Commission Decision of 26 September 2006 concerning the State aid granted by the Netherlands to Holland Malt BV (notified under document number C(2006) 4196)
Date: 2006-09-26
Institutions: European Commission
Subjects: Netherlands, State aid, beverage industry, control of State aid, investment aid, investment project, malt

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COMMISSION DECISION

of 26 September 2006

concerning the State aid granted by the Netherlands to Holland Malt BV

(notified under document number C(2006) 4196)

(Only the Dutch text is authentic)

(2007/59/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

II.

DESCRIPTION OF THE AID MEASURE

Having regard to the Treaty establishing the European Commu-
nity, and in particular the first subparagraph of Article 88(2)
thereof,

Having called on interested parties to submit their comments (1)
pursuant to the provision(s) cited above and having regard to
their comments,

Whereas:

(1)

(2)

(3)

(4)

(5)

(6)

I.

PROCEDURE

The measure was notified in accordance with Article 88 (3)
of the EC Treaty by letter of 31 March 2004, registered on 6
April 2004.

By letters of 1 June 2004, 12 August 2004 and 16 February
2005, the Commission asked the Netherlands for further
information. By letters dated 5 July 2004, 17 December
2004 and 15 March 2005, registered as received on 7 July
2004, 3 January 2005 and 23 March 2005 respectively, the
Netherlands replied to the Commission's requests.

By letter dated 5 May 2005, the Commission informed the
Netherlands of its decision to initiate the procedure laid
down in Article 88(2) of the Treaty concerning this aid
measure.

The Commission decision to initiate the procedure was
published in the Official Journal of the European Commu-
nities (2). The Commission requested the interested parties
to submit their comments on the aid measure in question.

By letter dated 10 June 2005 the Netherlands submitted a
series of comments.

The Commission received comments
from interested
parties. It forwarded them to the Netherlands, which was
given the opportunity to react; the Netherlands' comments
were received by the Commission by letter dated 14
October 2005.

(1) OJ C 154, 25.6.2005, p. 6.
(2) See footnote 1.

(7)

(8)

(9)

The Netherlands has decided to grant a subsidy to Holland
investment scheme ‘Regionale
Malt BV under a regional
(hereinafter called the IPR
investeringsprojecten 2000’
scheme). The regional
investment scheme was approved
by the Commission in 2000 (3); on 18 February 2002 an
amendment to the scheme was also approved (4), whereby
the IPR scheme was applied to the sectors processing and
selling agricultural products listed in Annex I to the Treaty.

The present case concerns a subsidy for an investment
project of Holland Malt BV. Holland Malt BV, hereinafter
referred to as ‘Holland Malt’, is a joint venture between the
brewery Bavaria NV and Agrifirm, a cooperative association
of cereal producers in North Netherlands and Germany.
The subsidy is for building a malting plant in Eemshaven, in
the municipality of Eemsmond. As a result of
the
investment, the various stages (storage and processing of
malting barley and the production of and trade in malt) will
be integrated in one chain.

The Netherlands Ministry of Economic Affairs has decided
the eligible
to subsidize 13,5 % gross (10 % net) of
investments of EUR 55 million, with a maximum of EUR
7 425 000. Because it concerns a subsidy for an investment
project by an undertaking in the sector processing and
marketing agricultural products mentioned in Annex I of
the Treaty, and the eligible costs of the project are over EUR
25 million, the aid must be specifically notified to the
Commission under point 4.2.6 of the Community guide-
lines for state aid in the agriculture sector (5) (hereinafter
referred to as ‘the guidelines’).

(10) The decision by Holland Malt to invest was taken after the
to granting a
Dutch government had committed itself
subsidy by letter dated 23 December 2003. The commit-
ment was entered into subject to approval of the aid by the
European Commission. The building activities of Holland
Malt in Eemshaven started in February 2004. The plant
became operational in April 2005.

(11)

In initiating the procedure under Article 88(2) of the Treaty,
the Commission had regard to the following:

(3) Regionale investeringsprojecten 2000 (IPR 2000-2006), N 549/99.
Approved on 17 August 2000 by letter SG (2000) D/106266.

(4) Wijziging Regionale

investeringsprojecten 2000, N831/2001.

Approved on 18 February 2002 by letter C(2002)233.

(5) OJ C 28, 1.2.00, p. 2.

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(12) Having established that the measure at this stage would
appear to be state aid within the meaning of Article 87(1)
of the Treaty, the Commission investigated whether there
were any derogations which meant that the measure could
be considered compatible with the common market.

(13)

In view of the measure's characteristics, the only possible
derogation is that in Article 87(3)(c) of the Treaty, under
which 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 compatible
with the common market.

(14) As the aid was linked to an investment in the processing
and marketing of agricultural products, the Commission
had to verify whether all requirements of point 4.2 of the
guidelines were fulfilled. The Commission doubted the
for the
applicability of Article 87(3)(c) of
following reasons:

the Treaty,

(15) Point 4.2.5 of the guidelines states that no aid may be
granted for investments in connection with the processing
and marketing of agricultural products unless sufficient
evidence can be produced that normal market outlets for
the products concerned can be found. On the basis of the
information available to the Commission at the time of the
opening of the procedure, it could not be excluded that the
malt market showed overcapacity.

(16) Holland Malt argued that it provided ‘premium malt’ of
high quality for the production of ‘premium beer’ and that
the market for this kind of malt and beer was still growing.
However, at the time of the opening of the procedure, it
was not clear whether ‘premium malt’ and ‘premium beer’
were not simply marketing concepts and therefore did not
correspond to a specific separate product market for which
overcapacity could be excluded.

III.

COMMENTS FROM INTERESTED PARTIES

(17) The Commission received comments from

— the Finnish Maltsters' Association

— the Maltsters's Association of Great Britain

— the German Maltsters' association

— the French Maltsters' Association

— the Danish Maltsters' Association

— Holland Malt

— the Dutch province of Groningen.

(18) The Finnish Maltsters' Association opposes the Netherlands'
intention to grant a subsidy to Holland Malt B.V, saying that
state subsidies for malting plant investments will have an
anti-competitive impact. It mentions that the overcapacity
in the malting industry in the Community is about one
million tonnes, which would necessitate a closure of 10 %
of the capacity during the coming years. As for Holland
the
Malt's claim that
production of
the Finnish Maltsters'
Association mentions that existing malting houses in the
Community can already serve the market with a wide range
of malts including high quality ‘premium malt’.

it provides ‘premium malt’

‘premium beer’,

for

(19) The Maltsters Association of Great Britain strongly believes
that any state aid for malting must by expressly prohibited.
It refers to a letter of 2004 from Euromalt, the European
association representing the malting industry,
to the
Commission, in which the association expresses its concern
that no new malting capacity should receive state funding
due to the existing overcapacity of malt production in both
the Community and the world market (6). According to the
association, the Member States have a malting capacity of
8,8 million tonnes, with demand at about 5,9 million
tonnes. This leaves a potential Community export surplus
of 2,9 million tonnes to serve a global market in which 4,3
million tonnes are traded annually. Community malt export
licences were issued in the 2003/2004 marketing year for a
total of 2,48 million tonnes. In the marketing year ending
June 2005, this fell to 2,22 million tonnes, reflecting the
difficult market situation and limited market opportunities
for Community maltsters. The Maltsters' Association of
Great Britain estimates that the surplus of malt in the
Community is 500 000 tonnes, which is expected to grow
to nearly one million tonnes due to a combination of new
capacity still
to come on stream and reduced export
demand from Russia and Eastern Europe as those areas
have become virtually self-sufficient. According to the
Maltsters' Association of Great Britain, the effect of this
overcapacity has been that, in the current market for malt,
prices have fallen to a level where variable costs are no
longer covered. The Maltsters Association of Great Britain
the new Dutch
furthermore contests the notion that
capacity has been built
for
premium markets. There has been significant consolidation
in the brewing industry and the majority of maltsters'
customers want only high-quality malt that meets their
exacting (and often global) specifications and satisfies all
food safety requirements. To divide the malt market into
premium and non-premium sectors defies reality, according
to the Maltsters Association of Great Britain.

to produce premium malt

— an interested party which on grounds of potential
damage requested that its identity be withheld

— the Dutch Agriculture and Horticulture Organisation

(LTO Nederland)

— Agrifirm

(20) The German Maltsters' Association is very concerned about
the intention of the Netherlands to grant an investment
subsidy for the establishment of a production plant for malt

(6) Letter dated 23 July 2004 on the granting of subsidies for the

construction of malt houses.

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in the province of Groningen. According to the German
Maltsters' Association, exports from the Community to
traditional sales areas such as the Mercosur countries and
Russia/Ukraine will decline markedly due to the develop-
ment of an own malting industry and protection against
imports. In addition, overseas competitors such as Canada
and Australia are doing extremely well because of their
proximity to the still growing beer markets of the Far East
and South-East Asia and because of their governments'
liberal trade policies. Simultaneously, malt sales in the
leading to an EU over-
internal market are stagnating,
capacity in the Community of around one million tonnes.
The German Maltsters' association considers that
the
local malting barley production is not a
promotion of
the entire Dutch
that
proper argument.
production of malting barley is already bought by the
malting industry and that the new production plant in
Groningen will depend on barley imports.

It points out

(21) The French Maltsters' Association is against any state aid for
new malting factories in the Community. It refers to the
same letter from Euromalt as the Maltsters' Association of
Great Britain and mentions the same production, import
and export figures for malt.
It also states that malt is
currently being traded at prices at which variable costs are
not covered. According to the French Maltsters' Associa-
tion, justifying the state aid for the Dutch investment by
referring to a separate market for high-quality malt is not
correct, since the majority of brewers ask for such high
quality malt. Finally the French Maltsters' Association is of
the opinion that the Community malting industry would
actually have to close obsolete malting plants to improve
market conditions.

It is characterised by private ownership,

(22) The Danish Maltsters' Association objects to the planned
subsidy for Holland Malt. According to the Association, the
malting industry worldwide is based on free market
conditions.
its
development being driven by private investments made by
companies in the malting sector. A subsidy of EUR 7,4
million out of a total investment of EUR 55 million would
distort competition and give an unjustified comparative
advantage for
the company receiving such a subsidy,
especially in the first years after commissioning. The Danish
Maltsters' Association furthermore objects to the argument
is distinguished from ‘normal
whereby ‘premium malt’
malt’. Malt is a generic product, with slight variations, but
to quality standards imposed by the brewing
subject
industry. Lastly,
the Danish Maltsters' Association does
not see any local or regional reasons to subsidise the
investment in the Eemsmond region, which is, in its view, a
normal developed region in the Netherlands with an
infrastructure that is closely associated with the barley and
malt supply chain.

(23) The interested party which on grounds of potential damage
requested that its identity be withheld objects to the subsidy
for the following reasons. It considers a distinction between

reasons

regional

premium and normal malt artificial, does not see any local
or
to subsidise the investment and
considers that the subsidy would distort competition on
the malt market, which is characterised by private owner-
ship and private investments.

in Eemshaven is of great

(24) The Dutch Agriculture and Horticulture Organisation (LTO
Nederland) is of the opinion that the Holland Malt malting
plant
importance for arable
farming in that region. The location of the factory at a port
and the production process aimed at
the high-quality
segment of the malt and beer market offer considerable
socio-economic prospects for arable farming in the north-
east Netherlands. It will stimulate the cultivation of cereals
that can be used in this production process. The barley of
the arable farmers forms part of a fully registered and
certified integrated chain,
leading to an end product of
high-quality beer. The two most important crops being
grown in this region are starch potatoes and sugar beet.
However, efficiency improvements and reform of Commu-
nity policy have meant that the area under these crops has
become smaller. Barley for the malting factory would offer
one of the few lucrative alternatives to growing these crops.
For these reasons, arable farmers have promised a financial
stake in Holland Malt.

(25) Agrifirm fully supports the granting of a subsidy to Holland
Malt. It is cooperating with the brewery Bavaria in the
Holland Malt joint venture, which provides an integrated
chain with regard to the cultivation, storage and processing
of malting barley. According to Agrifirm, the Holland Malt
production and storage facility provides unique opportu-
nities. The cultivation of malting barley will offer better
prospects for farmers in the region. By focusing on the
production of malting barley that meets the needs for
premium malt, farmers in the region can profit from the
growth prospects afforded by the market for premium beer.
Building the plant in Eemshaven will, given the logistic
advantages, create new industrial activity in North Nether-
lands. The decision of the Dutch government to grant a
subsidy provides a basis for feasible exploitation in the first
critical years of the project.

(26) According to Holland Malt, it is possible to argue that there
is a separate market for premium beer and premium malt.
In the premium malt market, outlets for Holland Malt's
HTST (‘high temperature, short time’) malt can easily be
found. HTST malt increases stability of taste, flavour and
sparkle and therefore the shelf life of beer. Holland Malt
refers to a letter from the University of Weihenstephan,
Munich, which confirms that the patented technology leads
to a type of malt that can clearly be distinguished from
regular malt (7). In addition, a premium beer brewer, in an
annex to the letter from Holland Malt, also recognises the
unique features of HTST malt. HTST malt will, moreover, be
priced in a higher price range than regular malt produced
by other malt houses. As a result of its unique physical
characteristics, its perceivable quality and its higher price

(7) Letter from Dr. Krottenthaler of the University of Weihenstephan,

May 2005.

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range, it is very likely according to Holland Malt, that there
will be no or limited substitutability between HTST malt
and regular malt. HTST malt is expected to create a demand
and a market of its own. According to Holland Malt, it
cannot simply be assumed therefore that its investment will
result in a capacity increase of 55 000 tonnes on the
market for regular malt.

(29) The province of Groningen supports the state aid for the
Holland Malt investment. It refers to the positive effect on
employment in the region. It also underlines the innovative
technology used in the project and the boost it will give to
the development of Eemshaven,
inter alia through the
creation of an agri-business park. The province also
mentions the stimulus it will provide to farmers facing
difficulties in traditional,
locally grown crops like starch
potatoes. Changing to the cultivation of malting barley will
give them better prospects.

(27) Holland Malt also notes that, despite the overcapacity in the
global market, the investment in Holland Malt will not
necessarily lead to more capacity. Holland Malt, being
located at a deep sea port, will find normal outlets in the
market for export malt. While the growth prospects of the
inland European malting industry may deteriorate on
account of falling demand for malt in Western Europe,
the export trade in malt offers substantial growth prospects.
According to Holland Malt, this is confirmed by three
reports from 2005 (8). These show that emerging markets
in Asia, Latin America, Africa and Eastern Europe place the
highest requirements on malt and that the European malt
industry has a competitive advantage because of the high
quality of
its malt. Holland Malt notes that it has no
difficulties in finding normal outlets for its malt and refers
to the fact that its order books were full for 2005, while for
the second year in a row it would sell more malt than it
produced.
its closed capacity at
that
Wageningen and Lieshout was catering for the declining
malt market in Western Europe, whereas the new capacity
at Eemshaven will be targeted at a growing export market.
As a result, the net increase in capacity on the malt market
will be smaller than is stated in the Commission's letter of 5
May 2005. Holland Malt contends that the investment in
the facility at Eemshaven will affect
trade with third
countries rather than trade between Member States, as the
export of malt is a separate market segment from that in
which inland malt
suppliers operate. Holland Malt
emphasises that the situation on the world malt market
did not prevent the Commission from authorising invest-
ment aid for a malting plant in Lithuania.

It also notes

(28) Holland Malt states that the investment will have a positive
impact on the rural development of the North Netherlands
region and Germany. It will create an alternative form of
crop-growing for a large number of arable farmers (about
1 800). Farmers will grow high quality malting barley for a
growing market that, unlike feed barley, will not end up in
the
the Community intervention scheme.
cultivation of malting barley is less harmful
the
environment than that of feed barley. Holland Malt notes
that
its integrated malt production and barley storage
facility makes a definite contribution to food safety.

In addition,
for

(8) RM International, Malt Market Report, 22 April 2005; Rabobank,
The malt industry, a changing industry structure, driven by emerging
beer markets, March 2005; H.M. Gauger, Market report, May 2005
H.M. Gauger is a malt broker/consultant who issues a monthly malt
market report containing data on the production of, and trade in
malt.

IV.

COMMENTS FROM THE NETHERLANDS

(30) The Netherlands responded to the opening of the procedure
by letter of 10 June 2005. It reacted to the comments from
third parties by letter of 14 October 2005, having requested
an extension of the period for replying.

(31)

(32)

In the first letter, the Netherlands states that although the
growth prospects for the inland European malting industry
may deteriorate given the decreasing demand for malt in
Western Europe, the export trade in malt offers substantial
growth prospects. Holland Malt can profit from its location
at a deep sea port. In this sense it is fair to talk of a divided
malt market. The investment in Holland Malt will not affect
the already shrinking market of local, inland malt houses in
Western Europe. The Netherlands states that the quantity of
malt
for which export certificates were issued in the
Community in 2004/05 was the same as in 2003/04 and
requests the Commission to take account of the most
recent data on export
the
Netherlands considers that a special market segment exists
for the high-quality malt of Holland Malt. Reference is made
to the letter
from the University of Weihenstephan
confirming the distinctive characteristics of HTST malt.

certificates. Furthermore,

In its response to the comments from third parties, the
Netherlands affirms that in the coming years the world
market for malt will grow. Reference is made to a seminar
on malting barley on 4-5 October 2005, at which the
International Grains Council (9) forecast that global malting
capacity will have risen by 10 % in 2010. At this seminar,
Rabobank announced that global beer consumption was
growing by 2 % a year, mainly caused by increasing beer
consumption in emerging markets like South America,
Africa, Russia, South-East Asia and China. Modern malting
facilities located at deep sea ports and able to produce in
bulk will be able to profit from this development. The
Netherlands refers to a letter from Euromalt of August
2005 (10),
is stated that small, old and
inadequate capacity must be closed. The same letter
mentions an overcapacity in the Community malting

in which it

(9) An intergovernmental organisation in the cereal trading sector.
(10) Euromalt: ‘The EU malting industry’, August 2005

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industry of at least 500 000 — 700 000 tonnes. The
Netherlands, however, claims that this figure is based on a
production of 24 hours a day, 7 days a week, 365 days a
year. Periods of standstill are not taken into account, which
makes it uncertain whether overcapacity actually exists. The
Netherlands furthermore refers to a report (11) by the
research bureau Frontier Economics on Holland Malt (on
the geographic market and innovation aspects). The report's
conclusion is as follows:
‘there is no indication that the
subsidy granted to Holland Malt will lead to a displacement
of malt sales by other European producers over and above
that which would occur in any event. There is no indication
therefore that the provision of the subsidy would exacerbate
any overcapacity among European producers of standard
malt’. The Netherlands requests the Commission to take
account of the existence of a separate market for HTST
malt, a type of high-quality malt which counteracts the
‘ageing’ of beer. In addition, it mentions a further closure of
12 000 tonnes of malting capacity, bringing the total
closure of existing capacity to 77 000 tonnes. The extra
capacity is merely 0,5 % of the total Community produc-
tion capacity, which would not distort the Community malt
market. Finally, the Netherlands states that the subsidy it
plans to give is only meant to compensate the location
disadvantage of Eemshaven and to offer a level playing field
to Holland Malt
the subsidy, a comparable
investment would have been made in a production plant
in the deep sea port of Terneuzen).

(without

(35) The measure consists of a direct subsidy for investment. It is
selective in the sense that it favours one single undertaking,
i.e. Holland Malt.

(36) According to the case law of

Justice,
improvement in the competitive position of an undertaking
resulting from a state aid generally points to a distortion of
competition compared with other competing undertakings
not receiving such assistance (13).

the Court of

(37) A measure affects trade between Member States adversely if
it hampers imports from other Member States or facilitates
exports to other Member States. The deciding factor is
whether there is a risk that intra-Community trade will
develop differently or is liable to develop differently as a
result of the measure in question.

to significant

intra-Community trade.

(38) The product to which the aid in question relates (malt) is
In 2004,
subject
some 1,3 million tonnes of malt were traded within the
Community. This represented some 15 % of total 2004
Community malt production (14). The sector
thus
exposed to competition. Therefore, there is a risk that
intra-Community trade will develop differently as a result of
the measure.

is

V.

ASSESSMENT OF THE AID

(39) The measure in question thus constitutes aid within the

meaning of Article 87(1) of the Treaty.

Market organisations

(33) The measure concerns aid to an undertaking that is active
in barley processing. Under Article 23 of Council
Regulation (EC) No 1784/2003 of 29 September 2006
on the common organisation of the market in cereals (12),
Articles 87, 88 and 89 of the Treaty are to apply to the
products covered by the Regulation. The sector concerned
by the aid scheme in question is therefore subject to the
Community rules on state aid.

Article 87(2) of the Treaty: exceptions

(40) Exceptions

to the prohibition in Article 87(1)

are

established in paragraphs 2 and 3 of that Article.

(41) The exceptions listed in Article 87(2) are not applicable,
given the nature of the aid measure and its objectives. Nor
has the Netherlands claimed that Article 87(2) is applicable.

Prohibition of state aid under Article 87(1) of the
Treaty

Article 87(3) of the Treaty: exceptions at the
Commission's appreciation

(34) 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 competi-
tion by favouring certain undertakings or the production of
certain goods is, insofar as it affects trade between Member
States, incompatible with the common market.

(42) Article 87(3) specifies other forms of aid, which may be
regarded as compatible with the common market. Their
compatibility with the Treaty has to be studied from the
point of view of the Community, not solely that of a given
the
Member State. To ensure the proper operation of
common market, the exceptions provided for in Article 87
(3) must be interpreted in a strict manner.

(11) Frontier Economics: ‘Holland Malt’, October 2005.
(12) OJ L 270, 21.10.2003, p. 78. Regulation as amended by
L 187,

Commission Regulation (EC) No 1154/2005 (OJ
19.7.2005, p. 11).

(13) Case C-370/79 Philip Morris [1980] ECR 2671, paragraphs 11 and

12.

(14) Source: H.M. Gauger Statistical Digest 2004-2005.

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(43) As regards Article 87(3)(a),

it

that

is pointed out

the
beneficiary of the aid is not located in a region where the
economic situation can be described as extremely unfa-
vourable in accordance with the Guidelines on national
regional aid (15)
(having a per capita gross domestic
product, measured in purchasing power standards, of less
than 75 % of the Community average). Therefore, Article
87 (3)
the Treaty cannot justify an aid for the
production, processing or marketing of products in Annex I
to the Treaty.

(a) of

Economic viability and Community minimum
standards

(50) Point 4.2.3 of the guidelines states that aid for investments
may only be granted to firms the economic viability of
which can be demonstrated by an assessment of
the
prospects of the enterprise. The enterprise must comply
with minimum Community standards
regarding the
environment, hygiene and animal welfare.

(44) As regards Article 87(3)(b), it is noted that the measure
concerned is not intended to promote the execution of an
important project of common European interest or to
remedy a serious disturbance in the economy of a Member
State.

(45) Nor is the aid intended or suitable for achieving the

objectives referred to in Article 87(3)(d).

(51) These conditions are satisfied. The Netherlands has given
sufficient guarantees concerning the economic viability of
form
both Bavaria NV and Agrifirm, which together
Holland Malt. In addition, it has been adequately shown
that the malting plant complies with minimum Community
standards regarding the environment, hygiene and animal
welfare as laid down in the Dutch rural development
programme.

Article 87(3)(c) of the Treaty

Market outlets

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

(47) Since Holland Malt

is not a small or medium-sized
enterprise as defined by the Commission (16), Regulation
(EC) No 1/2004 of 23 December 2003 on the application
of Articles 87 and 88 of the EC Treaty to State aid to small
and medium-sized enterprises active in the production,
processing and marketing of agricultural products (17) does
not apply. Whether investment aid for the processing of
agricultural products is compatible with Article 87(3)(c) is
the
assessed therefore on the basis of point 4.2 of
guidelines.

Eligible expenses and aid rate

(48) According to point 4.2.3 of the guidelines, eligible expenses
may include construction, acquisition or improvement of
immovable property, new machinery and equipment,
including computer software. The aid rate may not exceed
50 % of eligible investments in Objective 1 regions and
40 % in other regions.

(49) These conditions are met, as aid would be given for the
construction of buildings, the purchase of plots for these
buildings and machinery. In addition, the Netherlands has
limited the notified aid to a maximum of 13,5 % of the
eligible costs.

(15) OJ C 74, 10.3.1998, p. 9.
(16) Commission Recommendation 2003/361/EC of 6 May 2003
concerning the definition of small and medium-sized enterprises
(OJ L 124, 20.5.2003, p. 36).

(17) OJ L 1, 3.1.2004, p. 1.

(52) Point 4.2.5 of the guidelines provides that no aid may be
granted for investments in products for which normal
market outlets cannot be found. This must be assessed at
the appropriate level in relation to the products concerned,
the types of
investments, and existing and expected
capacities. To this end, any restrictions on production or
limitations of Community support under the common
market organisation must be taken into account.

(53) The procedure provided for under Article 88(2) of the
Treaty was initiated, since, on the basis of the information
available to the Commission at the time, could not be ruled
out that the malt market showed overcapacity.

(54) The Netherlands' and Holland Malt's comments on the
opening of the procedure essentially concern three points.
First,
the issue of overcapacity on the malt market is
challenged (the Netherlands and Holland Malt do not
dispute, however,
the project creates additional
capacity on the malt market). Second, it is stated that the
investment in the Eemshaven plant will affect trade with
third countries more than trade between Member States,
since the export of malt constitutes a market segment
separate from that in which inland malt suppliers operate.
Third, different markets are assumed to exist for regular and
premium malt.

that

Overcapacity on the malt market

(55) The Commission has examined the situation concerning
the production of and trade in malt at both world and
Community levels. As Eurostat statistics on malt are
incomplete due to missing or confidential data on the
production and exports of several countries, the Commis-
sion has used the data of Euromalt, the International Grains
Council and H.M. Gauger's report on the barley-malt
market report.

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(56) As regards the situation on the world market, the Euromalt data indicate that the current world supply
capacity of malting plants substantially exceeds demand and will do so for some years to come. The letter
from Euromalt of August 2005 (18) contains the following table on world malt capacity.

Worldwide Malt Capacity

2004

Surplus

2006 (estimate)

Surplus

(1000 tonnes)

7 500

1 200

8 700

850

230

70

460

7 600

1 150

8 750

1 550

330

70

470

2 500

-550

-50

-6

-60

2 700

100

120

-10

-60

Total EU-25

EU-15

EU-10

Russia

Ukraine

Belarus

Central and Eastern Europe

Total Europe

10 130

1 834

11 170

2 850

NAFTA

South America

Oceania

Middle East and Central Asia

Africa

China

Far East

Total

3 600

1 220

770

200

380

3 000

300

9 470

- 1 300

3 900

1 370

950

200

380

3 300

340

1 440

World total

19 780

534

21 610

-900

1 950

(57) As can be seen from the table,

in 2004 world malt
production capacity exceeded demand by approximately
half a million tonnes. Estimates for 2006 point to an
increase in this overcapacity to approximately 2 million
tonnes.

(58) Euromalt in its letter mentions that world beer production
is forecast to continue growing at an average minimum rate
of between 1 % and 2 % a year. This average growth is a
two-digit growth in some ‘new’ beer regions
result of
(South America, Africa, Russia, South-East Asia and China)
and a decline in the ‘old’ regions (Western Europe and
North America). At the same time however, the efficiency
of the new brewery investments in the growth regions and
the trend towards ‘lighter’ beers has resulted in a drastic
decline in the use of malt per litre of beer. Euromalt
therefore concludes that the rising demand for beer is not
matched by an increase in worldwide malt demand for

(18) See footnote 10.

some years to come. In fact, the beer consumption growth
pattern, and its predicted continuation, have overencour-
aged the building of additional malting capacity in the
world, the result being that current world capacity on the
supply side substantially exceeds demand, and will do so for
some years to come. According to Euromalt, continuous
investment in maltings is required, but Europe does not
need additional new capacity while export markets decline.

(59) The current situation of overcapacity worldwide seems to
be confirmed by declining global trade figures for malt, as
presented by the International Grains Council at
the
Malting Barley Seminar on 4 and 5 October 2005 in
Brussels (19). According to the International Grains Council,

(19) Presentation by John Tjaardstra on trends in the production and

consumption of beer, malting barley and malt.

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global trade in malt declined for two years in a row from
5,621 million tonnes in 2002/2003 to 5,275 million
tonnes in 2004/2005 (the latter figure is an estimate). For
2005/2006, the International Grains Council expects a
further fall in the quantity of malt traded. This downward
trend is also reflected in lower export certificates booked by
EU malt exporters in 2004/2005 (2 219 661 tonnes) as
compared with 2003/2004 (2 477 849 tonnes), with
expectations for 2005/2006 being slightly lower than the
figure for 2004/2005 (20). RM International's report on the
malt market (21) would also seem to indicate global
overcapacity: given the higher standard capacity for new
malting plants and that world beer production has
increased less quickly in recent years, new malt output
would be absorbed less quickly by demand.

(60) The Netherlands in its letter of 14 October 2005 states that
world demand for malt is expected to rise by 10 % by
2010. Reference is made to the presentation by the
International Grains Council at the Malting Barley Seminar
in Brussels on 4 and 5 October 2005. It was also stated at
this presentation, however, that as regards forecasts for
2010, global malting capacity was expected to rise by 10 %.
It would not seem appropriate to use global malting
capacity as an indicator of demand, as the Netherlands
appears to do.

(61)

In the years ahead, the development of the global malt
market would seem to be subject
to two important
developments. First, there is the increase in beer consump-
tion in the ‘new’ beer regions.
It remains to be seen
however, to what extent the Community malting industry
will be able to take advantage of this growth.

(62) The growth of beer production in China has not led to a
imports. According to the
substantial
increase in malt
Rabobank report on the global malt
the
imported volume of malt did not rise, even after the import
tariff was significantly reduced in 2002, because China's
huge processing industry favours the import of malting-
barley.

industry (22),

(63) Rising beer consumption and production in South-East
Asia has been made possible to a large extent through
higher malt imports from Australia due to the proximity of,
and free-trade agreements, with that country.

(64) Community maltings located at deep sea ports, such as
Holland Malt, would seem to be in a good position to
satisfy the growing demand for malt in South America and
Africa. As regards South America, however,
the new
malting capacity currently being built in Argentina could
partially absorb the rising demand for malt. In addition,
Mercosur's expansion, with Venezuela and possibly other
South American countries joining will probably lead to a
higher intra-South American trade in malt.

(20) Report No 5 of H.M. Gauger, 2.6.2006. In this report an expected
total export figure for 2005/2006 is assumed of 2 140 million
tonnes.

(21) See footnote 8.
(22) See footnote 8.

(65) Developments in Russia are a second important factor for
the global malt market. Russia has a total malting capacity
of 1 million tonnes, with a further 450 000 tonnes under
construction. As the availability of good malting barley
catches up with this capacity expansion, Russia will become
self sufficient and probably a malt exporter.

(66)

In view of the above, the Commission has no evidence that
the current overcapacity in the global malt market will
disappear in the next few years. As far as worldwide trade in
malt until 2010 is concerned, the International Grains
Council seems to predict a relatively stable volume with the
‘decline in Russia being offset by South American growth’,
as mentioned in the presentation at the Malting Barley
Seminar in October 2005.

(67) As regards malt production capacity and trade in the
Community, it should be noted that Holland Malt's plant at
Eemshaven became operational in April 2005. Euromalt in
its letter of August 2005 mentions that, despite closures of
several malting factories due to low profitability,
the
Community still has a surplus capacity in malt of at least
500 000-700 000 tonnes (capacity in the Community
being 8 800 000 tonnes, consumption 5 900 000 tonnes
and exports 2 250 000 tonnes).

(68) According to Euromalt, the profitability of the Community
malting industry in 2005/2006 will be at its lowest, with
many companies making a loss and covering only part of
their costs. Probably as a result of this low profitability, the
largest German malt producer, Weissheimer in Andernach,
filed for bankruptcy in spring 2006. In addition, other malt
production plants have shut permanently, including four in
the United Kingdom, two in Germany and one in France.
large companies. Other malt
These are older units of
producers have decided to shut part of
their capacity
temporarily. In other cases, old malt production capacity
has been replaced by new. The resultant total malt capacity
in the Community in July 2006 is put by H.M. Gauger at
8 800 000 tonnes (23), the estimates of consumption in,
and exports from, the Community being comparable with
those in Euromalt's letter of August 2005. This would still
leave an overcapacity of around 600 000 tonnes.

(69) The Netherlands, in its letter of October 2005, claims that
the figure of 500 000 — 700 000 tonnes mentioned by
Euromalt as being the overcapacity of the Community
malting industry is based on so-called ‘nameplate’ capa-
cities, i.e. production 24 hours a day, 7 days a week, 365
days a year. Periods when plants are at a standstill owing to
maintenance, technical failures and overhaul are not taken
into account, which makes it uncertain whether over-
capacity actually exists.

(23) H.M. Gauger, July 2006 — State of the European Malt Industry.

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(70) The Commission has

looked at actual capacity and
production figures for the Community malt industry for
the last few years. It has taken the following table from H.M.
Gauger's statistical digest 2004/2005, which uses national
statistics, Euromalt and Eurostat as sources.

Total malt capacity and production in the Community

2002

2003

2004

Capacity (in tonnes)

Production (in tonnes)

8 613 304

8 632 525

8 818 633

8 455 119

8 595 156

8 644 575

(71) The figures in the table point to a utilisation of at least 98 %
of total capacity during the years 2002-2004. The figures in
the report by Frontier Economics (24) indicate a comparable
level of utilisation. In 2005, the utilisation rate was lower,
with malt production in the Community at 8,4 million
tonnes and capacity at 8,8 million tonnes. For marketing
year 2006/2007, total production is expected to be 8,0
million tonnes and capacity 8,8 million tonnes (25). These
lower rates of utilisation appear, however, to reflect the
reaction of malting plants to low profitability,
i.e. their
decision to produce less malt and temporarily to shut
production capacity. For marketing year 2006/2007, part
of the explanation is also provided by the poor harvest of
malting barley. The figures for 2002 to 2004 show that it is
technically possible to use at
the total
production capacity. This high percentage for the actual
utilisation of total capacity does not seem to be a reason to
doubt the existence of overcapacity in the Community
malting industry.

least 98 % of

(72) As for the future, as mentioned in the Euromalt letter of
August 2005, ‘small, old and inefficient capacity must be
closed. This will be a slow process because of the very
structure of the industry in certain Member States’. The
process would appear to have accelerated in 2006. By mid-
2006, production of malt in the Community appears to
have been brought
into equilibrium again with actual
demand, as malt producers have learned to limit their
production to possible sales volumes (26). However, even
after the above-mentioned permanent closure of old malt
production facilities, total malt production capacity in the
Community still exceeds actual demand by some 600 000
tonnes. In addition, demand in the Community is not
expected to increase due to stagnating beer consumption,
while Community exports will face a global trade situation
which is expected to remain relatively stable for the next
few years. The Commission does not have clear evidence,
therefore, that the current situation of overcapacity will
change soon.

(24) See footnote 11.
(25) H.M. Gauger Market report No 4, 2 May 2006.
(26) H.M. Gauger, July 2006 — State of the European Malt Industry.

Consequences for trade between Member States

(73) The Netherlands and Holland Malt take the view that the
investment in the Eemshaven plant will affect trade with
third countries rather than trade between Member States,
since the export of malt is a separate market segment from
that in which inland malt suppliers operate.

(74) The Commission recognises that part of

the malting
capacity in the Community consists of inland, small family/
privately-owned companies
that produce mainly for
domestic markets. However, part of their production can
also be for export,
in which case they would face
competition from other malt companies in the Community
mainly focused on exports (such as Holland Malt).

(75)

In addition, there are large groups in the Community malt
industry which sell their malt both inside and outside the
Community. Holland Malt falls into this category, being
located at a deep sea port from which it can serve both the
Community and non-Community markets. Community
malt companies primarily focused on exports to other
markets could therefore face competition from Holland
Malt. The same applies to Community malt companies
concentrating on selling in the internal market, since
Holland Malt still expects to sell a considerable volume of
malt to European countries. In its business plan of August
2003, Holland Malt mentioned that it expected to sell
71 540 tonnes to European destinations in 2005 (com-
pared to expected sales of 28 100 tonnes to Asia, 40 600
tonnes to Latin America and 29 000 tonnes to Russia).

(76) Situations may well occur

in which malt companies
concentrating primarily on exports to third countries (such
as Holland Malt) may not be able to find buyers for the
output intended for those destinations, in which case they
might seek to sell it inside the Community. The opposite
may also occur. The Commission therefore does not
consider the segments inside and outside the Community
to be completely separate. Linkages exist, with develop-
ments outside the Community having an effect on
developments inside, and vice versa.

(77) Given the above,

the Commission does not share the
conclusion of the report by Frontier Economics that there is
no indication that the subsidy granted to Holland Malt will
lead to a displacement of malt sales by other European
producers over and above those which would occur in any
event. The Commission cannot rule out such displacements
in the sale of malt by other Community malt producers to
customers within and outside the Community. It concludes,
therefore, that the aid may well have an impact on trade and
competition between the Member States.

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A market for premium malt

(78) The Commission has taken note of the information sent by
the Netherlands and Holland Malt (including the letters
from third parties) on the development of HTST malt (27).
The Netherlands, Holland Malt and the interested parties
describe HTST malt as having different characteristics from
regular malt, which give the beer more taste and flavour,
longer-lasting sparkle and an increased shelf life.

(79) The Netherlands and Holland Malt state that HTST malt can
be considered to be a premium malt. They also maintain
that as a result of its unique physical characteristics, its
perceived quality and its higher price range, it is very likely
that there will be no or limited substitutability between
HTST malt and regular malt. HTST malt is expected to
create a demand and a market of its own.

(80) The Commission acknowledges that HTST may well have
particular characteristics and be of a high quality. It has to
be established, however, whether or not a separate market
exists for premium malt (which HSTS malt would serve)
alongside a market for regular malt. The Court of First
Instance has specified that in order to be considered the
subject of a sufficiently distinct market,

‘it must be possible to distinguish the service or the good in
question by virtue of particular characteristics that so
differentiate it from other services or other goods that it is
only to a small degree
interchangeable with those
alternatives and affected by competition from them. In
interchangeability between
that context,
the degree of
products must be assessed in terms of
their objective
characteristics, as well as the structure of supply and
demand on the market, and competitive conditions.’ (28)

(81) As regards the structure of supply and demand on the
market and competitive conditions, the Commission has
received comments from several parties (mostly national
maltsters' associations) indicating that a clear distinction
between regular and premium malt cannot be made.
According to these, malt is, if anything, a product of a
generic nature, with small variations in characteristics and
subject
to quality standards imposed by the brewing
industry. The majority of maltsters' customers seem only
to want high-quality malt that meets their specifications
and satisfies all food safety requirements.

(82) The degree of interchangeability between different malts
from different malting companies would therefore not seem
to be small, since all these companies have to produce malt
of high quality to be able to satisfy their customers'
demand.

(27) Statement by Bühler on Holland Malt's technologies, not dated.

Letter from the University of Freising — Weihenstephan, Munich,
May 2005
Letter from an interested party which contains business secrets and
will therefore be treated as confidential.

(83) This would seem to be confirmed by evidence that
premium beer is not necessarily produced with another
quality of malt
than regular beer. According to the
Netherlands, Holland Malt will produce its HTST malt
primarily for the ‘premium’ segment of the beer market.
The Netherlands states that for the production of these
premium beers, raw materials of a high quality are required
with characteristics that improve the flavour of these beers.
Holland Malt in its letter mentions the ‘Just Drinks.com
2004 report’ (29), in which — according to Holland Malt —
‘major brewers state that premium beers are an inherently
better liquid with a fuller, more distinctive taste’.

(84) According to the Commission, however, this sentence in
the report refers to consumers' perception of premium beer,
and not to a statement of major brewers. On page 59 of the
report it is stated that ‘Scottish & Newcastle on the other
hand pointed to consumers' perception of higher quality
and the status that is conferred by purchasing a premium
brand. The key factors are: perception of higher quality —
premium beers are an inherently better liquid with a fuller,
more distinctive taste’.

(85)

In fact, the executive summary of the report as submitted
by Holland Malt itself starts by saying that ‘interviews by
just-drinks.com with a number of major international
players
in the global brewing industry revealed that
premium beer is basically a marketing concept’. The report
also mentions that a standard beer can become a premium
beer in a given region or a particular country within a
region and that the major international brewers adopt
different marketing strategies for different markets. Brands
recognised as premium in some regions are not necessarily
recognised as such in others. The report furthermore states
that ‘the reader must be aware that demand for premium
beer looked at in terms of comparisons between years and
trends over a number of years, is variable due to changes in
consumer perceptions and not in product specification. As
Interbrew points out, it is consumers who decide what is
premium, not the industry’.

(86) The fact that product specification is not an important
factor in determining which beers are considered premium
beers indicates that different malts, provided they meet
(minimum) quality standards imposed by the brewing
industry, are easily interchangeable. This interchangeability
of malt is also referred to in the Hugh Baird/Scottish and
Newcastle merger
relevant
product market, the notifying parties (Hugh Baird and
Scottish and Newcastle) state that it is at least as broad as
the malt market. The decision mentions that ‘although the

case (30). Concerning the

(29) www.just-drinks.com, ‘A global market review of premium beer —

with forecasts to 2010’.

(28) Case T-229/94 Deutsche Bahn [1997] ECR II-1689, paragraph 10.

(30) Case No IV/M.1372, 18.12.1998.

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malt market may arguably be subdivided, e.g. into brewing
malt and distilling malt, the parties do not believe that this
is appropriate because of the high degree of supply-side
substitutability’.

(87)

In addition, the Commission has not been able to detect a
separate market for premium malt in studying the statistical
sources for malt production. On the contrary, all these
sources (Eurostat, Euromalt, International Grains Council)
only provide data on the general malt market. The
Netherlands and Holland Malt
themselves have not
provided data on existing capacities for, or the production
of, premium malt. On the contrary, in the argument about
overcapacity, they have referred to figures for malt (as a
product), without making a distinction between regular and
premium malt.

(88) The Commission considers, therefore, that a clear dividing
line between the two categories (regular and premium malt)
cannot be drawn. There may perhaps be differences in
quality, but they do not appear to be of such a nature that
the interchangeability of
types of malt or competition
between maltsters is appreciably limited thereby.

(89) Based on the above findings on overcapacity in the malt
market, possible effects on trade between Member States of
the aid measure in question and the lack of a clearly
distinctive separate market for premium malt, the Commis-
sion considers the aid not to comply with point 4.2.5 of the
guidelines, which provides that no aid may be granted for
investments in products for which normal market outlets
cannot be found.

had been initiated, Spain withdrew its notification of the aid
in question.

Regional aspects

(93) The Commission acknowledges and does not dispute the
important regional development aspects of
the aid for
Holland Malt, as explained by the Netherlands and various
interested parties. In this sense, the project would fit well
with the IPR scheme.

(94) The project must, however, meet all the requirements for
investment aid for the processing and selling of agricultural
products as laid down by the guidelines. As it does not fulfil
at least one important condition, the Commission cannot
authorise the state aid for the project, despite its positive
regional development aspects.

VI.

CONCLUSION

(95) For the above-mentioned reasons, the Commission con-
siders the aid to Holland Malt to be incompatible with
Articles 87 and 88 of the Treaty. The aid measure does not
comply with point 4.2.5 of the guidelines, which provides
that no aid may be granted for investments in products for
which normal market outlets cannot be found.

(96)

In its letter dated 17 December 2004, the Netherlands
declared that the aid was promised subject to approval by
the Commission. If, despite this condition, any aid has
actually been disbursed, it will have to be recovered,

Aid to a malting plant in Lithuania

HAS ADOPTED THIS DECISION:

(90) Holland Malt points out that the situation on the global
malt market did not prevent
the Commission from
authorising investment aid for a malting plant in Lithuania.

Article 1

(91) The Commission would like to stress that

it has not
authorised state aid for an investment in a malting plant in
Lithuania after that country's accession to the Community
on 1 May 2004. Before that date, no state aid rules applied
in Lithuania for agricultural products. In any event, failings
by other Member States to meet their obligations under
Articles 87 and 88 of the Treaty are irrelevant to whether
the Member State against which the procedure in Article 88
(2) of the Treaty has been initiated has granted (unlawful)
aid (31).

The state aid which the Netherlands has granted to Holland Malt
BV in the form of a subsidy of EUR 7 425 000, subject to
authorisation by the Commission,
is incompatible with the
common market.

Article 2

The Netherlands shall withdraw the state aid referred to in Article
1.

(92) The Commission also wishes to state in this respect that it
initiated the formal investigation procedure laid down in
Article 88(2) of the Treaty after Spain had notified its
intention to grant aid to a malt factory named Maltacarrión
S.A (32). The procedure was initiated on the same grounds
as in the present case, i.e. that it cannot be ruled out that
the malt market shows overcapacity. After the procedure

(31) See, for example, Case T-214/95 Het Vlaamse Gewestties [1998] ECR

II-717, paragraph 54.

(32) Case C 48, 21.12.05 (not yet published in the Official Journal).

Article 3

1. The Netherlands shall take all necessary measures to recover
from the recipient the aid referred to in Article 1 and unlawfully
made available to the recipient.

2. Recovery shall be effected without delay and in accordance
with the procedures of national law, provided that they allow the
immediate and effective execution of this Decision. The aid to be
recovered shall include interest from the date on which it was
made available to the recipient until its actual recovery. Interest

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shall be calculated on the basis of the reference rate used for
calculating the net grant equivalent under the regional aid rules.

Article 5

This decision is addressed to the Kingdom of the Netherlands.

Article 4

Done at Brussels, 26 September 2006.

The Netherlands shall
inform the Commission, within two
months of notification of this Decision, of the measures taken to
comply with it.

For the Commission
Mariann FISCHER BOEL
Member of the Commission