2004/317/EC: Commission Decision of 11 November 2003 on the State aid which the United Kingdom is planning to provide under the WRAP environmental grant funding and WRAP lease guarantee fund (Text with EEA relevance) (notified under document number C(2003) 4087)
Date: 2003-11-11
Institutions: European Commission
Subjects: State aid, United Kingdom, control of State aid, environmental protection

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II

(Acts whose publication is not obligatory)

COMMISSION

COMMISSION DECISION

of 11 November 2003

on the State aid which the United Kingdom is planning to provide under the WRAP
environmental grant funding and WRAP lease guarantee fund

(notified under document number C(2003) 4087)

(Only the English text is authentic)

(Text with EEA relevance)

(2004/317/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Com-
munity, 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) and having regard to their
comments,

Whereas:

1. PROCEDURE

(1)

the Treaty, of

By letter dated 9 July 2002, registered on 16 July 2002,
the United Kingdom notified the Commission, pursuant
the Waste and
to Article 88(3) of
resources action programme (WRAP). By letter dated 2
August 2002, the Commission asked for further infor-
mation, which was provided by the United Kingdom
authorities by letter dated 28 August 2002. Following a
meeting between the Commission and the United
Kingdom authorities that was held on 29 August 2002,
the United Kingdom authorities provided further infor-
mation by letter dated 13 September 2002, registered on
18 September 2002. The Commission sent another
for information by letter dated 23 October
request
2002, to which the United Kingdom authorities replied
by letter dated 3 December 2002, registered on 6
December 2002. By letter dated 15 January 2003, regis-

tered on 23 January 2003, the United Kingdom authori-
ties requested a new meeting with the Commission,
which was held on 21 January 2003. Following that
meeting,
the United Kingdom authorities provided
supplementary information by a series of letters dated
between 24 January 2003 and 7 February 2003.

(2)

(3)

On 19 March 2003, the Commission decided partly to
approve the WRAP programme and to initiate the
procedure laid down in Article 88(2) of the Treaty with
respect to the WRAP environmental grant funding and
part of the WRAP lease guarantee fund that had been
notified on the basis of the Community guidelines on
State aid for environmental protection (2) (the environ-
mental aid guidelines). By letter dated 21 March 2003,
the Commission informed the United Kingdom of this
decision. The case was registered under number C 21/
2003.

By e-mail dated 8 April 2003, registered on the same
day under number A/32568, the United Kingdom autho-
rities requested the removal of certain elements of confi-
dential information from the Commission decision. The
Commission replied by letter dated 22 April 2003. The
United Kingdom authorities responded by e-mail dated 2
May 2003,
registered under number A/33144. The
Commission sent further comments on the question of
confidentiality by letter dated 7 May 2003. The United
Kingdom authorities agreed to these comments by letter
dated 12 May 2003, registered on 19 May 2003 under
number A/33512.

(1) OJ C 129, 3.6.2003, p. 6.

(2) OJ C 37, 3.2.2001, p. 3.

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(4)

(5)

(6)

(7)

(8)

(9)

(11)

(12)

By letter dated 25 April 2003, and registered on the
same day under number A/32958, the United Kingdom
responded to the opening of the procedure.

The Commission decision to initiate the procedure was
published in the Official Journal of the European Union (3).
The Commission invited interested parties to submit
their comments on the aid.

The Commission received 29 comments from interested
parties. It forwarded them to the United Kingdom by
letter dated 17 July 2003. The United Kingdom's
comments were received by e-mail dated 26 August
2003, and registered the same day, under number A/
35866.

The legal basis for the programme is Section 153 of the
Environmental Protection Act 1990 and the Financial
Assistance for Environmental Purposes (No 2) Order
2000.

The objective of WRAP is to promote sustainable waste
management and efficient markets for waste manage-
ment and recycling. In particular, the aim of the United
Kingdom authorities is to fulfil the Community targets
for waste recycling set by Council Directive 1999/31/EC
of 26 April 1999 on the landfill of waste (4), (the landfill
Directive) which requires Member States to reduce the
disposal of municipal waste to landfill and by Council
Directive 94/62/EC of 20 December 1994 on packaging
and packaging waste (5) (the packaging Directive) which
requires significant increases in packaging waste recy-
cling by at least 2006.

In its decision of 23 July 2003 in case C 61/2002, the
Commission decided partially to approve the aid granted
to Shotton Newsprint. That case was an individual appli-
cation of the WRAP Environmental Grant Funding.

(13)

By letter dated 1 August 2003,
the Commission
requested further information, which was provided by
the United Kingdom authorities by letter dated 3
September 2003,
registered on 4 September 2003,
under number A/36039.

A meeting was held on 12 September 2003 between the
Commission and representatives of the United Kingdom
government and of the WRAP programme. In the course
of this meeting, the Commission asked further questions
of the United Kingdom authorities, to which they replied
by e-mail dated 26 September 2003 and registered on
29 September 2003 under number A/36643, and e-mail
dated 30 October 2003 and registered on 31 October
2003 under number A/37458.

In order
to increase waste recycling in the United
Kingdom, WRAP has put into place different schemes,
notified on 16 July 2003. The Commission gave a posi-
tive decision on the following ones: the WRAP grant
funding regional scheme, notified on the basis of the
the WRAP SME
guidelines on national regional aid,
grant
the
funding scheme, notified on the basis of
Commission Regulation (EC) No 70/2001 of 12 January
2001 on the application of Articles 87 and 88 of the EC
Treaty to State aid to small and medium-sized enter-
prises (6), the WRAP pilot fund, and the part of the
WRAP lease guarantee fund that had been notified on
the basis of the Guidelines on national regional aid (7)
and Regulation (EC) No 70/2001. On two remaining
schemes, the WRAP environmental grant funding and
the part of the WRAP lease guarantee fund that had
been notified on the basis of the Community guidelines
on State aid for environmental protection, the Commis-
sion decided to open the formal investigation procedure
laid down in Article 88(2) of the EC Treaty.

2. DESCRIPTION OF THE MEASURE

2.2. The WRAP environmental grant funding

2.1. Presentation of WRAP and its objectives

2.2.1. Aim and mechanisms of the scheme

(10)

The aid is given within the framework of the Waste and
resources action programme. According to the informa-
tion submitted by the United Kingdom, WRAP is an
entity established to promote efficient markets
for
recycled materials and products, by stimulating demand
for recycled materials and products. WRAP's members
comprise the charity Wastewatch,
the Environmental
Services Association and the Secretary of State for Envir-
onment, Food and Rural Affairs. It is responsible for
administering the aid, and is funded by the government
for the period 2001 to 2004. WRAP functions as an
adjunct to the government, and implements government
policies, although it has a private corporate form.

(3) See footnote 1.

(14)

The purpose of this grant
funding programme is to
subsidise investments by private companies in recycling
facilities in order to increase the recycling of waste in
the United Kingdom. According to the United Kingdom
authorities, the necessity of such investment aid stems
from the uncertainty of returns on this type of invest-
ments, due to the risks and costs associated with
obtaining and using appropriate waste materials and the
difficulty in motivating the purchase of products made
from recycled materials. The selected firms will commit

(4) OJ L 182, 16.7.1999, p. 1.
(5) OJ L 365, 31.12.1994, p. 10.
(6) OJ L 10, 13.1.2001, p. 33.
(7) OJ C 74, 10.3.1998, p. 9.

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themselves to recycle a certain amount of waste per
year. These firms will then conclude supply contracts
with local authorities. As a result, local authorities will
have the incentives to set up systems of selective collec-
tion of waste since they will have the guarantee of
selling their selected waste. Through the creation of
these reprocessing units,
it is therefore expected that
markets for waste products will be created.

ties also stress that this project has further environ-
mental benefits, other than the diversion of 80 000
tonnes of glass from landfills. For instance, the use of
glass in sanitary ware will reduce the need for primary
mineral extraction.

(15)

The waste products concerned by this scheme are wood,
glass, plastics, aggregates and compost. In order to select
the recipients of support, and to determine the propor-
tional level of aid funding, WRAP uses open and compe-
titive tenders for each type of products. These tenders
are advertised in the specialised press throughout the
Community. Projects are selected on the basis of a
certain number of criteria: most economically advanta-
geous offer, magnitude and relevance of deliverables in
relation to the environmental objectives of the competi-
tion and organisational feasibility.

(19)

In the plastic sector, WRAP's proposed intervention
involves the creation of a new automated plastic bottle
sorting and reprocessing capacity, which would divide
the materials by polymer type and by colour. The sorted
material would then be converted into plastic feedstock,
which could be used for the production of new plastic
bottles. Currently, waste plastic sorting is normally done
by hand in the United Kingdom, and the state of the art
manufacture of plastic bottles uses virgin polymer. In
2001, 460 000 tonnes of plastic bottles were consumed
in the United Kingdom, of which less than 500 tonnes
(0,1 %) contained any recycled material.

2.2.2. Types of projects to be subsidised

(16) Under the WRAP environmental grant funding, WRAP

intends to fund projects in various sectors.

(17)

(18)

In the wood sector, WRAP will finance three or more
involving the creation of new reprocessing
projects,
capacity that will produce different
types of end
products: animal bedding, horticultural and landscaping
mulches, or activated carbon (a specific type of filter to
be used in industrial chemical engineering applications).
According to the United Kingdom authorities, waste
wood is not normally used for the manufacture of end
products. Animal bedding, for example, has traditionally
been manufactured from virgin wood. In 2001, only
about 5 % of all bedding in the United Kingdom was
manufactured from waste wood. According to the
United Kingdom authorities, this is due to the fact that
the cost of waste wood processed for
recycling is
normally higher than the cost of virgin wood processed
for equivalent application. This is why support to stimu-
in new recycling infrastructure (for
late investment
example,
is
necessary.

advanced decontamination equipment)

In the glass sector, WRAP wants to subsidise one new
facility that would process up to 80 000 tonnes of waste
glass per annum (from domestic and commercial waste
stream) by grinding it to very small particle size, below
90 microns. This will allow for and facilitate new end
uses, in particular for waste green glass, which currently
has very limited end uses. One possible use of this fine
glass powder is as a fluxing agent in bricks and sanitary
ware products. This is a relatively innovative technology.
According to the United Kingdom authorities, the only
comparable facility in the Community that
they are
aware of is in Sweden, where the ground glass is used as
a cement additive. A potential recipient has already been
selected. It is a joint venture project between Cleanaway
Ltd and Glass Group Ltd. The United Kingdom authori-

(for example,

(20) With respect to aggregates, the United Kingdom authori-
ties have already implemented a levy on aggregates
extraction from the ground to provide an incentive for
the reuse of waste aggregates
from
construction and excavation activity). Due to the already
low costs of virgin aggregates and high costs of aggre-
gates recycling equipment, the levy in itself is insufficient
incentive for the market to invest in such capacity. As a
result, WRAP intends to subsidise up to 20 projects
across the United Kingdom that would involve the crea-
tion of sorting and reprocessing capacity for waste
aggregate. These projects would focus on waste aggre-
gates that are currently hardly recycled at all, in particu-
lar waste aggregates with a high level of contamination
from soil, clays and other contaminants. It is expected
that this intervention will
increase recycling of waste
aggregates by two million tonnes by 2004.

(21) With respect to the compost sector, WRAP considers
that this is an immature sector, with a lack of compre-
hensive infrastructure for collection, processing and
composting of organic waste (mainly garden and public
park waste). This is due to the relatively high capital cost
of establishing infrastructure and the low value of
compost products. WRAP intends to support up to 20
projects that will involve the processing of organic waste
into basic compost products, and the manufacturing of
more sophisticated horticultural products by blending
these basic compost products with other inputs to create
more sophisticated horticultural products. These end
products will mostly be used in horticulture, landscaping
and organic horticulture. It is expected that this interven-
tion will
increase the recycling of organic waste by
500 000 tonnes, and the share of composted products
in the United
in these sectors. For instance,
Kingdom, composted products represented less than 3 %
of the three million cubic metres of raw materials used
in horticulture. The product normally used for this end
application is peat.
replacement by composted
products will also have the environmental benefit of
conserving peat bogs.

in 2002,

Its

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2.2.3. Eligible costs

(26)

The United Kingdom authorities have included in the
calculation of the eligible costs the entirety of the invest-
ments linked to the recycling activity.

The United Kingdom authorities will ensure that no
project receives aid for the same eligible costs from
other sources if the cumulated aid exceeds the aid inten-
sities applicable under the environmental aid guidelines.
In order to ensure compliance with this principle, recipi-
ents will be asked to provide a declaration concerning
any other aid applied for.

(22)

(23)

(24)

the

equipment

For example, for the wood projects, the eligible invest-
ments include the segregation, chipping and shredding
equipment capable of producing different grades of
reprocessed wood,
for contaminant
removal, and the equipment for end product processing
(for example, dyeing equipment and baling and bagging
equipment). For the glass project, the eligible invest-
ments include the grinding equipment capable of proces-
sing glass to produce finely ground glass. For the plastics
project, the eligible investment costs include the equip-
ment to sort and reprocess waste plastics. In the case of
compost, they include the equipment to shred, aerate,
turn and mix the organic waste material. Finally, in the
case of aggregates, they include the equipment to sort,
screen, wash, crush and grind aggregate materials so that
they meet specific requirements required for end applica-
tions.

costs,

eligible

the United
investment
From these
Kingdom authorities will deduct the costs of investments
necessary to comply with any mandatory compliance
standards. They will also deduct the net benefit to the
recipient over five years, taking account of the savings
over five years of life of the investment, any increase in
production during that
five year period, and any
increased revenue or other benefits to the recipient
during that period. For example, in the aggregate project
involving Huntsmans Quarries Ltd, the calculation of the
the profit after tax
benefits includes an estimate of
including the operational costs, cost of capital and aggre-
gate levy contribution, using costing presented by the
company. To those profits, valued at GBP 110 000 the
United Kingdom authorities have also added an estimate
of Huntsmans's saved reserve, (8) valued at GBP 26 532.
From those benefits, they have deducted various addi-
tional extra costs, such as management overhead, which
result in a valuation of the net benefits over the first five
like the glass
years of GBP 109 632.
project, no net benefit is expected. However, WRAP will
require that the relevant portion of the aid be repaid,
should a net benefit occur.

In some cases,

2.2.4. Aid intensity

(25)

The aid intensity of the grants will not exceed 30 %, plus
the extra percentage points allowed under point 34 of
the environmental aid guidelines for projects involving
small and medium-sized enterprises and/or located in
assisted areas.

(8) Thanks to the production of recycled aggregate, Huntmans Quarries
Ltd will be able to spare its quarry of virgin aggregate, the life of
which will therefore be extended.

2.2.5. Budget

(27)

The total budget for the WRAP environmental grant
fund is EUR 20,3 million. The total budget for the three
wood projects is EUR 0,75 million. The budget
is
the glass project, and EUR 3,3
EUR 1 million for
million for the plastics project. The budget for the 20
aggregates projects is EUR 8,55 million, and EUR 5,7
million for the 20 compost projects.

2.2.6. Reporting

The United Kingdom authorities will report annually to
the Commission on the activity of the scheme.

2.3. The WRAP lease guarantee fund

(28)

(29)

Like the WRAP environmental grant funding, the WRAP
lease guarantee fund supports investments in reproces-
sing activities and aims, in this way, to contribute to an
increase in the waste recycling capacity in the United
Kingdom.

The fund will provide guarantees that will cover leases
of machinery and equipment for the purpose of repro-
cessing waste material and manufacturing products from
those materials. Only leases that have a duration of at
least five years will be eligible. The maximum value for
an individual asset to be supported under this measure
will be GBP 5 million. As regards the part of the WRAP
lease guarantee fund notified on the basis of the environ-
mental aid guidelines, which the object of this Decision,
the United Kingdom authorities made the commitment
that projects involving ‘state of the art’ processes will not
be eligible for lease guarantee support. By ‘state of the
art’,
is meant a process in which the use of a waste
product to manufacture an end product is economically
profitable and normal practice (for example, the use of
waste paper for the production of newsprint).

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(30) According to the United Kingdom authorities,

leasing
companies are very reluctant to provide leases for waste
recycling equipment. This is due to the perceived low re-
sale value of the specialist equipment used in the recy-
cling sector. As a result, leasing contracts for such equip-
ment are regarded by leasing companies as very high-
risk and are therefore disproportionately expensive.

areas, and is notified under the environmental aid guide-
lines (10). As in the WRAP environmental grant funding
scheme, the United Kingdom authorities have included
in the calculation of the eligible costs all of the invest-
ments linked to the recycling activity, that is to say, in
that case, the investments that are the object of the guar-
anteed lease. From these eligible costs,
the United
Kingdom authorities will deduct the benefits from the
investment over a five-year period.

(31)

(32)

situation,

to remedy this

In order
the guarantees
provided by the fund will cover the residual value of the
equipment, which, under an operating lease, will remain
the lessorós asset, and which the lessor will sell at the
end of the lease-period or earlier, in the case of bank-
ruptcy of the lessee. Before the lease contract is signed,
the management agent will set a residual value for the
asset concerned in negotiation with a panel of lessors.
The Fund will be obliged to acquire this asset for the
agreed residual value in two circumstances: either if the
lessee becomes bankrupt, or if the residual value of the
assets falls short of the guaranteed value at the end of
the lease period.

In order to calculate the net grant equivalent of these
guarantees, the United Kingdom authorities have used
the method laid down in the Commission Notice on the
application of Articles 87 and 88 of the EC Treaty to
State aid in the form of guarantees (9), which states that
the grant equivalent is equal to (guaranteed sum x risk)
— premium. In the case of a GBP 100 000 investment,
the guaranteed residual value would typically be
GBP 20 000. According to the United Kingdom, a
normal commercial asset finance portfolio has a risk
basis of 10 to 20 % default rate. Given the higher risk
profile of the waste recycling activities covered by the
fund, the United Kingdom authorities estimate that it
would be appropriate to apply a higher default rate,
namely 30 %. The grant equivalent for a GBP 100 000
investment
be
GBP 20 000 x 30 % = GBP 6 000. There are unlikely to
be premiums paid to WRAP. This means that the aid
intensity for this aid will be 6 000/100 000 = 6 %. The
calculation of this aid intensity is based on the assump-
tion that the guaranteed residual value is set at 20 % of
the value of the investment. In some cases, this guaran-
teed residual value could exceed 20 %. In such cases, the
calculation of the aid element will vary accordingly. In
any case, the United Kingdom authorities confirmed that
the aid intensity should normally not be higher than
15 %.

therefore

would

(34)

The size of the lease guarantee fund is approximately
EUR 3,6 million, which will enable it to guarantee a
maximum of EUR 12 million in residual values over a
five-year period (the
fund will operate until 31
December 2006). Since this fund is mainly directed at
small and medium-sized enterprises, it is likely that few
large firms located in non-assisted areas will, in any case,
benefit from the application of this fund.

(35)

The United Kingdom authorities will report annually to
the Commission on the activity of the scheme.

(36)

(37)

3. REASONS TO INITIATE THE FORMAL INVESTIGA-

TION PROCEDURE

The Commission doubted that the WRAP environmental
grant
funding and the WRAP lease guarantee fund
would qualify for an assessment under the environ-
mental aid guidelines.

In particular, under point 29 of the environmental aid
guidelines,
investment aid may be authorised on the
basis of the guidelines when firms undertake investment
in the absence of mandatory Community standards or
where they have to undertake investment in order to
comply with national standards that are more stringent
than Community ones. The Commission considered that
investment aid granted under the WRAP environmental
grant funding and the WRAP lease guarantee fund does
not fulfil such an aim and is actually meant to enable
the United Kingdom to fulfil the targets set by the land-
fill Directive. The Commission noted that investment aid
approved under the environmental aid guidelines aims at
reducing the emissions and pollution caused by the
beneficiary in the course of its production process. The
aim of these schemes is different: it is the whole activity
of
is
supposed to have environmental benefits. The Commis-
sion doubted that the aim of the environmental aid
guidelines was to apply to such situations.

the beneficiaries (the recycling of waste)

that

(33)

The section of the WRAP lease guarantee fund to which
this decision relates concerns the application of the fund
to investments carried out by large firms in non-assisted

(9) OJ C 71, 11.3.2000, p. 14.

(10) As for the guarantees given to investments carried out by large
firms in assisted areas or by SMEs, the Commission, in its decision
of 19 March 2003, found that they were compatible with the
guidelines on national regional aid and with Regulation (EC) No
70/2001 respectively.

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(38)

Furthermore, supposing the environmental aid guidelines
were applicable to these schemes,
the Commission
doubted whether the calculation of the eligible costs was
in conformity with the guidelines. This is because the
United Kingdom authorities included the entirety of the
investments linked to the recycling activity, and because
they did not provide sufficient information on how they
intended to calculate the benefits accruing to the recipi-
ents of the aid over a five-year period.

(42)

Comments from the other interested parties are very
similar to one another in content and form. They under-
line the existence of a market failure in the recycling of
various waste products, and the unsatisfactory level of
selected waste collection in the United Kingdom. Some
comments acknowledged that raising tax on landfills is
part of the solution, but this cannot be done until cheap
alternatives to landfills have been developed.
In their
views, WRAP's intervention will help to create these
alternatives and to establish markets
recyclable
products.

for

(39)

Finally, the Commission expressed doubts as to whether
these two schemes could be exempted directly on the
basis of Article 87(3) of the Treaty, since the United
Kingdom authorities had not sufficiently shown why
State aid was necessary in this area, and why it did not
adversely affect trading conditions to an extent contrary
to the common interest.

4. COMMENTS FROM INTERESTED PARTIES

(40)

comments were

The Commission received comments from 29 third
parties. These
introduced by the
German and the Irish governments, by the Community
Recycling Network, the Local Authority Recycling Advi-
sory Committee, Friends of the Earth, the Consumers'
Association,
the Soft Drinks Association, Coca Cola
Enterprises Ltd, the Composting Association, the Soil
Association Producer Services, the Royal Society for the
Protection of Birds, Recycling of Used Plastics Ltd,
the Glass Recycling
Nampak Plastics, Dryden Aqua,
Group Ltd, Knauf Insulation, Dr Andrew Smith and Dr
Philip Jackson from CERAM Research Ltd, the Aggregate
Industries United Kingdom Ltd, Hanson Aggregates Ltd,
the British Aggregates Association, the Wood Recyclers
Association,
Industries Federation,
Kronospan Ltd,
the Environmental, Food and Rural
Affairs Committee, Mr. Colin Pickthall MP, Mr. David
Kidney MP, Mrs Helen Clarke MP and Mrs Julia Drown
MP. All these comments, apart from those of the British
Aggregates Association, were in favour of the WRAP
schemes.

the Wood Panel

(41)

that

The British Aggregates Association claims
the
proposed aid to the aggregate sector would discriminate
between different types of waste aggregates. According
to the Association, aid will be granted to recyclers of
industrial mineral processing waste and to recyclers of
slate and shale quarry processing waste. Therefore, the
scheme cannot deliver any environmental benefits since
the subsidised recycled material would simply replace
other material that is currently recycled without subsidy.

(43) Most comments underline the relative smallness of the
support provided by WRAP, and the lack of significant
impact on competition of the measures involved. At the
same time, they underline the positive effects of the
measures on the environment, with a reduction of waste
going to landfills. Some third parties mention more
specific benefits. For instance, the Royal Society for the
Protection of Birds underlines the problems raised by the
use of peat bog and its impact on birds' habitat. The
replacement of the use of peat by compost will help to
protect this natural habitat.

(44)

Therefore, all third parties, with the exception of the
British Aggregates Association, consider that this is a
clear case of environmental aid, which should be
exempted on the basis of the environmental aid guide-
lines.

5. COMMENTS FROM THE UNITED KINGDOM

(45) On the question of the applicability of the environ-
mental aid guidelines, the United Kingdom authorities
state that there is no reason to limit the application of
these guidelines to the pollution caused by the benefi-
ciary, as stated in the Commission decision to open the
formal
investigation procedure. They note that under
point 42 of the environmental aid guidelines, aid can be
approved for the management of waste. They also recall
that the guidelines refer to the Community strategy for
waste management, which makes waste management a
‘priority objective for the Community in order to reduce
the risks to the environment’ (11). Therefore, it is, in their
view, wrong that schemes designed to increase waste
recycling should be excluded from the environmental aid
guidelines on an a priori basis.

(11) COM(96) 399 final of 30.7.1996.

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(46)

Concerning point 29 of the environmental aid guide-
lines, the United Kingdom authorities interpret this point
as simply meaning that a firm cannot receive aid if the
aid is merely designed to help it comply with a legal
obligation imposed on that firm as the result of Com-
munity law. If there is no relevant law with which the
firm must comply, as is the case here, then the aid may
have the desired incentive effect and a company is in no
way precluded from receiving State aid under the envir-
onmental aid guidelines. The United Kingdom authorities
further add that there is no per se prohibition on a
Member State supporting companies which assist that
Member State in complying with its obligations deriving
the United
from Community law. For these reasons,
two aid
consider
Kingdom authorities
measures can fall within the scope of the environmental
aid guidelines.

these

that

(47) On the question of

the

the eligible costs,

the United
Kingdom authorities quote point 37 of the guidelines
which states that ‘eligible costs must be confined strictly
to the extra investment costs necessary to meet
the
environmental objectives’. Since
environmental
objective of the schemes is to increase waste recycling,
the United Kingdom authorities claim that all the extra
investment costs necessary to increase waste recycling,
that is to say, all the investments linked to the recycling
activity, are to be included in the eligible costs. As to the
calculation of the benefits accruing to the recipient of
the aid over the first five years, the United Kingdom
authorities have provided a detailed description of how
they are calculated in a number of concrete examples.

may be considered to be compatible with the common
market when it facilitates the development of certain
economic activities and certain economic areas and
where it does not adversely affect trading conditions to
an extent contrary to the common interest.
In the
the United Kingdom authorities put
case,
present
forward that
the two aid schemes at stake aim at
supporting waste recycling, which is fully in line with
Community environmental policy. Furthermore, the aid
is proportional and does not adversely distort competi-
tion. The aid amounts are relatively small, the aid is
targeted at sectors where there is a market failure and
the use of competitive tenders ensures that only the
minimum support necessary to stimulate market forces
is provided.

(49) On the specific objection of the British Aggregate Asso-
ciation, the United Kingdom authorities replied that the
waste aggregates that are allegedly discriminated against
are in fact the by-products of virgin aggregate extraction.
The United Kingdom authorities do not consider that
these products are real waste, whose recycling needs to
be supported, since such support would also encourage
increased extraction of virgin aggregate and would
defeat the objective of encouraging the use and recycling
of aggregates. Under the WRAP environmental grant
funding, the United Kingdom authorities will limit their
support to the recycling of waste aggregate,that is to say,
aggregate that has been used once, and aggregates that
are by-products of industrial processes other than extrac-
tion of virgin aggregates, such as mineral wastes arising
from the production of china, clay, coal and slate.

6. ASSESSMENT OF THE AID

6.1. The WRAP environmental grant funding

(48)

If the Commission concludes that the environmental aid
guidelines are not applicable to the case in question, the
United Kingdom authorities submit that
the two aid
measures can be exempted directly on the basis of
Article 87(3)(c) of the Treaty. On the question of the
necessity of the aid, the United Kingdom authorities first
underline that measures taken to increase waste recy-
cling and based on the principle of the internalisation of
costs have been taken. They include an increase of the
tax on landfill. However, given that the pre-tax cost of
landfill is so low in the United Kingdom, the post-tax
cost of
in the United Kingdom remains well
below European averages and will not be sufficient in
itself to deter excessive landfill. Furthermore, the fact
that landfill does not happen does not necessarily ensure
that recycling does happen. That
is why the United
Kingdom authorities have concluded that it is necessary
to target recycling directly under the WRAP programme.
Under the terms of Article 87(3)(c) of the Treaty, aid

landfill

6.1.1. Existence of

the aid within the meaning of Article

87(1) of the Treaty.

(50) Under Article 87(1) of the Treaty, ‘any aid granted by a
Member State or through State resources in any form
whatsoever which distorts or threatens to distort compe-
tition by favouring certain undertakings or the produc-
insofar as it affects trade
tion of certain goods shall,
between Member States, be incompatible with the
common market.’

(51)

In this case, the measure is funded by resources granted
by the State under the WRAP programme. It gives a
selective economic advantage to certain firms, operating
in specific sectors, in the form of a grant. The use of a
public tender procedure can ensure that the amount of

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the subsidy is limited to the minimum necessary but
does not remove the aid character of
the measure.
Furthermore, the waste products that are recycled can be
internationally traded. For instance, it is estimated that
up to 25 % of United Kingdom waste plastics was
exported in 2001, while 10 000 tonnes of waste glass
was imported, mainly from Ireland. Similarly, the end
products that are made from the recycled waste (for
example, animal bedding or activated carbon made from
waste wood or sanitary ware incorporating waste glass)
can also be internationally traded. For these reasons, the
WRAP environmental grant
funding constitutes aid
within the meaning of Article 87(1) of the Treaty.

6.1.2. Assessment of the compatibility with Article 87 of the

Treaty

(52)

The Commission has assessed whether the exemptions
set out in Article 87(2) and (3) of the Treaty apply. The
exemptions in paragraph 2 of Article 87 of the Treaty
could serve as a basis to consider aid compatible with
the common market. However, the aid does not have a
social character and is not granted to individual consu-
mers,
it does not make good the damages caused by
natural disasters or exceptional occurrences and it is not
required in order to compensate for the economic disad-
vantages caused by the division of Germany. The exemp-
tions in Article 87(3)(a), (b) and (d) of the Treaty, which
refer to promotion of the economic development of
areas where the standard of living is abnormally low or
where there is serious underemployment, to projects of
common European interest and to the promotion of
culture and conservation cannot apply either.
In any
case, the United Kingdom did not attempt to justify the
aid on those grounds.

(53) As far as the first part of the exemption in Article
87(3)(c) of the Treaty is concerned, namely aid to facili-
tate the development of certain economic activities, the
Commission notes that the aid did not have purposes
such as research and development. Nor can it be found
to be compatible with the guidelines on national
regional aid or Regulation (EC) No 70/2000. All the
projects of the WRAP environmental grant funding that
were compatible with those two texts, were the object of
a positive decision of the Commission on 19 March
2003. Therefore, by definition, the WRAP environmental
grant funding exclusively comprises projects that are not
compatible with Community rules on regional aid or aid
to small and medium-sized enterprises.

(54)

It should therefore be examined whether this scheme
qualifies for an exemption under Article 87(3)(c) of the
Treaty on other grounds than those referred to in recitals

52 and 53. The Commission will assess in the following
recitals whether the WRAP environmental grant funding
scheme is compatible with the environmental aid guide-
lines, and whether it is directly compatible with Article
87(3)(c) of the Treaty.

(55)

(56)

(57)

6.1.2.1. A sse ssme nt u nde r

t h e

e nv i r onme nta l

a i d g u i d e l i n e s

the Commission
In its decision of 19 March 2003,
acknowledged that
the WRAP environmental grant
funding scheme has environmental benefits. The recy-
cling of waste is more environmentally friendly than
in its decision of 17
putting it into landfill. However,
July 2003, in case C 61/2002 Shotton paper — news-
print reprocessing case, which concerned investment aid
for waste paper recycling, the Commission concluded
that the environmental aid guidelines were not applic-
able to this type of aid. Since that case is an individual
application of the WRAP environmental grant funding
to the specific sector of waste paper, the same conclu-
sion must be drawn with respect to the scheme itself.

The reasons why the environmental aid guidelines are
not applicable are the following. According to point 29
of the environmental aid guidelines, investment aid may
be granted ‘to enable firms to improve on Community
standards applicable, or when the firms undertake invest-
ment in the absence of Community standards applicable
(…)’.

The first possibility expressed in point 29 of the environ-
mental aid guidelines, which allows aid to be granted in
order to enable firms to improve on Community stan-
dards applicable, does not apply in this case. The aid is
granted in order to improve the United Kingdom's envir-
onment in general, and to help the United Kingdom to
achieve its obligations under the landfill and packaging
Directives. It is not granted to enable the beneficiaries to
improve on the standards applicable to them directly.

(58) As regards the second possibility in point 29 of the
environmental aid guidelines, which concerns aid for
firms to undertake investments in the absence of Com-
munity standards applicable, the United Kingdom argued
that the relevant standards applied to the Member State
itself, rather than to the firm, and that investment aid
under the environmental aid guidelines could therefore
be allowed.
the
Commission has already rejected that argument. This
exception should be interpreted in the light of point 18
(b) of the environmental aid guidelines, which states that

In its decision in case C 61/2002,

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aid ‘may act as an incentive to firms to improve on stan-
dards or to undertake further investment designed to
reduce pollution from their plants’. On this basis, the
Commission considers that point 29 of the environ-
mental aid guidelines concerns cases of investment aid
where an undertaking invests to improve its own envir-
onmental record, and to reduce its own pollution. This
is not the case under the present scheme.

(63) Article 87(3)(c) of the Treaty states that ‘aid to facilitate
the development of certain economic activities or of
certain economic areas, where such aid does not
adversely affect trading conditions to an extent contrary
to the common interest’ may be considered to be
compatible with the common market.

(59)

(60)

The Commission also considers that no other provisions
of the environmental aid guidelines apply to the case at
stake. The Commission recalls, in this context, that oper-
ating aid to promote waste management may be
authorised, under the conditions set out in points 42 to
46 of the Guidelines, for waste management. However,
the measures in question, which constitute investment
aid, do not fulfil these conditions.

The United Kingdom authorities tried to draw a distinc-
tion between case C 61/2002 Shotton Paper and the
present case, and argued that there were sufficient differ-
ences between the two cases to reach different conclu-
sions concerning the applicability of the environmental
aid guidelines in this case. In particular, they noted that
the Shotton paper case involved a much higher amount
of aid than the individual amounts provided under the
WRAP environmental grant funding, that it concerned a
mature market while the scheme is targeted at immature
markets with a clear market failure, and that the aid
measure subsidised a ‘state of the art’ process while the
technologies which the WRAP environmental grant
funding seeks to develop are untested in the market
place. The Commission considers that these arguments
are of a factual nature, which are relevant in the context
of the discussion of the direct applicability of Article
87(3)(c) of the Treaty. They are not, however, such as to
alter the Commission's legal interpretation of point 29
of the environmental aid guidelines which leads it to
conclude that the guidelines are not applicable in the
present case.

(61)

It must therefore be concluded that the environmental
aid guidelines are not applicable to the WRAP environ-
mental grant funding.

(64)

(65)

The Commission first notes that the objective of this aid
measure is to encourage waste recycling. Waste recycling
is an essential element of waste management, which the
Commission considers to be ‘a priority objective for the
Community in order to reduce the risks to the environ-
ment’ (12). The importance of this objective was under-
lined by the landfill Directive, which requires Member
States to reduce the disposal of municipal waste to land-
fill and by the packaging Directive, which requires signif-
icant increases in packaging waste recycling. Waste recy-
cling is therefore an economic activity, the development
of which should be encouraged, because of its environ-
mental benefits, both at national and Community levels.

In that case,

In order to be compatible with Article 87(3)(c) of the
Treaty, the aid measure must also be proportionate to
the objective, and must not distort competition to an
extent contrary to the common interest. Some elements
of appreciation of the proportionality of this type of aid
measure were set out by the Commission in its decision
in case C 61/2002.
the Commission
concluded that the aid given to increase waste paper
recycling capacity of Shotton was not proportionate, nor
necessary, and led to an undue distortion of competition.
The Commission first noted that producing newsprint
paper on the basis of waste paper is the normal state of
the art technique, which is economically profitable and
widely spread. Therefore, providing aid for the develop-
ment of such equipment appeared to be dispropor-
tionate and not necessary. Furthermore, given the high
amount of aid involved (EUR 35 million), granted to
one single undertaking, which is a major player in the
market of newsprint, the Commission concluded that
the aid would cause an undue distortion of competition.

6.1.2.2. Di r e ct A p p li ca ti on of A r ti c le 87(3)(c )

of th e T r e a ty

(62)

The granting of investment aid in favour of waste recy-
cling is not foreseen in the environmental aid guidelines,
despite its environmental benefits. It is therefore appro-
priate to consider whether this type of aid fulfills the
criteria to be directly compatible with Article 87(3)(c) of
the Treaty.

(66)

The Commission considers that a different conclusion
can be reached as regards this aid measure. The United
Kingdom authorities have convincingly argued that the
projects to be subsidised under the WRAP environ-
mental grant funding do not involve ‘state of the art’
processes, which can be defined as processes in which
to manufacture an end
the use of a waste product
product is economically profitable and therefore normal
practice. Some of the WRAP projects involve techniques
that are little tested in the market place. This appears to

(12) Community strategy for waste management, COM(96) 399 final of

30.7.1996.

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be the case of the glass project, which involved the fine
grinding of glass for its subsequent incorporation into
sanitary ware or bricks, or the plastics project, which
involves automated plastic bottle sorting equipment (a
process normally done by hand in the United Kingdom).
like the wood, compost or aggregates
Other projects,
projects,
involve activities in which the use of waste
product as raw material is not the normal practice. In
the case of wood, for instance, the cost of waste wood
processed for recycling is normally higher than the cost
of virgin wood processed for equivalent application,
which normally makes its use unprofitable. Since this
aid scheme does not subsidise ‘state of the art’ processes,
the aid can be considered to be necessary.

(68)

Furthermore, in order to determine whether the aid does
cause an undue distortion of competition, regard must
be paid to the aid intensities granted to the various
projects. The United Kingdom authorities have based
their calculation of the eligible costs and the relevant aid
intensities on the principles laid down in the environ-
mental aid guidelines. The Commission has already
concluded that the guidelines are not applicable to the
aid measure in question. However, given the environ-
mental objective of
the WRAP environmental grant
funding, it is appropriate to find guidance in the envir-
onmental aid guidelines on the way the eligible costs
should be calculated and aid intensities determined in
this case.

(67) As to the impact of the measure on competition and on
trade between Member States,
the Commission first
notes that the amounts of aid are significantly lower
than that granted in the Shotton paper case. The largest
amount of
individual aid to be granted under this
scheme is EUR 3,3 million, compared to EUR 35
million in the Shotton case. Furthermore, for most waste
products, the aid is spread over several projects (up to
20 in the case of compost and aggregates). All but one
of the comments from third parties were in favour of
the project. Only one comment, from the British Aggre-
gates Association underlined the potential negative
impact on competition of the measure, in the specific
sector of aggregates, since it would discriminate between
different types of recycled materials. However, it appears
that the waste aggregates that are allegedly discriminated
against are by-products of virgin aggregate extraction.
The United Kingdom authorities have argued that these
products cannot be considered as real waste. However,
according to the definition of waste contained in
Council Directive 75/442/EEC of 15 July 1975 on
waste (13), such by-products are to be generally consid-
ered as waste. Additionally, the Court of Justice of the
European Communities has recently defined criteria for
case-by-case determination of whether by-products may
be considered as waste (14). This jurisprudence does not
alter the general conclusion that by-products of virgin
aggregate extraction are to be considered as waste.
Nevertheless, the Commission considers that it is legiti-
mate not to support the reprocessing of by-products of
virgin aggregate extraction. Supporting the latter would
have the unwanted effect of encouraging extraction of
virgin aggregate and would defeat
the objective of
encouraging the recycling of materials that have already
been used. In addition, the relevant projects would focus
on waste aggregates which are currently hardly recycled
at all, in particular waste aggregates with a high level of
contamination from soil, clays and other contaminants.
The situation of such aggregates clearly differs from that
of by-products of virgin aggregate extraction. The
Commission therefore considers that there is no undue
discrimination in the area of aggregates.

(13) OJ L 194, 25.7.1975, p. 39. Directive as last amended by Directive

96/350/EC (OJ L 135, 6.6.1996, p. 32.)

(14) See judgment of 11 September 2003, in Case C-114/2001 Avesta-

Polarit Chrome Oy, not yet reported.

(69) On the question of the eligible costs, point 37 of the
environmental aid guidelines states that ‘eligible costs
must be confined strictly to the extra investments costs
necessary to meet the environmental objectives’, which
is normally done by deducting, from the eligible invest-
ment costs, ‘the cost of a technically comparable invest-
ment that does not provide the same degree of environ-
mental protection’. Under
the WRAP environmental
grant funding scheme, the United Kingdom authorities
have not deducted the cost of any such comparable
investment
from the eligible investment costs. This
approach appears to be justifiable given the specificity of
the measure. As explained in point 6.1.2.1, the environ-
mental aid guidelines are applicable to aid measures
intended to make a certain production process more
environmentally friendly, by reducing its polluting emis-
sions. This is why point 37 recommends the deduction
from the eligible investment costs of a comparable, less
environmentally friendly investment. In the present case,
however,
is the whole
economic activity of the aid beneficiary (waste recycling)
that is environmentally friendly. It is therefore appro-
priate to consider that the whole cost of investment is
eligible. Furthermore, as recommended by point 37 of
the guidelines,
the United Kingdom authorities have
deducted from the costs of these investments the benefits
over a five-year period. They have provided the Commis-
sion with descriptions showing how these benefits had
been calculated. These calculations appear to be correct.
The aid intensities calculated on the basis of
these
eligible costs will not exceed the thresholds laid down in
points 34 and 35 of the environmental aid guidelines.

the situation is different.

It

(70)

Finally,
the Commission notes that an open tender
procedure is used to select the beneficiaries and deter-
mine the amount of the aid. This system helps to guar-
antee that the aid is limited to the minimum and is
proportionate.

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(71) Given that the aid amounts granted are relatively small,
that they are calculated in accordance with the principle
laid down in the environmental aid guidelines and set at
the end of a open tender procedure, and that no
comment convincingly demonstrated that the measure
in question was creating an undue distortion of competi-
tion, it may be concluded that the WRAP Environmental
Grant Funding does not adversely affect trading condi-
tions to an extent contrary to the common interest.

light of the Commission Notice on State aid in the form
of guarantees. It concluded that the guarantee fund was
in line with the Notice, and in particular that the calcula-
tion of the grant equivalent was correct and the aid
intensity was estimated to be around 6 % on average (15).
Since the mechanisms of this fund have not changed
and will apply in exactly the same way to large firms in
non-assisted areas, the same conclusions are applicable
to the present analysis.

(72)

(73)

(74)

In the light of the above, it is concluded that the WRAP
environmental grant funding is compatible with Article
87(3)(c) of the Treaty.

(76)

The Commission intends to amend the environmental
aid guidelines in order to expressly provide for the possi-
bility to approve State aid which has environmental
benefits at the global level of the Member State or the
Community, and not at the individual level of the benefi-
ciary. Given the lack of experience in this field of envir-
onmental aid, such cases will be assessed on their own
merits. Pending the amendment of the guidelines, the
Commission will apply the same criteria as in the
present decision to any similar case

Secondly, this aid measure is very similar to the WRAP
environmental grant funding. The only significant differ-
ence between the two measures is the form of the aid:
grant in the case of the WRAP environmental grant
funding, and guarantee in the case of the WRAP lease
guarantee fund. Like the WRAP environmental grant
funding, this scheme aims at supporting investment aid
in the field of waste recycling. Consequently, the conclu-
sions concerning the compatibility of the WRAP envir-
onmental grant funding with Article 87(2) and Article
87(3) of the Treaty can be applied to the WRAP lease
guarantee fund. For
it can be
concluded that Article 87(2), the guidelines on national
regional aid, Regulation (EC) No 70/2001 (16) and the
environmental aid guidelines do not apply.

the same reasons,

6.2. The WRAP lease guarantee fund

6.2.1. Existence of

the aid within the meaning of Article

87(1) of the Treaty.

The WRAP lease guarantee fund is funded by resources
granted by the State under the WRAP programme. The
Commission notes that
the fund provides guarantees
that cover leases of machinery used to recycle waste. It
enables firms that want to acquire this equipment to
obtain a lease on conditions that are more favourable
than normally available on the market. Since the lessees
do not pay any premium for the guarantee, they clearly
get an economic advantage from this measure. This
economic advantage is specific, since only firms oper-
ating in the sectors of waste recycling can benefit from
the application of this fund. Furthermore, the products
manufactured by those companies may be internation-
ally traded, so this aid measure may have an effect on
competition and trade between Member States. For these
reasons, it may be concluded that the WRAP lease guar-
antee fund constitutes aid to the lessees within the
meaning of Article 87(1).

6.2.2. Assessment of the compatibility with Article 87 of the

Treaty

(77) On the question of whether the WRAP lease guarantee
fund is directly compatible with Article 87(3)(c) of the
Treaty, the United Kingdom authorities have committed
themselves not to grant guarantees to leases of equip-
ment involved in ‘state of the art’ processes.

(78)

(79)

Secondly, the calculation of the eligible costs is compar-
able to the situation under the WRAP environmental
grant funding, and the principles laid down in point 37
of the environmental aid guidelines. It notes in particular
that the United Kingdom authorities will deduct from
the eligible investment costs,
the benefits from the
investment over a five year period.

The Commission also notes that the maximum value of
an individual asset to be supported under this fund is
GBP 5 million, that the aid intensity will not exceed
15 %, and that, therefore, the maximum possible grant
equivalent of a guarantee is GBP 750 000. In the large
majority of cases, this amount is likely to be significantly
smaller, because the value of the asset will be lower, and
the aid intensity will generally be around 6 %.

(75)

In its decision of 19 March 2003, the Commission made
a detailed analysis of the WRAP guarantee fund, in the

(15) See point 83 and 84 of the decision.
(16) The part of the Lease Guarantee Fund that was compatible with the
regional aid guidelines and Commission regulation (EC) No 70/
2001 was the object of a positive decision of the Commission on
19 March 2003.

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(80)

Therefore, given that no ‘state of the art’ process will be
eligible for guarantees, given that the grant equivalent of
the guarantees will not be, on average, of a high level,
and that the aid intensities will be significantly lower
than the thresholds imposed in the environmental aid
guidelines, it can be concluded that guarantees granted
by the WRAP lease guarantee fund will
‘not affect
trading conditions to an extent contrary to the common
interest.’ Since its aim is to encourage the recycling of
waste, which is a priority objective of the Community,
the WRAP lease guarantee fund fulfills the criteria to be
considered compatible with Article 87(3)(c) of
the
Treaty,

HAS ADOPTED THIS DECISION:

Article 1

The WRAP environmental grant funding and the WRAP lease
guarantee fund are compatible with the common market
within the meaning of Article 87(3)(c) of the EC Treaty.

Implementation of the aid is accordingly authorised.

Article 2

This Decision is addressed to the United Kingdom of Great
Britain and Northern Ireland.

Done at Brussels, 11 November 2003.

For the Commission

Mario MONTI

Member of the Commission