Invitation to submit comments pursuant to Article 1(2) in Part I of Protocol 3 to the Surveillance and Court Agreement on the sale of the State's shares in Sementsverksmiðjan (Case No 56694 — former Case No 47824)
Date: 2005-05-19
Institutions: EFTA Surveillance Authority
Subjects: EFTA, Iceland, State aid, cement, control of State aid, privatisation

19.5.2005

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Official Journal of the European Union

C 117/17

EUROPEAN ECONOMIC AREA

EFTA SURVEILLANCE AUTHORITY

Invitation to submit comments pursuant to Article 1(2) in Part I of Protocol 3 to the Surveillance
and Court Agreement on the sale of the State's shares in Sementsverksmiðjan (Case No 56694 —
former Case No 47824)

(2005/C 117/07)

By means of Decision 421/04/COL of 20 December 2004, reproduced in the authentic language on the
pages following this summary, the EFTA Surveillance Authority initiated proceedings pursuant to Article
1(2) in Part I of Protocol 3 of the Agreement between the EFTA States on the establishment of a Surveil-
lance Authority and a Court of Justice (Surveillance and Court Agreement). The Icelandic Government has
been informed by means of a copy of the decision.

The EFTA Surveillance Authority hereby gives the Contracting Parties to the EEA Agreement and interested
parties notice to submit their comments on the measure in question within one month from the publica-
tion of this notice to:

EFTA Surveillance Authority
35, rue Belliard/Belliardstraat 35
B-1040 Brussels

The comments will be communicated to the Government of Iceland. Confidential treatment of the identity
of the interested party submitting the comments may be requested in writing, stating the reasons for the
request.

Procedure

SUMMARY

By letter from the Icelandic Mission to the European Union dated 19 August 2003, the Icelandic authorities
notified the Authority pursuant to Article 1(3) in Part I of Protocol 3 to the Surveillance and Court Agree-
ment of their intention to sell the State's shares in Sementsverksmiðjan (hereinafter: Iceland Cement). The
Icelandic authorities signed the sale agreements on 2 October 2003, before the Authority had taken a deci-
sion on the notification.

Description of the aid measure

Until the entry, in 2000, into the Icelandic market of an importer of cement from Denmark, Iceland
Cement had enjoyed a de facto monopoly in the market for cement. As a result of the new competitive
situation, Iceland Cement experienced economic difficulties and started cumulating losses. The sale of the
undertaking, wholly owned by the State, has to be seen against this background.

On 12 March 2003, the Government published an announcement in the newspaper Morgunblaðið calling
for a tender to purchase 100 % of its shares in Iceland Cement. Five offers were submitted before the dead-
line expired on 28 March 2003. The offers were evaluated by an independent expert taking into account
five criteria: purchase price, effect on competition on the Icelandic construction market, financial strength
of bidder, future vision of the company and managerial experience and knowledge of the market. The
Government initiated negotiations for the sale of the State's shares in Iceland Cement with the bidders that
were considered to have put forward the best offer, a group of investors which created Íslenskt Sement ehf,
on the condition that cement production should continue.

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The same independent expert was also requested to assess the value of Iceland Cement. The assessment
stated that for a company in a financial situation like Iceland Cement, establishment of the liquidation
value would be the most generally accepted valuation method. The outcome was a negative equity esti-
mated at ISK […] (compared to the book value of Iceland Cement's equity of ISK […] as of 31 March
2003). Furthermore, the costs associated with the demolition and cleaning of the factory plant at the site
in Akranes were estimated to amount to approx. ISK […]. Including this sum as a liability, the negative
equity amounted to ISK […].

On the basis of this assessment, the company was sold based on the following agreements:

Iceland Cement and the Township of Akranes concluded an agreement on 31 July 2003 according to
which, title to all lots of Iceland Cement in Akranes were transferred, as of 1 August 2003, to the Town-
ship of Akranes. Following the privatisation of the company, on 2 October 2003, the Township of
Akranes and Iceland Cement signed five 25-year rental agreements for different lots of land on which the
cement production of the company is located. One of them contained a clause stating that, if cement
production were to cease for a continuous period of 24 months, Iceland Cement would have to demolish
the materials storage at its own expense.

On 2 October 2003, the Ministry of Industry on behalf of the Government of Iceland, signed a Share
Purchase Agreement with Íslenskt Sement ehf. On the basis of this Agreement, the State, owner of 100 %
of the shares in Iceland Cement Ltd. having a nominal value of ISK […], sold them to Íslenskt Sement ehf
for a price of ISK […].

On the same date, 2 October 2003, Iceland Cement and the National Treasury of Iceland signed a Purchase
Contract, on the basis of which, the Treasury purchased the properties and assets of the company in
Reykjavík, the office building of the company in Akranes (with the exception of one and half floors) and
the shares and bonds owned by Iceland Cement in other companies, for the price of ISK […]. According to
the Contract, Iceland Cement may keep a part of the sold properties, use them for purposes of its own
industrial operations and return them to the National Treasury no later than 31 December 2011. The
company does not pay anything for this right of use. Until 31 December 2009, Iceland Cement has the
right to re-purchase the abovementioned sold properties for a total price of ISK […] with a fixed annual
interest of […] % as from 1 August 2003.

Although the Icelandic authorities were of the opinion that no State aid would be involved in the transac-
tion because the sale was accomplished in accordance with the provisions of Chapter 18B of the State Aid
Guidelines, they notified it to the Authority.

Assessment

The Authority has doubts regarding the non-State aid nature of the notified measures as alleged by the
Icelandic authorities. The Authority questions the applicability of Chapter 18B to the case in question since
the State is not merely selling land and buildings which it owns but its shares in a 100 % owned under-
taking with the supplementary condition of continuing the operations of the company. Furthermore, at
this stage, it cannot be ascertained whether the Icelandic authorities followed the market economy investor
principle to carry out this privatisation.

Notwithstanding the above, the two procedures laid down under Chapter 18B of the Guidelines, on the
basis of which it can be presumed that no State aid is involved in a sale, can, by analogy, give an indication
to determine whether aid has been granted or not.

In accordance with the provisions of Chapter 18B.2.1 of the Guidelines, a sale of land and buildings is by
definition at market value and consequently does not contain any State aid if it follows a sufficiently well-
publicised, open and unconditional bidding procedure, comparable to an auction where the best, or only
bid, is accepted. In the case in question, it cannot be maintained that the abovementioned conditions for
the sale to be completed at market value, were fulfilled.

To the extent an open and unconditional bidding procedure is not applied, Chapter 18B.2.2 of the Guide-
lines establishes an alternative procedure that presumes that no State aid is involved: the value established
by an independent asset valuer on the basis of generally accepted market indicators prior to the sale,
constitutes the minimum purchase price that can be agreed upon without granting State aid.

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In the case in question, an independent asset valuer estimated the value of Iceland Cement after a negotia-
tion partner was selected by means of the tender procedure, but before the company was sold. Although
the company was sold as a going concern, i.e. on the condition of continuation of the operations, the
valuer estimated its liquidation value. In principle, the value of a company in operation, even if it currently
makes losses, cannot be assumed to be equivalent to its liquidation value, which is based on the supposi-
tion that operations will cease. Furthermore, the valuation of some of the assets of Iceland Cement for the
purpose of establishing the liquidation value of the company is questionable. For these reasons, it cannot
be determined at this stage whether the liquidation value of the company corresponded to its market
value.

Should the market value of 100 % of the State's shares in Iceland Cement be higher than the price paid by
Íslenskt Sement ehf. for them, the State would have sold the company below its market price. State
resources within the meaning of Article 61(1) of the EEA Agreement would have been involved because
the State would have obtained lower revenue than a private operator acting on market terms would have
got for the same assets. Should the National Treasury of Iceland have paid a higher price than their market
value for the assets re-purchased from Iceland Cement, State resources would also be consumed. However,
even though the State, on the same day although on different agreements, was both the seller and the
purchaser of these concrete assets, no State aid would be involved if the price of the assets remained the
same in both transactions.

Furthermore, the State is foregoing income when it abstains from being remunerated by Iceland Cement
for the use of its assets in Reykjavik. This constitutes State resources within the meaning of Article 61(1) of
the EEA Agreement.

The State will also forego income by losing revenue, if Iceland Cement makes use of its re-purchase price
for the assets in Reykjavik for a price below their market price.

Should it be determined that these transactions were not carried out under market conditions and that,
accordingly, State resources have been involved, Iceland Cement and/or Íslenskt Sement ehf. would have
received an advantage within the meaning of Article 61(1) of the EEA Agreement. This would be so
because either their costs were reduced or they were paid a price for assets higher than their market value.

Any advantage granted to Iceland Cement which reduces the costs it should normally incur, places this
undertaking in a better competitive position vis à vis the other market player in the Icelandic cement
market, which does not receive this advantage, and accordingly distorts competition. Any advantage
granted to the consortium of investors Íslenskt Sement ehf, at least in competition with the other invest-
ment groups which participated in the tender procedure called upon by the Icelandic Government for the
acquisition of shares, also has the effect of distorting competition.

Considering that the direct competitor of Iceland Cement in the Icelandic market is an undertaking, located
in another State party to the EEA Agreement, which imports cement from other EEA countries into
Iceland, and that there were investors established in other EEA countries interested in the acquisition of the
State's shares in Iceland Cement Ltd., the measure affects trade between the Contracting Parties to the EEA
Agreement within the meaning of Article 61(1) of the EEA Agreement.

Conclusion

The Authority has doubts as to the State aid nature of the notified sale of the State's shares in Iceland
Cement Ltd. within the meaning of Article 61(1) of the EEA Agreement. Should the measures involved in
the privatization process constitute State aid, the Authority would have to assess their compatibility with
the functioning of the EEA Agreement. Consequently, the Authority is obliged to initiate the formal investi-
gation procedure provided for in Article 1(2) in Part I of Protocol 3 of the Surveillance and Court Agree-
ment.

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Official Journal of the European Union

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EFTA SURVEILLANCE AUTHORITY DECISION

No 421/04/COL

of 20 December 2004

on the sale of the Icelandic State's shares in Sementsverksmiðjan (Iceland)

THE EFTA SURVEILLANCE AUTHORITY,

Having regard to the Agreement on the European Economic Area (1), in particular to Articles 61 to 63 and
Protocol 26 thereof,

Having regard to the Agreement between the EFTA States on the establishment of a Surveillance Authority
and a Court of Justice (2), in particular to Article 24 thereof as well as Article 1(2) in Part I and Article 4(4)
in Part II of Protocol 3 thereof,

Having regard to the Authority's Guidelines (3) on the application and interpretation of Articles 61 and 62
of the EEA Agreement,

Whereas:

I. FACTS

1. Procedure

Pursuant to Article 1(3) in Part I of Protocol 3 to the Surveillance and Court Agreement (hereinafter:
Protocol 3), the Icelandic authorities notified the sale of the State's shares in Sementsverksmiðjan hf. (here-
inafter referred to as Iceland Cement) by letter dated 19 August 2003 from the Icelandic Mission to the
European Union, forwarding a letter from the Ministry of Finance dated 19 August 2003, received and
registered by the EFTA Surveillance Authority (hereinafter: the Authority) on 19 August 2003.

By letter dated 29 August 2003, the Authority acknowledged receipt of the notification and reminded the
Icelandic authorities of their obligation under Article 1(3) in Part I of Protocol 3 not to put the proposed
measures into effect until the Authority's examination of the notification had resulted in a final decision.

The Icelandic authorities provided further documentation on the notification with letters from the Icelandic
Mission to the European Union of 22 September 2003 and 9 October 2003, forwarding letters from the
Ministry of Finance dated 17 September 2003 and 3 October 2003, respectively.

On 10 October 2003, the Authority sent a request for additional information to the Icelandic authorities,
which was answered by a letter from the Icelandic Mission to the European Union of 12 November 2003
forwarding a letter from the Ministry of Finance dated 7 November 2003.

In its letter of 27 November 2003, the Authority informed the Icelandic authorities that, since the Icelandic
authorities signed the sale agreements in October 2003, the notified measure was put into effect and
constituted a breach of the standstill obligation. Accordingly, the procedure regarding unlawful aid, as laid
down in Section III of Part II of Protocol 3, was applicable.

The Authority sent new information-requests with letters dated 27 February 2004 and 4 June 2004. The
Icelandic authorities replied by letters from the Icelandic Mission to the European Union of 4 May 2004
and of 7 September 2004, respectively, forwarding two letters of the Ministry of Finance of the same dates.

(1) Hereinafter referred to as ‘the EEA Agreement’.
(2) Hereinafter referred to as ‘the Surveillance and Court Agreement’.
(3) Procedural and Substantive Rules in the Field of State Aid — Guidelines on the application and interpretation of Arti-
cles 61 and 62 of the EEA Agreement and Article 1 of Protocol 3 to the Surveillance and Court Agreement, adopted
and issued by the EFTA Surveillance Authority on 19 January 1994, published in OJ 1994 L 231, EEA Supplements
03.09.1994 No 32,
last amended by the Authority's Decision No 371/04/COL of 15 December 2004, not yet
published, hereinafter referred to as ‘the Guidelines’.

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Two meetings between representatives of the Authority and the Icelandic authorities to discuss the notifica-
tion were held in the framework of a package meeting which took place in Reykjavik on 26 May 2004
and at an ad hoc meeting in Brussels on 7 July 2004.

On 4 November 2004, the Authority sent a letter to the Icelandic authorities explaining its doubts
concerning the non-State aid character of the notified measures. It also requested further information
which was missing in the case. The Icelandic authorities commented on this letter and responded by letter
from the Ministry of Finance dated 30 November 2004.

2. Description of the notified measure: the sales process of Iceland Cement

Until the entry in 2000 of an importer of cement from Denmark into the Icelandic market, Iceland
Cement had enjoyed a de facto monopoly in the market for cement. As a result of the new competitive
situation, Iceland Cement experienced economic difficulties and started cumulating losses. The sale of the
undertaking, wholly owned by the State, has to be seen against this background.

On 12 March 2003, the Government published an announcement in the newspaper Morgunblaðið calling
for a tender to purchase 100 % of its shares in Iceland Cement. Offers had to be submitted by 28 March
2003. Additionally, the Government announced the tender on the website of MP Verðbréf, a privately held
authorized securities firm which had been appointed to monitor the selection procedure for a purchaser of
the shares. A press release was submitted to the Icelandic main media, television and radio. No announce-
ment was made at international level.

Five criteria were to be taken into account in the selection procedure: (1) the suggested purchase price,
(2) the description and evaluation on the effect of sale on the competition in the Icelandic construction
market, (3) the financial strength and description of financing provided by the bidder, (4) the future vision
of the operation of the factory as well as (5) the managerial experience and knowledge of the market
which the factory operates in. The offers received were to be ranked and allocated points according to how
well MP Verðbréf thought they scored on each criterion. For each offer, the scored points were to be given
different weights for each criterion (30 % for suggested purchase price, 25 % for effect on competition,
20 % for financial strength, 15 % for future vision of the operation of the factory and 10 % for managerial
experience).

Five offers were made and evaluated by MP Verðbréf who ranked them in accordance with the total score
obtained. Following meetings between the Executive Committee on Privatisation, MP Verðbréf and the
different bidders, the scores of each group were amended. MP Verðbréf considered that the offer that
originally got the third score was the best purchase offer (1) taking into account the explanations given.
The Government initiated negotiations for the sale of the State's shares in Iceland Cement with this group
of investors (2), which created Íslenskt Sement ehf for the purpose of acquiring the State's shares. Following
the tender, negotiations for the sale of the State's shares were initiated with the bidder selected. A condition
for the sale was that cement production should continue.

MP Verðbréf was also requested to assess the value of Iceland Cement. MP Verðbréf stated that for a
company in a financial situation like Iceland Cement, establishment of the liquidation value would be the
most generally accepted valuation method. Consequently, MP Verðbréf revalued Iceland Cement Ltd's
equity taking into consideration the possible price for its assets and how much of the receivables could
possibly be collected. The outcome was a negative equity estimated at ISK […] million (compared to the
book value of Iceland Cement's equity of ISK […] million as of 31 March 2003). The monetary value of
the liquidated assets was consequently not expected to be sufficient to cover all of Iceland Cement's debt.
In addition, another independent expert, Almenna Verkfæðistofan hf., had estimated that all the costs asso-
ciated with the demolition and cleaning of the factory plant at the site in Akranes would amount to
approx. ISK […] million. With this sum included as a liability, the negative equity amounted to ISK […]
million. MP Verðbréf accordingly estimated on 30 April 2003 that the costs would amount to the negative
sum of ISK […] million, including the demolition and cleaning of the plant area, should the company be
closed down and liquidated.

(1) It should be mentioned that this bidder obtained the best mark for the criteria ‘managerial experience and knowledge

of the market which the factory operates in’ and ‘financial strength’.

(2) The investment group was made out of Framtak fjárfestingarbanki hf, Björgun ehf., BM Vallá ehf and originally Stey-

pustöðin, which was later replaced by the Norwegian company Norcem AS.

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Against this background, the company was sold based on the following agreements:

Iceland Cement and the Township of Akranes concluded an agreement on 31 July 2003 based on which
title to all lots of Iceland Cement in Akranes were transferred to the Township of Akranes as of 1 August
2003. This was necessary in view of the imminent privatisation since the ownership of the land used by
the company in the municipality of Akranes had not been clarified (1).

Following the privatisation of the company, on 2 October 2003, the Township of Akranes and Iceland
Cement Ltd signed five 25-year rental agreements for different lots of land on which the cement produc-
tion of the company is located. One of the agreements had a clause stating that, if cement production were
to cease for a continuous period of 24 months, Iceland Cement would have to demolish the materials
storage at its own expense.

On 2 October 2003, the Ministry of Industry, on behalf of the Government of Iceland, signed a Share
Purchase Agreement with Íslenskt Sement ehf. On the basis of this Agreement, the State, owner of 100 %
of the shares in Iceland Cement for a nominal value of ISK […], sold them to Íslenskt Sement ehf for a
price of ISK […].

According to Article 5 of the Share Purchase Agreement, the Government of Iceland shall purchase some
assets from Iceland Cement in a separate agreement. As indicated in Section 3 of Article 5, the purchase
price for these assets shall be ISK […]. The payment shall, if necessary, be in the form of paying the debts
which are secured with the said assets to free them from any lien and encumbrances. Pursuant to Section 5
of Article 5, ‘the purchaser [i.e. the Government of Iceland] shall use the purchase price to pay the outstanding
debts of the company’.

On the same date, 2 October 2003, Iceland Cement and the National Treasury of Iceland signed a Purchase
Contract on the basis of which the Treasury purchased the properties and assets of the company in
Reykjavík, the office building of the company in Akranes with the exception of one and half floors, and
the shares and bonds owned by Iceland Cement in other companies, for the price of ISK […] million. As
stated in Article 5 of the Purchase Contract, Iceland Cement may keep a part of the sold properties in
Reykjavik (2), use them for purposes of its own industrial operations and return them to the National
Treasury no later than 31 December 2011. Iceland Cement pays for all maintenance and improvements to
these properties but does not pay any compensation for this right of use. According to Article 6 of the
Purchase Contract, until 31 December 2009, Iceland Cement has the right to re-purchase the abovemen-
tioned sold properties in Reykjavik for a total price of ISK […] million with a fixed annual interest of
[…] % as of 1 August 2003.

It follows from the above that there are two undertakings involved in these transactions: Iceland Cement,
the company sold by the State, and Íslenskt Sement ehf, the consortium of shareholders which acquired
the State's shares in Iceland Cement.

Although the Icelandic authorities held the view that no State aid would be involved in the transaction
because the sale, in their opinion, had taken place in accordance with Chapter 18 of the State Aid Guide-
lines (hereinafter: the Guidelines) on the sales of land and buildings, they notified it to the Authority. The
Icelandic authorities have stated during the preliminary phase that the overall sales price corresponds to
the market value of the company without regard to the economic disadvantage of the special obligations
of the buyer. In their opinion, special obligations (clearing obligation of the site in Akranes) further offset
the purchase price (3).

II. APPRECIATION

1. Procedural requirements

Pursuant to Article 1(3) in Part I of Protocol 3 to the Surveillance and Court Agreement, ‘the EFTA Surveil-
lance Authority shall be informed, in sufficient time to enable it to submit its comments, of any plans to grant or
alter aid (…). The State concerned shall not put its proposed measures into effect until the procedure has resulted in a
final decision.’

(1) According to the information provided by the Icelandic authorities, the land where the company was situated in
Akranes belonged to the township which had put it at the disposal of the State following the establishment of the
company. There was however no documentary record of this property right.

(2) Two cement storage tanks, cement delivery/packaging building, stairs and hallway, cement pipe casing, fence and
gate, steel silo with accompanying equipment, air compressors, dryer and electric equipment in a storage shed by the
dock, quayside crane, piping in cement pipe casing, vehicle scale and accompanying computer equipment.

(3) The Icelandic authorities' letter to the Authority of 26 November 2004.

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Although the Icelandic authorities submitted a notification by letter dated 29 August 2003 on the planned
sale of the State's shares at Iceland Cement, the signature of the abovementioned agreements by the
Icelandic authorities put any possible State aid measure granted on the basis of these agreements into effect
before the Authority had taken a final decision on the notification.

For this reason, any State aid granted in the framework of this transaction constitutes unlawful State aid
within the meaning of Article 1(f) in Part II of Protocol 3, that is, new aid put into effect in contravention
of Article 1(3) in Part I of the same Protocol.

Article 61(1) of the EEA Agreement reads as follows:

2. State aid assessment

‘Save as otherwise provided in this Agreement, any aid granted by EC Member States, EFTA States or
through State resources in any form whatsoever which distorts or threatens to distort competition by
favouring certain undertakings or the production of certain goods shall, in so far as it affects trade
between Contracting Parties, be incompatible with the functioning of this Agreement.’

Thus, in order for a measure to be considered State aid within the meaning of Article 61(1) of the EEA
Agreement, the following cumulative conditions must be fulfilled: it must constitute a selective advantage
in favour of certain undertakings, be granted through State resources and affect competition and trade
between the Contracting Parties to the EEA Agreement.

Chapter 18B of the Authority's State Aid Guidelines lays down certain procedures related to public authori-
ties' sales of land and buildings. If these procedures are followed, there is a presumption that no State aid is
involved in the sale. The Authority questions the applicability of Chapter 18B to this case since the State is
not merely selling land and buildings which it owns, but its shares in a 100 % owned undertaking with the
supplementary condition of continuing the operations of the company.

Furthermore, at this stage, it cannot be determined whether the market investor principle laid down in
Chapter 20 of the Guidelines has been followed, since it is uncertain as to what extent the State has taken
into account other considerations beyond the mere economic return of the transaction during the negotia-
tion process (i.e. the consequences of a closure for the local economy of Akranes, its the effects on compe-
tition, etc.) and whether the price obtained in the sale corresponded to the market value of the company.

Notwithstanding the above, the principles laid down in Chapter 18B of the Guidelines concerning sales
procedures, could, by analogy, give an indication to determine whether it can be presumed that no State
aid has been involved in the sale.

(a) State resources

In accordance with the provisions of Chapter 18B.2.1 of the Guidelines, a sale of land and buildings
following a sufficiently well-publicised, open and unconditional bidding procedure, comparable to an
auction, where the best or only bid is accepted, is by definition a sale at market value and consequently
does not contain any State aid.

In the case in question, it cannot be maintained that the abovementioned conditions for the sale to be
completed at market value, were fulfilled. The offer was not sufficiently well publicised, since it was only
announced in the Icelandic newspaper Morgunblaðið (as well as on the website of MP Verðbréf) and gave
bidders 14 calendar days to present their offers. The Guidelines require that the offer is repeatedly adver-
tised over a reasonably long period (two months or more) in the national press, estate gazettes or other
appropriate publications and through real-estate agents addressing a broad range of potential buyers, so
that it can come to the notice of all potential buyers. The sale did not follow an unconditional bidding
procedure since the buyers were not free to acquire the land and buildings and to use them for their own
purposes. Furthermore, the bidding procedure was not designed to find the economically best offer for
acquiring the State's shares, but only to select a future buyer with whom the price and other conditions of
the sale could be negotiated afterwards.

Against this background, it cannot be concluded that the provisions of Chapter 18B.2.1 of the Guidelines
have been complied with.

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To the extent an open and unconditional bidding procedure is not applied, Chapter 18B.2.2 of the Guide-
lines establishes an alternative procedure that presumes that no State aid is involved. According to these
provisions, the value established by an independent asset valuer on the basis of generally accepted market
indicators prior to the sale, constitutes the minimum purchase price that can be agreed upon without
granting State aid.

In the case in question, an independent asset valuer, MP Verðbréf, estimated the value of Iceland Cement
after a negotiation partner was selected by means of the tender procedure, but before the company was
sold. Although the company was sold as a going concern, i.e. on the condition of continuation of the
operations, MP Verðbréf estimated its liquidation value. In principle, the value of a company in operation,
even if it currently is making a loss, cannot be assumed to be equivalent to its liquidation value, which is
based on the supposition that operations will cease. The estimation of some of the assets of Iceland
Cement, for the purpose of establishing the liquidation value of the company, is questionable. In particular,
the factory buildings and machinery in Akranes were valued at zero since it was considered that assets
specialised for cement production could not be sold to third parties if operations were to be terminated.
Nevertheless, these assets certainly have a value for an acquirer who is willing to continue operation of
cement production, a condition imposed by the Icelandic State for the sale of its shares. In the view of the
Authority,
it is not clear to what extent the valuation of the real estate repurchased by the National
Treasury of Iceland, reflects their market value.

The Icelandic authorities decided to base the sales negotiations on the liquidation value of the company,
which originally corresponded to the negative amount of ISK […] million, without taking into account the
costs of clearing the plant in Akranes. During the preliminary phase, the Icelandic authorities have
corrected this figure, stating that some assets had been partly or incorrectly considered. The liquidation
value has been accordingly amended to ISK […] million (1). Taking into account that the company was
sold for a price of ISK […], the sales price was very close to the corrected liquidation value.

Nonetheless, at this stage, it cannot be determined whether this liquidation value of the company corre-
sponded to its market value. This is so in particular, because a liquidation value is the estimated value in
the event that operations cease. However, as already stated, the transaction took place on the condition
that production should continue.

Should the market value of 100 % of the State's shares in Iceland Cement have been higher than the price
of ISK […] paid by Íslenskt Sement ehf, the State would have sold the company below its market price.
State resources within the meaning of Article 61(1) of the EEA Agreement would have been involved
because the State would have obtained a lower revenue than a private operator, acting on market terms,
would have got for the same assets.

If the National Treasury of Iceland had paid a higher price than their market value for the assets repurch-
ased from Iceland Cement, State resources would also be consumed.

On the same day but in different agreements, the State was both the seller and the purchaser of these
concrete assets. Therefore, no State aid would be involved if the price of the assets remained the same in
both transactions.

Furthermore, Iceland Cement retains the right to use some of the assets located in Reykjavik sold to the
National Treasury, but does not pay anything for this right. The State is thus foregoing remuneration for
the use of its assets, which the company should pay under normal business circumstances. As already
mentioned above, there is a consumption of State resources within the meaning of Article 61(1) of the
EEA Agreement whenever the State foregoes income normally due.

At any time until 31 December 2009, the company has the right to reacquire certain properties and
ground rights in Reykjavik for a total of ISK […] million, assuming full payment in cash. The replacement
value of these properties (2) had been estimated by an independent expert at approximately ISK […]
million. Should Iceland Cement make use of this re-purchase price, the State might lose revenue if it sells
the assets for a price below their market value.

(1) The assets repurchased by the State in Reykjavik and Akranes had been estimated at a lower value in the original
assessment of the liquidation value: ISK […] million and ISK […] million respectively. According to the information
submitted by the Icelandic authorities lately their value was ISK […] million and ISK […] million respectively.

(2) This estimation did not include the steel silo with accompanying equipment, air compressors, dryer and electric
equipment in a storage shed by the dock, quayside crane, piping in cement pipe casing, vehicle scale and accompa-
nying computer equipment. This estimation did not include the value of the land itself, of which 2 050 m2 can
apparently also be acquired for this price.

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(b) Selective advantage

In order for Article 61(1) of the EEA Agreement to be applicable, the measure must be selective in that it
favours ‘certain undertakings or the production of certain goods’. Moreover, it must confer on certain undertak-
ings an advantage that reduces the costs they normally bear in the course of business and relieves them of
charges that are normally borne from their budgets.

The different measures identified in the various legal instruments mentioned above, in particular, the Share
Purchase Agreement between the Government of Iceland and Íslenskt Sement ehf, and the Purchase
Contract between Iceland Cement and the National Treasury of Iceland, have been granted selectively to
either the privatised company Iceland Cement or to the buyer of the company, Íslenskt Sement ehf.

Should it be determined that the transaction was not carried out on market conditions and that, accord-
ingly, State resources have been involved, Iceland Cement and/or Íslenskt Sement ehf. would have received
an advantage within the meaning of Article 61(1) of the EEA Agreement. This would be so because either
their costs were reduced or they were paid a price for assets higher than their market value.

(c) Distortion of competition

In order for Article 61(1) of the EEA Agreement to be applicable, the measure must distort competition.
Undertakings benefiting from an economic advantage granted by the State which reduces their normal
burden of costs, are placed in a better competitive position than those who cannot enjoy this advantage.

Any advantage granted to Iceland Cement which reduces the costs it should normally incur, places this
undertaking in a better competitive position vis à vis the other market player in the Icelandic cement
market which does not receive this advantage. By definition, competition is distorted.

Furthermore, any advantage granted to the consortium of investors, Íslenskt Sement ehf, at least in compe-
tition with the other investment groups which participated in the tender procedure employed by the
Icelandic Government for the acquisition of shares, also has the effect of distorting competition.

(d) Effect on trade

Finally, for Article 61(1) of the EEA Agreement to be applicable, the notified measure must have an effect
on trade between the Contracting Parties to the EEA Agreement.

The direct competitor of Iceland Cement in the Icelandic market is an undertaking located in another State
party to the EEA Agreement which does not produce cement in Iceland, but imports it from other EEA
countries into Iceland.

One of the companies participating in the consortium of investors who acquired Iceland Cement, is a
cement producer established in another country of the EEA. Other European companies were part of the
investors groups who participated in the tender to purchase the shares of Iceland Cement.

Accordingly, the measure affects trade between the Contracting Parties to the EEA Agreement within the
meaning of Article 61(1) of the EEA Agreement.

3. Conclusion

At this stage, based on the information submitted by the Icelandic authorities and for the abovementioned
reasons, the Authority has doubts about the classification of the notified sale and accompanying measures
as non-aid falling outside the scope of Article 61(1) of the EEA Agreement.

Consequently, and in accordance with Article 4(4) in Part II of Protocol 3 to the Surveillance and Court
Agreement, the Authority is obliged to open the formal investigation procedure provided for in Article
1(2) in Part I of Protocol 3 of the Surveillance and Court Agreement. The decision to open proceedings is
without prejudice to the final decision of the Authority.

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Should the Authority during this formal investigation procedure come to the conclusion that State aid has
been granted in the framework of the privatisation of Iceland Cement, it would like to note that the
Icelandic authorities have not provided any arguments and respective documentary evidence so far to
assess compatibility with the rules of the EEA Agreement.

In light of the foregoing considerations, the Authority, acting under the procedure laid down in Article
1(2) in Part I of Protocol 3 to the Surveillance and Court Agreement, requests Iceland to submit its
comments and to provide all such information as may help to assess the aid measure notified, within two
months of the date of receipt of this Decision,

HAS ADOPTED THIS DECISION:

1. The Authority has decided to open the formal investigation procedure pursuant to Article 1(2) in Part I
of Protocol 3 to the Surveillance and Court Agreement regarding the agreements related to the sale of
100 % of the shares of the Icelandic State in Iceland Cement.

2. The Icelandic Government is invited, pursuant to Article 6(1) in Part II of Protocol 3 to the Surveillance
and Court Agreement, to submit its comments on the opening of the formal investigation procedure
within two months from the notification of this Decision.

3. Other Contracting Parties to the EEA Agreement and interested parties shall be informed by the
publishing of this Decision in the EEA Section of the Official Journal of the European Union and the EEA
Supplement thereto, inviting them to submit comments within one month from the date of publication
of this Decision.

4. This Decision is authentic in the English language.

Done at Brussels, 20 December 2004.

For the EFTA Surveillance Authority

Hannes HAFSTEIN

President

Einar M. BULL

College Member