities were tailored
specifically to the needs of UCB. Linde's new plant was
meant to work exclusively for UCB. There has never
been a second purchaser of carbon monoxide who could
have benefited from any ‘subsidised’ carbon monoxide.
In the circumstances, therefore, there is no possibility
that ‘subsidised’ carbon monoxide left the Leuna site or
found another purchaser at the site. Consequently, any
spill-over effect of
the subsidy to other products or
markets can be ruled out.

(43)

It follows from these considerations that support given
by Germany to Linde's new plant was only a vehicle
allowing it to fulfil its commitments vis-à-vis UCB in a
financially less costly way. The subsidy granted to Linde
corresponded to the minimum amount necessary to
attain this objective. Taking into account the specific

(44)

circumstances of the case, such a support did not entail
distortions of competition on the markets where Linde
or UCB are present.

Furthermore, a distortion of competition seems to be
excluded on the amine market too since Linde's price for
the carbon monoxide was even higher than the original
price UCB paid under the privatisation contract and
therefore certainly did not improve its competitive situa-
tion. The price was negotiated between Linde and UCB
on purely commercial grounds. UCB agreed to the
higher price in exchange for the delivery guarantee being
extended beyond the original deadline of 2003 set in the
privatisation contract. Consequently, the subsidy did not
have any influence on a downstream market.

IV. CONCLUSION

(45) Given the unique factual characteristics of this case and
its historic background, a distortion of competition on
the relevant market (or even the threat of such distor-
tion) can be excluded. Linde was the only company
objectively suited to provide the carbon monoxide to
UCB and delivered all its production exclusively to UCB.
For Germany, Linde was just the means of assuring the
continuation of
carbon
monoxide to UCB. The subsidy was limited to the neces-
sary minimum for this purpose,

its delivery obligation for

HAS ADOPTED THIS DECISION:

Article 1

The subsidy of DEM 9 million which Germany granted to
Linde AG for the construction of a carbon monoxide plant at
Leuna does not constitute aid within the meaning of Article
87(1) of the EC Treaty.

This Decision is addressed to the Federal Republic of Germany.

Article 2

Done at Brussels, 19 March 2003.

For the Commission

Mario MONTI

Member of the Commission