2006/262/EC: Commission Decision of  21 September 2005  on State aid No C 5/2004 (ex N 609/2003) which Germany is planning to implement for Kronoply  (notified under document number C(2005) 3497)   (Text with EEA relevance)
Date: 2005-09-21
Institutions: European Commission
Subjects: Germany, State aid, aid to undertakings, control of State aid, investment aid, wood industry

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Official Journal of the European Union

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COMMISSION DECISION

of 21 September 2005

on State aid No C 5/2004 (ex N 609/2003) which Germany is planning to implement for Kronoply

(notified under document number C(2005) 3497)

(Only the German text is authentic)

(Text with EEA relevance)

(2006/262/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

(4)

By letter dated 19 March 2004 (A/32003), Germany
submitted its comments.

Having regard to the Treaty
establishing the European
Community, 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
to those provisions (1) and having regard to their
pursuant
comments,

(5)

By letter dated 24 May 2004 (A/33878), Luther Menold
Rechtsanwaltsgesellschaft mbH submitted comments on
behalf of Kronoply. The comments were forwarded to
Germany on 19 November 2004 (D/58277).

2. DETAILED DESCRIPTION OF THE AID

2.1. First notification N 813/2000

(6)

The present case is related to Case No N 813/2000, in
which the Commission approved aid to Kronoply.

Whereas:

(1)

(2)

(3)

1. PROCEDURE

By letter dated 22 December 2003 (A/39031), Germany
notified the Commission that it was planning to award
an investment grant to Kronoply GmbH, Heiligengrabe
(hereinafter ‘Kronoply’) under the multi-
(Brandenburg)
sectoral framework on regional aid for large investment
(‘1998 multisectoral aid framework’). The
projects (2)
notified aid was registered under No N 609/03.

By letter dated 18 February 2004 (SG/D/200649), the
Commission informed Germany of
its decision to
initiate the procedure laid down in Article 88(2) of the
EC Treaty.

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

(1) OJ C 258, 20.10.2004, p. 12.
(2) OJ C 107, 7.4.1998, p. 7.
(3) See footnote 2.

(7)

(8)

aid

the 1998 multisectoral

On 3 July 2001 (SG/D/289524)
the Commission
approved a gross aid intensity of 31,5% for Kronopoly
in
under
connection with the construction of a production plant
for Oriented Strand Board (4)
in Heiligengrabe,
Brandenburg, an assisted area within the meaning of
Article 87(3)(a) of the EC Treaty. The aid intensity was
than the maximum
set 3,5 percentage points lower
because the relevant market was considered to be in
decline.

framework

(‘OSB’)

The Commission calculated the three assessment criteria
to be applied in determining the maximum allowable aid
intensity under the 1998 multisectoral aid framework.
in order to comply with those criteria,
Consequently,
the maximum allowable aid intensity was calculated to
be 31,5% (competition factor 0,75, capital-labour factor
0,8 and regional impact factor 1,5). The amount of aid
involved was therefore €35,4 million (5).

(4) OSB is a wooden panel used in construction and consisting of three
layers of ‘strands’ made primarily of pine. It is used in timber frame
construction, in particular for the refurbishment and restoration of
in the prefabricated building industry and in the
old buildings,
packaging industry.

(5) Consisting of investment aid in the form of (i) a non-repayable grant
amounting to €19,92 million under the 29th general plan of the
joint Federal Government/Länder scheme for improving regional
economic structures and (ii) an investment allowance of €15,48
million under the Investment Allowance Law 1999.

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(9)

that

the competition factor caused some
Calculation of
disagreement between the Commission and Germany.
Both sides agreed, however,
the relevant market
consisted of OSB and plywood products. Germany
this
initially provided studies which showed that
market was not
in decline. The Commission had
doubts concerning those studies because the results
hinged on exceptionally strong demand growth for
2000 as compared with previous years.
Information
was exchanged on several occasions before Germany
reduced the notified aid intensity from 35% to 31,5%:

(cid:127) By letter dated 22 December 2000 (A/40955),
Germany notified its
aid to
Kronoply under the 1998 multisectoral aid framework.

intention to grant

(cid:127) On 3 January 2001 (D/56400)

the Commission
requested further information. A meeting was held
on 11 January 2001 between representatives of the
German Government, the Land of Brandenburg, the
company involved and the Commission. The German
Government provided the requested information by
letters dated 9 February 2001 (A/31359) and 20
February 2001 (A/31463). By letter of 9 April 2001
(D/51511), the Commission sent additional questions
to which Germany
replied on 21 May 2001
(A/34090).

(cid:127) By letter dated 19 June 2001 (A/34812), Germany
reduced the notified aid intensity from 35% to 31,5%.

(cid:127) By letter dated 5 July 2001 (SG/D/289525),

Commission informed Germany that
objections to the aid.

the
it had no

(10)

By letter dated 3 January 2002 (A/30013), Germany
requested an amendment to the Commission decision.
the growth in demand
It provided evidence
that
the
estimated for 2000 had been achieved and that
market was therefore not in decline. By letter dated 5
February 2002 (D/50463), the Commission refused to
amend its earlier decision because the aid had been
assessed on the basis of a correct calculation of all the
relevant factors. More specifically, the Commission could
not amend its decision for the following reasons: the
relied on a
assessment of
competition factor
comparison between the evolution of
the apparent
in question and the
consumption of
growth rate in manufacturing as a whole during the
period 1994-1999 and on a forecast which, at
the
time of the decision, was correct.

the product

the

2.2. Second notification N 609/2003

been rejected previously, by granting additional aid
equivalent to 3,5% (or €3 939 947).

(12) Germany argued that the market definition given in the
original notification N 813/2000 had been factually
wrong and referred to Article 9 of Council Regulation
(EC) No 659/1999 of 22 March 1999 laying down
detailed rules for the application of Article 93 of the
(‘Regulation (EC) No 659/1999’), which
EC Treaty (6)
allows the revocation of a decision under the following
‘The Commission may revoke a decision taken
conditions:
[…] where the decision was based on incorrect information
provided during the procedure which was a determining
factor for the decision.’

the newly submitted studies

(13) While the relevant market was defined in the original
notification as OSB and plywood, Germany claimed
that
the
relevant market was more correctly defined as OSB and
only certain segments of plywood. Using this new market
definition, the relevant market would not be in decline
during the period concerned (see point 3.4 of the 1998
multisectoral aid framework) and so the full aid intensity
of 35% would have to be approved.

showed that

(14)

(15)

2.3. Decision to initiate the procedure

The Commission did not comply with the request by
Germany that, on the basis of a different definition of
substitutable products,
the relevant market should be
limited to OSB and certain segments of plywood.

to be necessary because

The Commission did not consider a reassessment of the
market
two fundamental
elements were missing, and this gave rise to serious
doubts as to whether the aid was compatible with the
common market:

(cid:127) Lack of

incentive: The Commission expressed serious
doubts about the existence of any incentive effect of
the notified aid because the investments had already
been made. If the aid does not provide any incentive,
the derogations laid down in Article 87(3)(a) and (c) of
the EC Treaty concerning regional development do not
apply.

(cid:127) Lack of necessity: The Commission seriously doubted
that aid for investments already made could still be
considered necessary to facilitate the development of
certain economic activities or of certain economic
areas within the meaning of Article 87(3)(a) and (c).
In the case in point, the aid intensity of 31,5% was
sufficient to trigger the investment.

(11) An attempt was made with the second notification to
achieve the maximum intensity of 35%, which had

(6) OJ L 83, 27.3.1999, p. 1; as amended by the 2004 Acts of

Accession.

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3. COMMENTS FROM GERMANY

(16) Germany insisted that the Commission had to reassess
the market in accordance with Article 9 of Regulation
(EC) No 659/1999:

structures,

(cid:127) The aid would be granted under the joint Federal
improving regional
Government/Länder scheme for
economic
Commission
the
which
approved as a regional aid scheme. The Commission’s
duty,
the
therefore, was simply to assess whether
measure notified complied with the requirements set
out in the approved aid scheme and was compatible
with the 1998 multisectoral aid framework. As the aid
concerned by the new notification fulfilled all these
requirements, the aid measure was clearly investment
aid and not operating aid.

(cid:127) The European Court of First Instance confirmed in its
judgment in Kronoply (7) that it was possible to notify
additional aid or a change to existing aid. The
Commission could not, therefore, classify the aid in
the second notification as operating aid on the
grounds that the project had already been completed.
the possibility of notifying further aid
Otherwise,
measures – as confirmed by the Court - would be
meaningless.

4. COMMENTS FROM INTERESTED PARTIES

(17)

Kronoply insisted that several notifications were possible
for the same investment project and supported its line of
argument with rulings from several court cases:

(cid:127) The European Court of First Instance confirmed in
Kronoply (8)
change
to
additional
that
existing aid was possible:
the national
authorities cannot be denied the right to notify a measure
with which further aid shall be granted or an existing aid
measure shall be amended.’

aid or
a
‘Furthermore,

(cid:127) A similar opinion was expressed in Nuove Industrie
‘…the [Commission] Decision does not
Molisane Srl (9):
preclude the possibility for the Italian authorities to notify a
project to introduce new aid in favour of the applicant, or to
amend the aid already granted it.’

(18)

Kronoply also emphasized that the Commission had to
assess
the new notification on its own merits and
advanced two main arguments for this:

(7) Case T-130/02 Kronoply v Commission [2003] ECR II-4857.
(8) See footnote 7, paragraph 50.
(9) Case T-212/00 Nuove Industrie Molisane Srl v Commission [2002] ECR

II-347, paragraph 47.

(cid:127) The Commission could not rely on the earlier market
assessment because it had been based on a factually
wrong market definition.

(cid:127) Kronoply had no possibility of having the Court
review the Commission's original decision because its
interests were not affected (10).

(19)

Kronoply denied that there was any lack of incentives
and supported this view with the following main
arguments:

(cid:127) Point 4.2. of

the Guidelines on national

regional
aid (11) (‘regional aid guidelines’) indicates how to test
‘In
whether there is an incentive. It reads as follows:
addition, aid schemes must lay down that an application for
aid must be submitted before work is started on the projects.’
Kronoply fulfilled this requirement by applying to the
national authorities for aid before the start of
the
aid provided the desired
project. Therefore
incentive and fulfilled the criterion of necessity with
a view to promoting economic development within
the meaning of Article 87(3)(a) of the EC Treaty.

the

(cid:127) Kronoply had consistently applied for an aid intensity
of 35%. The reduction in the intensity of the notified
aid did not mean that
further aid was no longer
necessary. As the formal procedure might take up to
eighteen months,
it was more advantageous for the
recipient to receive immediately the part of the aid
the admissibility of which was not challenged by the
Commission.

5. ASSESSMENT

(20) Having considered the comments submitted by Germany
and Kronoply, the Commission maintains the position it
took in the decision instituting the procedure, viz. that a
reassessment of the market under the 1998 multisectoral
aid framework is not necessary because the two funda-
mental elements of incentive and necessity are missing in
the present case.

5.1. No further eligible investment costs within the
meaning of the regional aid guidelines

(21)

The Commission takes the view that the present notifi-
cation N 609/03 (dated 22 December 2003) has to be
regarded as a separate and second notification of aid for
Kronopoly – albeit aid that does not give rise to any new
investment or jobs. Consequently, there are no new addi-
tional eligible costs within the meaning of the regional
aid guidelines that might justify the granting of additional
aid.

(10) See footnote 9, paragraph 41.
(11) OJ C 74, 10.3.1998, p. 9.

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(22)

The Commission approved investment aid for Kronoply
amounting to €35.4 million in its decision SG (2001)
D/289524 of 3 July 2001, which was based on the
information provided by the German authorities at the
time. It decided not to raise any objections and approved
the aid as finally proposed by Germany. The decision was
accepted by Germany and Kronoply. The aid was subse-
quently granted by the German authorities and Kronoply
completed its investment project on 31 January 2003.

(23) Only eighteen months after

the Commission's

final
decision – and almost a year after completion of the
investment project - Germany provided a new market
definition by notification of 22 December 2003 and
explained that, on the basis of new studies, the relevant
market was more correctly defined as the market for OSB
and only certain segments of plywood. As already stated
in its decision to open the
investigation
procedure, the Commission will not, under these circum-
stances, reconsider its previous decision. It takes the view
that the submission of a different market definition by
Germany cannot be subsumed under Article 9 of Regu-
lation (EC) No 659/1999.

formal

granting additional aid will not lead to new investments
or to any incentive effect, it would like to expand on the
concept of incentive effect in response to the comments
submitted by Germany and Kronoply.

5.2.1. Investment process

(27)

investment

Business
should be seen as a dynamic
process. It is important to differentiate between the ex
ante and the ex post stages:

(cid:127) Companies decide ex ante whether or not to undertake
calculations on the
an investment, basing their
expected revenues and costs of
the
expected return on the investment project is higher
than the required rate of return, they will embark on
the project. Regional aid should be an incentive for
companies to change their behaviour and to invest
in regions in which they would otherwise not invest.

the project.

If

(24)

In line with the judgment of the Court of First Instance
in Kronoply, the Commission considers that it is indeed
possible for a Member State to notify, and for the
Commission to approve, additional aid or a change to
an approved project, or even different tranches of state
aid for a given project, provided that both the incentive
effect and the necessity of the aid can be established for
each tranche. However, Germany did not notify any addi-
tional
investment projects planned by Kronoply in
addition to the already completed project. Besides, the
project to be financed had been completed about one
year before the new aid project was notified. The
Commission has thus come to the conclusion that this
second notification was designed simply to achieve the
higher aid intensity of 35% rejected previously and that
there were no additional eligible costs for which aid of
€3 936 947 could be approved and no incentive effect
or necessity.

(cid:127) Once an investment has been undertaken, it is difficult
to reverse ex post because a substantial part of it goes
into specific assets which cannot easily be redeployed.
In selling such assets, the seller would lose some of the
investment capital.

5.2.2. Ex ante assessment of the incentive effect under the

regional aid guidelines

(28)

the regional aid guidelines applies the
Point 4.2 of
following test to determine whether or not the aid has
an incentive effect: the beneficiary must apply for aid
this condition is
before the start of
the project.
fulfilled,
there is an
that
incentive effect.

If
the Commission assumes

(25) As the Court of Justice of the European Communities
ruled in Germany v Commission (12), the Commission has
to consider such aid as operating aid because it is granted
without imposing any obligation on the part of recipients
and is intended to improve the liquidity situation of their
undertakings.

(29)

In their comments, Germany and Kronoply claimed that
the test in point 4.2 of the regional aid guidelines was
met because Kronoply had submitted its aid application
before the start of the project.

5.2. Incentive effect

(30)

(26)

Even though the Commission considers
foregoing

comments

that
the
to show that

sufficient

are

(12) Case C-288/96 Germany v Commission [2000] ECR I-8237,

paragraph 48.

The test of point 4.2 is designed to check for the
incentive effect without unduly delaying the investment.
A full analysis of the economic circumstances of the
recipient's
very
decision might
difficult or time-consuming and might
therefore hold
up the investment and the economic development of
the region.

investment

prove

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(31)

In assessing the presence of the incentive effect for the
additional aid corresponding to 3,5 %, the key question is
whether the difference between 31,5% and 35% changed
the incentive effect and influenced Kronoply’s investment
decision:

the adjustment

(cid:127) Prior to the investment, Kronoply could not know
how much aid it would eventually receive since the
factors in the 1998
assessment of
the discretion of
multisectoral aid framework is at
the Commission. Kronoply was unsure
therefore
it would be granted an aid intensity of
whether
expected
the
assumed that
It
31,5% or 35%.
intensity would lie between these
two values,
depending on the probabilities attached to the two
possible outcomes. Kronoply based its
investment
decision on the expected amount of aid.

(cid:127) The Commission notes

that Kronoply decided to
undertake the investment even though the precise
amount of aid or the aid intensity was not known.
Moreover, Kronoply completed the investment after
It was,
an aid intensity of 31,5% was approved.
therefore,
risk
attaching to an aid intensity of only 31,5%.

clearly prepared to take on the

(cid:127) The fact that Kronoply met the test of point 4.2 of the
regional aid guidelines does not therefore mean that
the expectation of these extra 3,5 percentage points
provided an incentive effect.

5.2.3. Ex post assessment of the incentive effect on the basis

of the facts

(32)

the Commission considers

Instead of examining even more closely the ex ante
decision of Kronoply,
it
more appropriate to rely on the facts.
It is apparent
that Kronoply decided to invest and continued its
operations after having been granted an aid intensity of
only 31,5%. The investment project was completed as
originally planned. Kronoply did not scale down the
investment project in response to the lower aid intensity.

(33) Whether further aid is granted or not, Kronoply will not
change its behaviour: There is no indication that further
aid will
induce it to increase production or enlarge its
production facilities. As the investments have already
been carried out,
there is also no reason to assume
that Kronoply will shut down production if it does not
receive any more aid.

(34) Accordingly,

the Commission

the
conclusion that granting further aid of 3,5% will not
provide any incentive effect.

come

has

to

(35) As stated in the decision to initiate the procedure, for aid
measures to help promote the development of certain
economic activities or of certain economic areas within
the meaning of Article 87(3)(a) and (c) of the EC Treaty,
they must act as an incentive. If, as in the case in point,
the investments have already been carried out, the aid
provides no such incentive and does not lead to new
investment or job creation. Therefore the Commission
is not in a position to justify the aid because of an
increase in new investment or job creation within the
meaning of Article 87(3)(a) and (c). It again concludes
aid of €3 936 947 constitutes
that
the
operating aid.

additional

5.3. Necessity

(36) As regards the statements in the decision to initiate the
procedure, the Commission considers that the principle
of necessity derives directly from the logic of state aid
control. It can declare aid compatible with Articles 87(2)
and (3) of the EC Treaty only if it can establish that the
aid contributes to the attainment of one of the objectives
something which, under normal market
specified,
firms would not achieve by
conditions,
the recipient
their own actions. This
in accordance with the
is
Commission's standard practice, as confirmed by the
Court of Justice of the European Communities in Philip
Morris (13).

(37) As explained in paragraphs 26 to 35, the planned aid
does not provide any incentive for new investment or
job creation. It does not require from the recipient any
quid pro quo or any contribution to an objective of
common interest. Therefore,
it is operating aid which
covers current costs that Kronoply itself must normally
bear.

(38)

(39)

Point 4.15 of
the regional aid guidelines normally
prohibits operating aid. Exceptionally, however, such
aid may be granted in regions eligible under the dero-
gation in Article 87(3)(a) provided that (i) it is justified in
terms of its contribution to regional development and its
nature and (ii) its level is proportional to the handicaps it
seeks to alleviate. Germany has not demonstrated the
existence of any handicaps or shown how the additional
aid is to contribute to regional development.

It is evident from the facts that any further aid is not
necessary because Kronoply decided to continue its
operations even after only the lower aid intensity of
31,5% was approved. This means that Kronoply runs a
viable economic operation or that, in any event, it does
not need any more aid. At this stage, any further aid
would provide a windfall profit for Kronoply.

(13) Case 730/79 Philip Morris v Commission [1980] ECR 2671.

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(40)

The Commission concludes therefore that, in the present
case, the aid is also not compatible with Article 87(3)(a)
of the EC Treaty because it is not necessary for regional
development.

87(1) of the EC Treaty. As the aid neither provides any
incentive effect nor is necessary, none of the derogations
in Article 87(2) or (3) apply. The aid therefore constitutes
incompatible operating aid and may not be implemented,

(41)

it will be examined whether the derogations in

Lastly,
Article 87(2) and (3) are applicable:

HAS ADOPTED THIS DECISION:

(cid:127) The derogations in Article 87(2), which concern aid of
a social character granted to individual consumers, aid
to make good the damage caused by natural disasters
or
and aid granted to
compensate for the economic disadvantages caused
by the division of Germany, do not apply in this case.

exceptional occurrences

(cid:127) The aid cannot be considered as aid for a project of
common European interest or to remedy a serious
disturbance in the German economy, as provided for
by Article 87(3)(b). Nor does it have as its object the
promotion of culture and heritage conservation, as
provided for by Article 87(3)(d).

the

(cid:127) Article 87(3)(c) provides for the approval of aid to
facilitate
certain economic
development of
activities or of certain economic regions, where such
aid does not adversely affect trading conditions to an
extent that is contrary to the common interest. As the
aid has been found to be incompatible with Article
87(3)(a) because it neither provides an incentive
effect nor is necessary,
the aid cannot be declared
compatible with Article 87(3)(c) for the same reasons.

Article 1

The state aid which, according to notification N 609/2003,
Germany is planning to implement for Kronoply, amounting
to €3 936 947, is incompatible with the common market.

The aid may accordingly not be implemented.

Article 2

Germany shall inform the Commission, within two months of
notification of this decision, of the measures taken to comply
with it.

Article 3

This decision is addressed to the Federal Republic of Germany.

Done at Brussels, 21 September 2005.

6. CONCLUSIONS

(42)

The Commission concludes
constitutes

the notified aid
that
state aid within the meaning of Article

For the Commission

Neelie KROES
Member of the Commission