2007/509/EC: Commission Decision of 20 December 2006 on State aid No C 3/2005 (ex N 592/2004 (ex PL 51/2004)) which Poland is planning to implement for Fabryka Samochodow Osobowych SA (formerly DAEWOO — FSO Motor SA) (notified under document number C(2006) 6628)   (Text with EEA relevance)
Date: 2006-12-20
Institutions: European Commission
Subjects: Poland, State aid, aid for restructuring, control of State aid, motor vehicle industry

L 187/30

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Official Journal of the European Union

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COMMISSION DECISION

of 20 December 2006

on State aid No C 3/2005 (ex N 592/2004 (ex PL 51/2004)) which Poland is planning to implement
for Fabryka Samochodow Osobowych SA (formerly DAEWOO — FSO Motor SA)

(notified under document number C(2006) 6628)

(Only the Polish text is authentic)

(Text with EEA relevance)

(2007/509/EC)

(4)

(5)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

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 (1)
pursuant to those provisions,

Whereas:

(1)

(2)

(3)

1. PROCEDURE

By letter dated 30 April 2004 Poland notified the
Commission of aid to DAEWOO-FSO MOTOR S.A.,
to Fabryka Samochodów
which changed its name
Osobowych S.A. (hereinafter ‘FSO’ or ‘the beneficiary’),
as aid granted before accession. By letter dated 19 May
2004 the Commission asked Poland to submit some
missing documents. These were provided on 18 June
2004. The Commission requested further information
by letters dated 2 August 2004 and 6 October 2004,
to which Poland replied by letter
registered on 13
September 2004, and by letter dated 3 November
2004 respectively. On 9 November 2004 a meeting
took place between the Commission and the Polish
authorities.

On 5 January 2005, the Polish authorities accepted that
the Commission would also treat the notification of 30
April 2004 as a notification under Article 88(3) EC
Treaty with regard to any measures which were found
to constitute new aid.

the Commission
By letter dated 19 January 2005,
it had decided to initiate the
informed Poland that
procedure laid down in Article 88(2) of the EC Treaty
in respect of the aid which had not been granted before
accession and constituted new aid. The Commission

decision to initiate the procedure was published in the
Official Journal of the European Union on 26 April 2005 (2).
The Commission invited interested parties to submit
comments on the measures. No third party submitted
comments.

asked for

the formal

In a letter dated 28 February 2005, registered on 1
March 2005,
an
the Polish authorities
extension of the deadline to submit its comments on
investigation procedure.
the opening of
Poland submitted a partial response by letter dated 1
April 2005, registered on 4 April 2005. In the same
letter Poland asked for the deadline for providing addi-
tional
information to be extended to 15 April 2005,
because it needed time to update the restructuring plan.
By letter dated 27 April 2005, registered on 29 April
2005, the Polish authorities asked for the deadline for
providing the supplementary information to be extended
again, to 13 May 2005. This information, together with
the restructuring plan, was
an updated version of
submitted by letter dated 31 of May 2005, registered
on 2 June 2005. Additional comments were submitted
by letter dated 13 June 2005, registered on 14 June
2005.

the

By letter dated 4 August 2005, registered on 8 August
2005, Poland informed the Commission that a new
investor had been found for FSO. By letter dated 28
September 2005, registered on 29 September 2005,
the Polish authorities informed the Commission that an
submitted in
updated restructuring plan would be
November 2005 together with a description of
the
models produced. By letter dated 16 November 2005,
registered on the following day, Poland submitted the
English version of
FSO stock valuation. The
Commission requested supplementary information on
12 December 2005. The Polish authorities submitted
further information by letter dated 15 December 2005,
in which the
registered on 19 December 2005,
announced update of
restructuring plan was
submitted.
In the same letter Poland informed the
Commission that it would provide more information in
In its letter of 3 January 2006,
the coming weeks.
registered on 5 January 2006, Poland submitted a
partial response to the Commission’s request for infor-
mation of 12 December 2005 and asked to be given
to provide the
more time (up to 23 January 2006)
remaining information. By letter dated 26 January
2006, registered on 30 January 2006, the Polish autho-
information,
rities

submitted part of

the additional

the

(1) OJ C 100, 26.4.2005, p. 2.

(2) See footnote 1.

19.7.2007

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L 187/31

requesting an extension of the deadline to 6 February
2006. By letter dated 14 February 2006, registered on
15 February 2006, Poland provided the missing points of
the response to the Commission’s letter of 12 December
2005.

(12)

(13)

(14)

2. DETAILED DESCRIPTION OF THE AID

2.1. Beneficiary of the aid

FSO is a Polish car manufacturer. The company’s main
is located in Warsaw, which is an
production plant
assisted area under Article 87(3)(a) of the EC Treaty. It
manufactures passenger cars, spare parts and accessories.
Its main source of revenue since the end of the nineties
has been the manufacture of the Daewoo brand vehicles
Matiz and Lanos. FSO S.A. now controls 18 subsidiaries
(service, manufacture of components, sales) down from
[…] (*) in 1999.

The predecessor of FSO had been in business in Poland
since the 1950s and was one of the two largest Polish
car manufacturers. A joint venture agreement was
concluded in 1996 between Daewoo Motor Corporation
Ltd (‘DMC’) and the former Ministry of
Industry and
the newly created
Trade. Daewoo acquired 70 % of
entity DAEWOO-FSO MOTOR S.A. About 25 % of the
company was owned by the State Treasury and the rest
by minority shareholders. Since then the company name
has been Fabryka Samochodów Osobowych (‘FSO’).

2.2. Difficulties and efforts to find a strategic

investor

services.

FSO’s difficulties are mainly the result of the bankruptcy
of its largest shareholder, DMC, in 2000. This led to a
decline in demand for Daewoo brand vehicles because of
the fate of FSO and the
customer uncertainty about
availability of
In
and repair
spare parts
addition, FSO suffered from a severe decline in the sale
of new vehicles in Poland at the beginning of this decade
owing to a very sharp increase in imports to Poland of
second-hand cars from Western Europe. Furthermore, as
the two models produced were not modernised, unlike
competing models, they became less attractive on the EU
market over
the
foregoing, FSO’s sales dropped from 189 000 units (of
which 179 000 sold in Poland) in 1999 to 47 000 in
2001. FSO generated net losses in 2000, 2001 and 2002
of PLN 2,1 billion (EUR 540 million (3)), PLN 1,1 billion
(EUR 282 million) and PLN 425 million (EUR 109
million) respectively.
In recent years the vast majority
of the cars manufactured have been Lanos, exported to
Ukraine [as assembly kits] and assembled and sold by the
firm AvtoZAZ, which started commercial cooperation
with FSO in 2000. Total sales remained at a very low
level and the company continued to register operating
losses.

the years. As a consequence of

(*) Confidential information.
(3) For information only, all the amounts provided by the Polish autho-
rities in Polish zloty (PLN) have been converted into euro (EUR)
using the exchange rate of 20 October 2006, namely 1 EUR =
3,89 PLN.

(6)

(7)

(8)

(9)

(10)

(11)

Polish

services,

authorities,

a meeting between the
On 21 February 2006,
Commission
FSO
the
management and the investor AvtoZAZ was held in
Brussels. Following the meeting, on 8 March 2006, the
Commission sent Poland a request
for further infor-
mation. Poland replied by letter dated 6 April 2006,
registered on the following day. In a letter to Poland
the Commission allowed an
dated 27 April 2006,
extension of
submitting the final
version of the restructuring plan to 20 May 2006. The
information was submitted by the Polish authorities by
letter dated 22 May 2006, registered on the following
day.

the deadline for

By letters dated 28 and 29 June 2006, both registered on
the following day, the Polish authorities informed the
Commission that a licence agreement had just been
signed for the production of a new car model by FSO.
On 29 June 2006, a meeting was held with the Polish
authorities.

By letter dated 5 July 2006, the Commission requested
authorities
further
provided by letters dated 19 and 27 July 2006.

information, which

Polish

the

The Polish authorities submitted additional
information
by letter dated 30 August 2006 and during a meeting on
31 August 2006.

By letter dated 6 September 2006,
the Commission
requested further information, which was provided by
registered on the
letter dated 3 October 2006,
following day. Poland informed the Commission that it
would provide more information in the next 10 working
days.

Poland submitted additional information by letter dated
17 October 2006, registered on 19 October 2006. In
this letter,
the Polish authorities requested a meeting
with the Commission services. This meeting took place
in Brussels on 7 November 2006. Following this meeting
the Polish authorities sent a letter on 17 November
2006.

L 187/32

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Official Journal of the European Union

19.7.2007

Total sales (1) (1 000 cars) including assembly
kits

Table 1

1999

2000

2001

2002

2003

2004

2005

189

121

47

30

35

43

47

(1) Source: ‘Company Presentation, Fabryka Samochodów Osobowych S.A., Warsaw 2006’, submitted by the Polish authorities on

31 August 2006.

(15)

Some parts (notably the brand name and some Asian
production plants) of the bankrupt DMC, but not FSO,
were acquired by General Motors and harboured in a
new subsidiary called GM DAT, which stands
for
General Motors Daewoo Auto & Technology.

forced FSO assets sales,

value of
less liabilities) were
applied. In both cases the value of the FSO shares was
negative. At the same time, the State Treasury selected a
second independent consultant (PriceWaterhouseCoopers)
to carry out its own appraisal.
It confirmed the first
valuation.

(16)

FSO had been looking for a strategic investor since its
difficulties began. In February 2004, it contacted the 29
them a
biggest motor vehicle companies and sent
memorandum presenting
attractive
[Some companies] AvtoZAZ,
investment opportunity.
[…],
in principle in investing in
interest
[expressed]
FSO. AvtoZAZ, FSO’s key customer, expressed concrete
interest in broadening cooperation with FSO. The Polish
government started exclusive negotiations with AvtoZAZ
for the sale of FSO.

itself

an

as

(17) AvtoZAZ is the biggest car manufacturer in the Ukraine.
It assembles cars of several brands, including ZAZ (own
brand), Daewoo, VAZ (the brand of the Russian Lada)
and Opel (4). It is owned by UKRAVTO, which is the
car distribution and service
owner of
station network in Ukraine. UKRAVTO distributes
several brands,
including ZAZ, Daewoo, Chevrolet,
VAZ and Opel.

the biggest

(18) On 25 June 2004 a Letter of Intent was signed between
the State Treasury, AvtoZAZ and FSO. By resolution of 9
November 2004, the Council of Ministers approved the
sale of FSO shares owned by the State Treasury. FSO and
the State Treasury agreed to appoint KPMG as an inde-
pendent consultant to appraise the market value of the
company. The cost method (the book value of
the
Company’s assets and liabilities, with correction when
necessary) and the liquidation method (the market

(19)

The sale agreement with AvtoZAZ (5) was signed on 30
June 2005 for a total price of PLN 100. Under the
the business
agreement, AvtoZAZ has to implement
plan negotiated with the State Treasury.
It covers the
period 2005-[…] and provides for launching production
of a new car model, increasing production volumes and
maintaining a minimum level of employment. The
agreement indicates that the State aid contained in the
restructuring plan notified to the Commission will be
granted by the Polish government if the Commission
endorses it. The buyer declares that the award of State
aid to FSO was one of the conditions of its decision to
purchase the company’s shares.

(20)

In the meantime, AvtoZAZ purchased (at a discount)
100 % of
the remaining claims against FSO, with a
nominal value of nearly […], of […] banks which were
creditors of FSO.

2.3. Markets (6)

(21)

In 1999, 640 000 new vehicles were sold in Poland and
FSO’s market share was 28 %, making it the number one
In 2003 the
car manufacturer in Poland at the time.
number of cars sold in Poland fell
to 358 000 and
FSO’s market share fell to 2,2 % (less than 8 000 cars
sold). In 2004, FSO sold only 3 500 cars in Poland. The
main competitors of FSO in Poland (and in Europe) are
Fiat, Skoda, Renault, Toyota, Opel, Peugeot, Ford,
Volkswagen and Citroen. On the Polish market,
the
share of
imported vehicle sales rose from 25 % in
1998 to 75 % in 2003.

(4) According to a press release dated 10 January 2006, published on its
website (www.ukravto.ua), ZAZ produced 148 163 vehicles in 2005.
Including 10 190 models ‘Travria’, 6 224 ‘Travria Pick-Up’, 20 864
‘Slavuta’, 21 379 ‘Sens’, 9 107 ‘Lanos T-150’, 697 ‘Opel Astra-H’,
1 915 ‘Opel CKD’, 6 179 ‘VAZ-21093’, 14 459 ‘VAZ-21099’ and
57 149 other vehicles.

(5) Formally, the contract is between the State Treasury of the Republic
of Poland and Zakrytoje Akcjonernoje Obszczestwo z Inostrannoj
Inwesticjej ‘Zaporozskij Awtomobilestroitelnyj Zawod’ with its head-
quarters in Zaporozhye, Ukraine.

(6) The data used in this section are taken from information provided

by the Polish authorities.

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L 187/33

(22)

(23)

Production capacity in the European Union as a whole in
2004 (25 Member States) was 20,8 million cars, whereas
production volume was only 14,5 million cars. With a
production capacity utilisation rate of 70 %, the industry
is therefore clearly suffering from a major excess of
production capacity. While FSO’s 1999 sales
level
would have corresponded to an EU market share of
over 1 %, FSO’s production in 2004 represented a
market share below 0,5 %.

FSO’s production has been
Since 2003, most of
purchased by AvtoZAZ and sold on the Ukrainian
market. New car sales in Ukraine have increased rapidly
in recent years. From 2001 to 2005 they rose from
65 000 to 265 000. On the Ukrainian market
the
Daewoo cars produced by FSO face competition from
the following brands: VAZ (Lada), ZAZ, Chevrolet and
the other Daewoo models not produced by FSO. Skoda,
Opel, Toyota, Mitsubishi, Nissan, Renault and VW are
present on this market but have more limited market
shares.

(24)

FSO also plans to export a part of its production to […].
Car sales in […] were around 1,6 million units in 2005.
The domestic brands hold a 72,5 % market share and
for 27,5 % of sales. However,
imported cars account

the low quality and outdated design of […] brand cars
is leading to a steady increase in imports. Furthermore,
foreign car manufacturers are building facilities in […].
Some 40 % of Western motor vehicle companies have
already established factories in the area and a further
16 % are planning to do so.

2.4. The restructuring plan

(25) As illustrated in Table 2, the management started restruc-
turing activities in FSO S.A. and its subsidiaries as soon
as the situation deteriorated in 2000 after DMC declared
bankruptcy. The workforce at FSO S.A. was reduced by
2 222 employees between January 2001 and September
2003. The restructuring programme notified to the
Commission in April 2004 (the ‘initial
restructuring
plan’) started at the end of 2003, with completion in
2007, and planned an additional reduction of 1 100
employees in the workforce of FSO S.A., bringing long-
term employment to around 2 000 workers. Since then,
the programme has been implemented to a large extent.
The workforce was down to 2 200 persons at the end of
2005.
In the meantime the Polish authorities have
announced that the latter level corresponds to the new
long-term objective. The subsidiaries controlled by FSO
were also completely restructured during this period and
the workforce was considerably reduced.

Table 2 (1)

Workforce at the end of the year

FSO S.A.

Service, component, and other subsidiaries

Subsidiaries responsible for sales

Total
FSO S.A. + subsidiaries

1999

2000

2001

2002

2003

2004

2005

8 769

[…]

[…]

19 099

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

2 236

[…]

[…]

6 534

(1) Source: reply from the Polish authorities of 30 August 2006.

(26)

The initial restructuring plan, which was notified to the
Commission on 30 April 2004, was based on the
condition that a strategic investor for FSO would be
the
found before 2006. As
investor was not certain when the restructuring plan
was prepared, the plan initially included two variants.
In the course of 2004, when the entry of a potential
investor became more certain, FSO confirmed the first
restructuring variant, although the target dates were

the time of entry of

pushed back slightly. The plan included the following
measures:

— extending the right to manufacture the Matiz and
Lanos models up to the end of 2006 (licence
agreement signed with GM DAT in April 2004),

L 187/34

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Official Journal of the European Union

19.7.2007

— entrance of AvtoZAZ as a strategic investor before
the end of the first quarter of 2005 (originally end of
2004),

could have developed a new model, as provided for in
the initial restructuring plan. The investor — AvtoZAZ
— has not developed models of
its own which are
competitive on the EU market.

— production of a modified Lanos model from 2005

onwards (originally not mentioned),

— development of new own models and production

start-up from 2007 (originally 2005/2006).

(27)

In the initial restructuring plan, FSO planned to produce
[between 130 000 and 170 000] units in the long-term.
In accordance with this long-term production objective,
it planned to reduce existing production capacity by one
third, i.e. from [200 000-230 000] vehicles per year —
on the basis of two shifts and 250 working days — to
[140 000-170 000] per year. Since 2001 small use has
been made of existing capacity (less than 25 %). The
Polish authorities estimate that after restructuring FSO’s
break-even point will be [100 000-150 000] cars per
annum (7).

(31) After being modified in response to negotiations with the
investor, the restructuring plan was again modified in
response to negotiations with potential licensors.

(32)

In the November 2005 version of the restructuring plan,
a new FSO
the Polish authorities
subsidiary, […], would be created.

indicated that

(33)

In […] 2006, FSO and its shareholder UkrAvto signed a
Memorandum of Understanding with GM DAT for the
production of a new model at FSO.

(28)

In subsequent letters the Polish authorities informed the
Commission of delays in implementation of the initial
restructuring plan and said that the intermediate sales
objectives had not been achieved.

(34)

In […] 2006, FSO and UkrAvto concluded a […]
agreement with GM DAT for the production and […]
of the […] model (Chevrolet Aveo). GM was looking for
new production capacity for this model in […]. Under
the terms of the contract, FSO can manufacture and
assemble this model until […]. It can continue to sell
in […] until […].

(29)

In 2005, the restructuring plan was modified in the sense
that FSO no longer planned to develop its own new
models but rather to produce an existing model of a
major car manufacturer, called ‘the licensor’, as opposed
to ‘the investor’, AvtoZAZ. All the components for their
production would thus already be available and the
investment expenditure would be limited to the techno-
logical adjustments to the existing FSO production lines,
in order to allow production of
the new model. To
implement
the new plan, FSO needed to attract a
licensor.

(35) At the same time, FSO signed an agreement with GM
DAT extending the existing licence agreement for the
production of the Daewoo Lanos […]. Under the new
agreement, FSO can produce this model until […] and
sell it until […]. As sales of Lanos […] increased in 2005
in
and 2006, FSO intends to produce this old model
the […]
significant quantities until
starts at the end of […].

the production of

(30)

The Commission observes that this modification of the
restructuring plan — attracting a licensor in addition to
the investor — became necessary as FSO failed to attract
as an investor a major car manufacturer with which FSO

(7) Letter from the Polish authorities of 13 June 2005.

(36)

In their recent submissions of information, the Polish
authorities have indicated that FSO, contrary to what
[from
had been announced previously, plans to sell
130 000 to 170 000] cars over
in
particular after 2008. Part of this production would be
sold in […] and most of the rest in […].

the long term,

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L 187/35

(37)

(38)

Regarding the financial restructuring which is part of the
restructuring plan, measures have been adopted and
implemented since 2003 to reduce the company’s
debts. On 22 September 2003, an agreement was
signed with FSO’s major creditors, namely DMC,
the
State Treasury, and […] financial institutions (including
[…]
for
conversion of
the State
Treasury into FSO shares at the same conversion rate.
[…]
This

the claims of DMC and of

Polish banks). The

agreement provided

taken place. The

conversion has

since

financial institutions agreed to write off the majority of
their claims against FSO. As indicated, since then […]
banks have sold (at discount) their remaining claims on
FSO to the investor. More than PLN […] million […] has
already been written off. Besides this agreement with its
major creditors, on 17 September 2003 FSO lodged an
application
arrangement
to
proceedings with its smaller creditors. These proceedings
have since been concluded.

commence

court

in

Table 3

Restructuring of liabilities

Item

Liabilities
(PLN 1 000)

Interest
(PLN 1 000)

Total
(PLN 1 000)

Liabilities
converted into
shares
(PLN 1 000)

Written off
(PLN 1 000)

DMC

State Treasury

Arrangement proceedings

[…] financial institutions

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

Total

4 193 892

873 849

5 067 741

3 547 475

1 188 500

The amount of liabilities under the loans was quoted in accordance with the Agreement (taking into account the USD exchange
rate as at the date of the Agreement, i.e. 3,94 PLN/USD).

[…]

2.5. Aid measures

formal

the Commission concluded that

In its decision to launch the
investigation
procedure,
several
constituting restructuring aid had already
measures
been granted before accession in the last quarter of
2003 and in the first
four months of 2004. These
measures are therefore not covered by this investigation
procedure, which concerns only the aid measures that
were to be granted after accession. However,
the aid
granted before accession has to be taken into account
in the compatibility assessment,
in particular when
assessing restriction of the aid to the minimum necessary.

(39)

The largest part of the aid granted after accession takes
the form of a […] % State guarantee on a future
investment loan to […]. The bank loan of USD […]
million (EUR […] million (8)) will be denominated in
US dollars. The guarantee therefore exposes the State

(8) All amounts provided by the Polish authorities in US dollars (USD)
have been converted into euro (EUR) using the exchange rate of
20 October 2006 of 1 EUR = 1,26 USD.

to potential payments amounting to USD 83 million
(EUR 66 million) (9). The second important measure is
a write-off by the Ministry of Finance of claims on FSO
amounting to PLN 34 860 000 (EUR 9 million).

(40)

The different measures are listed in the table below, on
the basis of the information submitted by the Polish
authorities on 3 January 2006 (10):

(9) The Polish authorities informed the Commission that the planned
guarantee had been revised downwards in their letter of 3 January
2006. The aid measures listed in the decision to launch the inves-
tigation procedure were based on the notification of 30 April 2004.
The notification contained a plan for a guarantee of USD 162,5
million.

(10) Measures 22 and 23 were omitted in the submission of information
of 3 January 2006. They are, however, presented in the decision of
19 January 2005 to initiate the procedure provided for in Article
88(2) of the EC Treaty. As the Commission has not received any
details on their withdrawal,
it has decided to take them into
account.

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Table 4

State aid after accession

No

Authority granting State aid/Type of liability

Form of State aid

Measure in nominal value
(USD 1 000)

1

Ministry of Finance

Guarantees and pledges on investment
credit

83 000

No

Authority granting State aid/Type of liability

Form of State aid

Amount of debt written-
off or deferred/measures
in nominal value
(PLN 1 000)

2

3

4

5

6

7

8

9

10

11

12

13

14

Tax office Warsaw Prague

Social Insurance Institute

Write-off

Write-off

State Fund for Rehabilitation of
Disabled Persons (PFRON)
Payments to PFRON

Write-off,
Deferral into 5 quarterly instalments;
First instalment payable 30 June 2005

State Fund for Rehabilitation of
Disabled Persons (PFRON)
Payments to PFRON

Write-off,
Deferral into 6 quarterly instalments;
First instalment payable 1 January
2006

Warsaw City Authority
Real estate tax

Deferral into 12 monthly instalments
First instalment payable 2 January
2006

Warsaw City Authority Białołęka
District
Fee for perpetual usufruct of land

Deferral of fee until
31 December 2005

Warsaw City Authority
Fee for perpetual usufruct of land

Deferral of fee until
31 December 2005

District Starost Office in Ełk
Fee for perpetual usufruct of land

Deferral of fee until
31 December 2005

Ełk City Authority
Real estate tax

Deferral into 12 monthly instalments
of liabilities for April and May 2004
First instalment payable 31 December
2004

Ełk City Authority
Real estate tax

Deferral into 12 monthly instalments
First instalment payable 30 June 2005

Kożuchów City Authority
Real estate tax

Deferral into 12 monthly instalments
First instalment payable 1 January
2005

34 860

1 586

467
382

375
375

5 836

376

2 022

56

54

323

458

Mazowiecki Provincial Governor
Fee for perpetual usufruct of land

Write-off of fee for 2004

2 419

Warsaw City Authority

Write-off of fee for 2004

397

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No

Authority granting State aid/Type of liability

Form of State aid

Amount of debt written-
off or deferred/measures
in nominal value
(PLN 1 000)

15

16

17

18

19

20

21

22

23

24

District Starost Office in Opole
Fee for perpetual usufruct of land

District Starost Office in Opole
Fee for perpetual usufruct of land

District Starost Office in Nysa
Fee for perpetual usufruct of land

District Starost Office in Nysa
Fee for perpetual usufruct of land

Deferral of fee until
31 December 2004

Deferral of fee until
31 December 2005

Deferral of fee until
31 December 2004

Deferral of fee until
31 December 2005

Nysa City Authority
Real estate tax

Write-off, Deferral into instalments
payable in 16 quarterly instalments

2nd Mazowiecki Tax office, Warsaw
Tax on civil law transactions

2nd Mazowiecki Tax office, Warsaw
Tax on civil law transactions

Write-off

Write-off

II Customs Office in Warsaw
Customs duties

Deferral of payments for May and
June 2004 until December 2004

II Customs Office in Warsaw
Customs duties

Deferral of payments for July and
August 2004 until January 2005

National Fund for Environmental
Protection and Water Management/
Provincial Fund for Environmental
Protection and Water Management
State Treasury

Subsidy or preferential loan to finance
costs for the implementation and
functioning by the end of 2008 of a
system to recycle vehicles and the
costs of adapting to legal requirements
concerning environmental protection

79

79

89

81

341
341

1 103

671

1 050

1 000

7 170

TOTAL in PLN (rows 2-24)

61 990

(41)

The notified aid measures amount to USD 83 million
(EUR 66 million)
and PLN 62 million (EUR 16
million). At the exchange rate of 20 October 2006, the
total aid measures therefore amount to EUR 82 million
or PLN 318 million.

(42) A large proportion of the aid measures are in the form of
a write-off or deferral of the State’s existing claims on
FSO. Since, to the Commission’s knowledge, FSO has not
paid these claims, the company has already benefited
from the suspension of payment of its liabilities. As a
result, these measures can be deemed to have already
been partially implemented.

2.6. Grounds for initiating the procedure

this date,

assessed on the basis of the applicable rescue and restruc-
turing guidelines. The current Community Guidelines on
State aid for rescuing and restructuring firms in difficulty
(‘the 2004 guidelines’) entered into force on 10 October
the
2004. For measures notified before
previous 1999 rescue and restructuring guidelines (11)
(‘the 2004 guidelines’)
entered into force on 10
October 2004. For measures notified before this date,
the previous 1999 rescue and restructuring guidelines (12)
(‘the guidelines’) apply. As the measures were notified on
29 April 2004,
apply. The
Commission therefore made an initial assessment of the
notified (new) aid on the basis of the criteria laid down
in those guidelines.

the 1999 guidelines

(43)

In its decision to initiate the procedure, the Commission
indicated that the compatibility of the new aid would be

(11) OJ C 244, 1.10.2004, p. 2.
(12) OJ C 288, 9.10.1999, p. 2.

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(44)

(45)

(46)

The Commission concluded firstly that given the losses
and the decline in sales which FSO had suffered in the
previous years, it qualified as a firm in difficulty under
section 2.1 of the guidelines.

the

updated

the Commission
Regarding restoration of viability,
the plan.
expressed doubts about certain aspects of
these doubts concerned the lack of
One element of
clarity about
the planned level of production. The
Commission also remarked that it did not have at its
disposal
plan, which,
according to the Polish authorities, had been negotiated
with the investor.
the Commission also
stated that it had not received a market survey from
the Polish authorities.
the survey
would have to include an assessment of total production
capacity and demand at Community level,
and a
conclusion as to whether there was excess capacity on
the market.

indicated that

restructuring

Importantly,

It

Regarding the avoidance of undue distortion of compe-
tition, the Commission indicated that it could not take a
final position because, firstly, the Polish authorities had
not provided information on whether there was overca-
pacity on the market on which FSO operated. Secondly,
Poland had not
the
investor were planning any measures that could be
considered compensatory measures, beyond the capacity
reduction already included in the restructuring plan as a
measure necessary to achieve viability.

indicated whether FSO and/or

(47)

Regarding the limitation of aid to the strict minimum
the Commission requested more details on
necessary,

(48)

(49)

the measures considered to be own contributions and
details about restructuring costs. The Commission also
expressed doubts about whether the aid was limited to
the minimum necessary because the conditionality of
some of the aid measures seemed to indicate that they
were not absolutely necessary.

Finally, the Commission noted that the agreement on
debt restructuring concluded with public creditors on
22 September 2003 might contain aid granted before
accession. Even if the compatibility of this potential aid
cannot be assessed and it cannot be recovered, it must
nevertheless be taken into account in the assessment of
the new aid.

3. POLAND’S COMMENTS

on

the

figures

in the

entry of

planned
Regarding
contradictory
production levels in the years 2005 and 2006,
the
Polish authorities explained in their letter of 13 June
the
2005 that, owing to delays
investor, the figures had had to be revised downwards
the restructuring plan. They
in successive versions of
indicated that
the break-even point, estimated to be
[100 000-150 000] units, should be reached in […]. In
their
letter of 22 May 2006 the Polish authorities
provided sales forecasts for the years 2008 to 2010. In
the documents submitted during the meeting of 31
August 2006, the Polish authorities provided a forecast
for the years 2006 to 2008, which confirmed the figures
set out above.

Table 5

Production forecast
(1 000 cars)

2006

2007

Letter of 22 May 2006 (1)

Document of 31 August 2006
(Production
including
forecast
assembly kits)

[< 100]

[…]

2009

[…]

2010

[> 200]

2008

[…]

[…]

(1) This forecast concerned the […] model, for which the […] agreement was concluded only […].

(50)

In their letter of 3 October 2006, the Polish authorities
for 2008 to
submitted a substantially higher forecast
2010. According to this forecast, annual production
should evolve to a level of [over 250 000] units during
that period.

(51) As requested in the decision to initiate the procedure,
the restruc-
Poland submitted the updated version of
turing plan on 31 May 2005. Poland has submitted
further updated versions since then. The restructuring
plan includes descriptions of
the markets on which
FSO operates. It shows that there are considerable over-
capacities in the EU, as already indicated.

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L 187/39

(52)

In terms of proposals for compensatory measures, Poland
has stated that, firstly, FSO plans targeted restriction of
production and sales to the level of [140 000-170 000]
cars until 2008, despite the fact that it could produce
[200 000-230 000] cars and has the real possibility of
selling over [140 000-170 000] cars. Secondly, FSO has
limited its sales network by reducing the number of car
sales outlets from […] in 2003 to […] in 2006. It has
also liquidated two of its own sales outlets. Thirdly, the
company is limiting the number of countries to which it
exports its products.

(57)

(53)

Regarding the limitation of
the aid to the minimum
necessary, the Polish authorities have provided several
documents on the amounts described as own contri-
butions.

(54)

Finally, Poland has provided a copy of the agreement of
22 September 2003 on debt restructuring.

4. ASSESSMENT OF THE AID

4.1. Existence of aid

(55)

The Polish authorities do not contest that the measures
listed in Table 4 constitute State aid, as concluded in the
opening decision.

larger than the amount converted by the State Treasury.
In these circumstances, the Commission concluded that
this operation respected the market economy creditor
principle and did not constitute State aid.

afterwards,

Even though doubts on this subject were not expressed
in the decision to launch the procedure, because the
transaction took place
the Commission
checked whether the sale of the State’s stake in FSO to
AvtoZAZ for the […] price of PLN 100 on 30 June
2005 contained aid to the purchaser, and, indirectly, to
FSO. The Commission has analysed the valuation report
drawn up by KPMG. The consulting firm observes that
the company has been registering heavy losses and that
demand for its products has been low. Therefore, the
discounted cash flows method cannot be
applied
properly. Only the cost method and liquidation method
can be applied. Both methods conclude that FSO’s value
is […]. PriceWaterhouseCoopers (‘PWC’) agrees to a large
extent with the conclusions of KPMG. The Commission
has not found any manifest errors in these reports and
has concluded that the events that took place between
the date of valuation by KPMG and the date of the
transaction did not result
the shares
becoming […]. The Commission therefore considers
that this transaction does not include an element of aid.

in the price of

(56)

the

agreement with public

Besides the measures listed in Table 4, in the decision to
open the procedure the Commission expressed doubts
that
creditors of 22
September 2003 on debt restructuring could contain
Indeed, the Commission
aid granted before accession.
noted that the financial
institutions accepted a partial
their claims against FSO only on the
write-off of
condition that
the depreciation resulting from this
waiver was accepted by the Polish tax authority as a
The Commission
cost
therefore indicated that the State may have granted a
more substantial concession than the private parties to
the agreement. The Polish authorities provided a copy of
the agreement of 22 September 2003. The Commission
observed that the conversion of debt into FSO shares
accepted by the State Treasury was carried out
in
parallel with and on the same terms as the conversion
of debt by DMC, which is a private sector company. In
addition, the amount so converted by DMC is much

reducing

income.

taxable

(58)

In conclusion, only the measures listed in Table 4
constitute aid covered by the current decision.

(59)

4.2. Quantification of the aid

In the decision to launch the procedure, the Commission
concluded that the measures listed in Table 4 had not
been granted before the accession of Poland to the EU on
1 May 2004. However, the Commission observed that in
the contract for the sale of FSO shares concluded on 30
June 2005 between the government and AvtoZAZ, the
State aid chapter (Article 9) provides that ‘The relevant
organs of the public administration intend, provided they
receive a decision from the European Commission recog-
nising the planned State aid as consistent with the
common market, to grant the Company […] State aid
for restructuring. This assistance shall be granted on

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the terms set out in FSO’s restructuring plan, which is
currently under review at
the European Commission
under case number C 3/2005. […] The Buyer declares
that the award of State aid to the Company referred to in
clause 1 above was one of the conditions of its decision
[…] The
to invest by purchasing Company Shares.
declarations of the relevant organs of the public admin-
istration on the intent to grant State aid to the Company,
referred to in clause 1 above, are included in Attachment
No 6 to this contract’. The Commission concludes from
the foregoing that on 30 June 2005 there was a legally
binding commitment from the State to grant the notified
aid subject to approval by the Commission.

(60)

In particular,

The Commission has noted that on 30 June 2005 and
on earlier dates, it was far from certain that FSO could
regain viability. This is confirmed by the aforementioned
KPMG and PWC valuation reports.
the
Commission notes that the company had no licensor
for the production of a new model. The company did
it would produce in the future. The
not know what
for the […] was only signed in 2006. The
contract
then existing licence agreement with GM DAT for the
[…]. The level of
production of
production of
to
cover costs. In conclusion, the aid was unconditionally
promised at a time when the risk of bankruptcy was
high.

the Lanos expires
the Lanos was low and insufficient

(61) As regards the precise amount of aid included in the
State guarantee covering the investment loan to […],
the Polish authorities have not submitted a calculation
of a risk factor by which the guarantee could be
weighted. Up to October 2006, the Polish authorities
always emphasised that this guarantee was necessary as
the company was unable to obtain financing from the
market due to the bad experience and the losses suffered
by the banks in connection with earlier loans to FSO. In
addition, the Commission has noted that, as indicated
above,
the guarantee was
entered into at a time when the risk of bankruptcy was
high. In these circumstances, the Commission considers
that the aid included in the State guarantee may be up to
100 % of the amount of the guarantee. However, on the
basis of the later assessment of the compatibility of the
aid,
the Commission does not need to quantify the
precise amount of aid included in this guarantee.

the commitment

to grant

(62)

in
The Commission notes that
the Polish authorities,
the
their letter of 17 October 2006, suggested that
company would be able to obtain loans
from the
market at that time. As a result, Poland asked for the

the reduction in the interest

aid included in the guarantee to be quantified on the
basis of
rate obtained
to the guarantee. The Commission cannot
thanks
accede to this request. The State committed itself
to
grant the guarantee (and the other aid measures), and
the aid amount has to be assessed with reference to
the time of the irreversible commitment by the State to
grant
loans
the support measures, and no later. All
offered by the market after this date are ‘contaminated’
by the aid which the State has undertaken to grant. The
market took account of the direct positive impact (and
indirect impact, such as the finding of an investor, which
was made possible thanks to the promise of the aid) of
the aid on the company. As a result, the price of the
financing offered later cannot be used as a basis to assess
contractually
the quantity of aid in the measures
promised previously.
information
the
provided by the Polish authorities on the willingness of
the banks to grant loans is not conclusive and does not
prove that any bank would actually be ready to lend the
amount in question to FSO without State support. The
Polish authorities confirmed […]
letter of
17 November 2006.

In addition,

in their

(63) As regards the aid by means of deferrals of tax and social
security liabilities owed by FSO,
these deferrals are
equivalent to loans to the company. As indicated, these
deferrals of payment were granted when the risk of bank-
ruptcy was high. In these circumstances, the Commission
concludes that the amount of aid in such deferrals could
amount to the full deferred amount. However, on the
basis of the later assessment of the compatibility of the
the Commission does not need to quantify the
aid,
precise amount of aid included in these deferrals.

(64)

Therefore,
the maximum aid amount granted after
accession to be assessed in this decision is USD 83
million (EUR 66 million) plus PLN 62 million (EUR 16
million). At the exchange rate of 20 October 2006, the
maximum aid amount is therefore EUR 82 million or
PLN 318 million.

(65)

Regarding the amount of aid contained in the measures
granted before accession, the Commission observes that
some of the measures also involved deferrals of tax and
social security debts. On the basis of the same reasoning
as previously set out, the Commission has concluded that
the maximum aid amount granted before accession is the
total of the nominal value of the measures, namely PLN
201 million (EUR 51 million). The Commission does not
need to quantify precisely the aid amount included in
these measures.

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4.3. Legal basis for the assessment

4.5. Restoration of viability

the

aid under

(66) As already indicated in the decision to initiate the
procedure,
consideration has been
assessed on the basis of the 1999 (and not the 2004)
Community guidelines on State aid for rescuing and
restructuring
in difficulty. The Commission
considers
restructuring aid is compatible when
each of the conditions laid down in the guidelines is
fulfilled (13).

firms

that

4.4. Eligibility of the firm

(67) As indicated in the decision to initiate the procedure, the
Commission considers that FSO is in difficulty and
eligible for restructuring aid. As confirmed by the infor-
mation submitted by the Polish authorities, without the
aid the company would not have been able to attract a
new shareholder and a licensor, which was indispensable
for its survival. In addition, without a State guarantee,
banks would still even today not give FSO an investment
loan, which is indispensable for production of a new
model and, consequently, for the firm’s survival.

(68)

The Commission has also to verify whether […], which
could be the beneficiary of the guaranteed investment
is eligible or not. The Polish authorities have
loan,
assured the Commission that […] — or whatever other
name it receives — would be a subsidiary of FSO and
would appear in the consolidated financial statement of
the FSO group. On the basis of the information provided
by Poland, it can be concluded that the creation of […]
would not constitute the creation of a new firm in the
sense of the guidelines. Being a core part of an economic
unit in difficulty, […] is eligible for restructuring aid.

and on the basis of

(13) This is confirmed in the judgment of the Court of First Instance in
Case T-17/03 Schmitz-Gotha Fahrzeugwerke GmbH [2006] ECR II-
1139, paragraphs 44 and 45.
the Guidelines, which lays down that
(44) Point 3.2.2 of
requirement, stipulates,
in particular, that the restructuring plan
must fulfil three material conditions. It is essential, first, that it
restore the viability of the beneficiary firm within a reasonable
timescale
(point
3.2.2(i)); second, that it avoid undue distortions of competition
(point 3.2.2(ii)); and, third, that it be in proportion to the restruc-
turing costs and benefits (point 3.2.2(iii)).
(45) As those conditions are cumulative, the Commission must
declare a restructuring aid plan to be incompatible if even one of
those conditions has not been satisfied (Case T-171/02 Regione
autonoma della Sardegna v Commission [2005] II-0000, paragraph
128; see also, to that effect, France v Commission, cited above, para-
graphs 49 and 50).

assumptions

realistic

(69)

‘the restructuring plan,

The guidelines indicate that
the
duration of which must be as short as possible, must restore
the long-term viability of the firm within a reasonable timescale
and on the basis of realistic assumptions as to future operating
conditions. […] The improvement
in viability must derive
mainly from internal measures […].’

in the sense that

(70) As stated previously, FSO will in the future operate as an
independent car manufacturer,
the
models produced, assembled and sold by the firm will
not be developed within the group to which it
belongs (14). Therefore, the company needs to conclude
a licence agreement with one of the major car manufac-
turers developing their own models. These companies
can locate the production of their models in their own
plants or in independent companies like FSO. It follows
from the foregoing that, when trying to get a licence
in competition with the
agreement,
existing production plants of
the car manufacturer
concerned as well as with other independent manufac-
licence agreements regularly and
turers. FSO can get
generate profits from the production of
the models
concerned only if
it is a reliable and efficient manu-
facturer with a low cost base.

FSO will be

(71)

The Commission notes that the restructuring plan aims
at fulfilling the latter condition.

(72) On the operational side, the company has implemented a
far-reaching restructuring plan, which concerned FSO
S.A. as well as the subsidiaries. Some of the problems
identified at FSO were an excessive number of divisions

(14) In their letter of 6 April 2006, the Polish authorities indicate that
‘As a rule, the granting of a licence is closely linked with closer
cooperation between the licensor and the licensee. This involves
technical
transfer of know-how, manufacturing technologies,
support, development of
research and development processes,
quality control, but also joint measures aimed at localising the
the licensee is
production of assemblies and components.
successful
the
licensing agreement, subsequent joint projects may be launched
[…].’ From the foregoing, it is clear that over the long term, FSO
expects to be involved more deeply in the development of new
products. However, that concerns the very long term and implies
a number of conditions, the fulfilment of which is at this stage
hypothetical. The Commission will therefore base its analysis on the
premise that FSO remains an independent manufacturer.

in implementing the terms and conditions of

If

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levels

of management

and management levels, as well as an inappropriate orga-
nisational structure. FSO decided to reduce the number
of divisions and to merge some of them, to reduce the
number
and management
positions. It has also modified the function distribution
map by concentrating some functions and eliminating
superfluous ones. More generally, as
the level and
structure of employment did not correspond to current
operations
company
substantially reduced its workforce, as shown in Table
2. The company has restructured its service subsidiaries,
component production subsidiaries and sales subsidiaries.

and production volumes,

the

(73) On the financial side, the company was riddled with
the
debts, which it could not reimburse because of
major losses it had suffered since 2000. However, as
the firm negotiated with its
illustrated in Table 3,
creditors, who agreed either
their claims
into shares or to waive a majority of them.

to convert

(74)

The foregoing description illustrates that, as required by
the guidelines, the company has already taken important
internal measures on the operating and financial sides to
restore its competitiveness. The restructuring period will
however only be completed when FSO has made the all
the investments necessary for the production of the new
model and has
restored a production volume that
generates a reasonable profit. Consequently, on the
basis of
restructuring period
should be considered as ending in the course of […].

current planning,

the

the low level of profit made by the manufacturers of
vehicles for the mass market, achieving profitability will
require constant
improvements in efficiency and cost
control. All these risks are inherent in the restructuring
plan and, should they materialise, cannot be considered
‘unforeseeable circumstances’ within the meaning of
paragraph 48 of the guidelines.

(77) However, in view of the operational and financial restruc-
turing already achieved, the support of the new share-
holder, and the […] agreement signed with GM DAT in
[…] 2006 for production of the […], the Commission
considers that there is a sufficient probability that the
restructuring plan will allow FSO to restore its long-
term viability.

4.6. Avoidance of undue distortions of competition

(78) As already mentioned,

reductions.

announce workforce

the EU automobile industry is
suffering from overcapacities and car manufacturers
regularly
In this
context, the exit of firms from the market is a normal
outcome of the operation of market mechanisms. The aid
these
currently examined thwarts
mechanisms and shifts the burden of adjustment
to
other manufacturers. These competitors have to face
one more competitor than they would have to if the
State had not intervened to rescue FSO from bankruptcy.
In order to assess the size of the distortion created by
this aid, it is therefore necessary to determine on which
markets FSO operates and who its competitors are.

the operation of

(75)

In addition to the internal restructuring, which makes
FSO a more efficient manufacturer, the company also
from having had a new shareholder —
benefits
AvtoZAZ — since 2005. This gives FSO privileged
access to the distribution network of UkrAvto to sell
its products.

(79)

(76)

The Commission notes that the restructuring plan is not
free of risks and uncertainties. Firstly, FSO will have to
successfully bid on a regular basis for licence agreements
in order to have a model to produce. Secondly, it will be
dependent on the commercial success of the one or two
vehicles produced, which cannot be guaranteed. Thirdly,
it will have to generate a sufficient profit margin from
production of the models concerned. Given the intensity
of competition on the automobile market, reflected in

it competes

The Commission observes that FSO is active on two
markets. Firstly,
to obtain licences or
orders to produce cars from existing major car manufac-
In this context, FSO is in competition with
turers.
existing production plants — either belonging to the
major manufacturer concerned or independent — that
could also produce these cars and would be interested
in assembling them. The Commission observes that over
recent years the major car manufacturers active in the EU
regularly oblige several plants located in a given geogra-
phical area, generally Europe (15), to compete with each
given model.
other

production

the

for

of

a

(15) Producing within the EU to serve the EU market avoids customs
duties and limits the transport costs. Therefore large car manufac-
turers consider the production plants operating within the EU to be
more substitutable — and therefore in fiercer competition with
each other — than production plants operating both within and
outside the EU.

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this

aside

assume,

Thanks to the aid, FSO can survive and will compete for
such production opportunities at the expense of other
production plants located in the area. This kind of
distortion may have already taken place when FSO was
awarded the […] licence agreement by GM DAT. The
[…] model could theoretically have been produced in
another European plant. As FSO will compete for other
licence agreements in the future, the Commission can
reasonably
particular
leaving
contract, that the kind of distortion just described will
take place in the future, at the expense of other plants
located in the EU.
the Commission
observes
in the EU currently
produce the type of car that FSO plans to produce.
Such distortion can seriously harm the production
plant which would have got
the licence agreement
concerned if FSO had left the market. The production
of a car model often involves employing hundreds (or
several years. The
even thousands) of persons over
welfare of
the Member State where the unsuccessful
bidder is located is thereby seriously affected by the
presence of FSO on the market.

In this respect,

several plants

that

(81)

(82)

The Commission concludes from the foregoing analysis
that the aid keeping FSO alive on a market suffering
from overcapacity will negatively affect FSO’s compe-
titors: production plants bidding for construction of the
same model, production plants producing competing
models and car manufacturers producing competing
models. Therefore,
that
measures are necessary to limit the distortion created
by the aid. In deciding on the level of these measures,
the Commission takes into account the mitigating factors
that the company is located in an assisted area and that
its market share is small.

the Commission considers

the Commission observes

In the course of the procedure, the Polish authorities
have proposed various compensatory measures. Firstly,
the Polish authorities have said that FSO has reduced
sales
sales network by reducing the number of
its
outlets. However,
that, as
sales in Poland have declined sharply and some outlets
have overdue liabilities vis-à-vis FSO or have gone
bankrupt, this rationalisation was necessary for viability
reasons and to reduce sales costs. In addition, some of
these outlets were not controlled by FSO and it was the
decision of the owners not to sell FSO cars anymore and
to sell other brands. This measure is therefore not an
additional effort of FSO and does not
the
presence of the company on the markets beyond what
is justified by the need to restore viability.
It cannot
therefore be accepted as a compensatory measure.

restrict

(80)

Secondly, the model produced by FSO will be in compe-
tition with other models and take part of their market
share from them. Sales of the competing models will be
lower than they would in the absence of FSO. This kind
of distortion will negatively affect the car manufacturers
and their production plants producing the competing
models.
If FSO had exited the market, production of
the models that FSO is going to build would most
probably have been awarded to another production
plant. However, the Commission observes that the fact
that FSO was awarded the contract means its production
is cheaper. Therefore, cheaper cars will be offered on the
market than would be the case if FSO left the market (16).
In addition, it is generally recognized that an increase in
the production capacity available on a market tends to
depress the prices of the product concerned. The lower
car prices will
therefore harm competitors. The
Commission observes that, according to the forecast
included in the restructuring plan, FSO’s production
will over the long term account for between 1 and 2 %
of EU car production. However, as acknowledged by the
Polish authorities, the cars produced by FSO will mainly
be in competition with car models of similar size and
price. Therefore the market share in that particular
segment cannot be considered ‘negligible’ within the
meaning of point 36 of the guidelines.

(16) Indeed, the intense competition is likely to force the major car
manufacturer producing its cars at FSO to reflect the lower costs
in a lower sales price.

(83)

The Polish authorities have also suggested that FSO
‘voluntarily’
limit the number of countries to which it
exports its products. However, the Commission notes
that FSO will not produce its own models but will
produce under a licence agreement. Such a contract
limits the countries in which the products can be sold.
Therefore, such a limitation is inherent to the business
plan and not a concession from FSO, which has no
control over it. In addition, the sales forecasts for these
countries were not underpinned by sufficient
infor-
mation.

(84)

The Polish authorities have proposed dismantling some
equipment on FOS’s production lines. However,
this
equipment has to be replaced anyway to produce a
new model.

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(85)

(86)

(87)

has

that

indicated

Poland, which

FSO’s
Finally,
production capacity is
[200 000-230 000] units per
year on a two shifts basis, has proposed restricting its
production capacity to [140 000-170 000] units per year
until 2008. The Commission notes that this corresponds
to the level of production forecast by FSO for 2008 (see
Table 5) (17). Therefore, this measure would not be a
constraint on the company.

To summarise, none of the measures proposed by the
Polish authorities represent concessions by FSO. They do
not limit FSO’s market presence more than the measures
necessary to restore viability would do in any case. Thus
they cannot compensate for the distortion created by the
aid. Undue distortions of competition are therefore not
avoided. As the Commission considers that measures are
necessary to limit the distortion of competition,
it has
decided to make the compatibility of the aid conditional
on compliance with the following measures:

1. Annual production of passenger cars,

including all
kinds of assembly kits, will be limited to 150 000
units until the end of February 2011 (18), […].

2. Annual sales of passenger cars in the EU (19) will be
limited to 107 000 units until the end of February
2011 (20).

3. These two conditions apply to FSO, to all its present
and future
company
controlled by the FSO shareholders to the extent
that it operates assets (e.g. plants, production lines)
currently belonging to FSO or its subsidiaries.

and to any

subsidiaries,

The Commission considers this condition appropriate to
reduce the distortion of competition created by the aid.
On the basis of the production forecasts provided by the
a
Polish authorities,

condition will

constitute

this

(17) On the basis of the amended forecasts submitted on 3 October

2006, this measure would only be a constraint in 2008.

(18) Production must be limited to 25 000 units in the first two months

of 2011.

(19) Including new Member States when they join the EU.
(20) Sales in the EU must be limited to 17 833 units in the first two

months of 2011.

constraint on the company only for
maximum,
during that period,
company
limitations also mean that
able
to bid for any additional
requiring production during this period.

two, or, at a
three years and two months (21). Thus,
the
cars. These
the company will not be
license agreements

condition will oblige
fewer

to produce

and sell

the

(88)

By setting the production ceiling (duration, level) so that
the restrictive effect is limited to two – at the maximum
three – years and two months,
the Commission has
taken into account the status of the region where the
company is located and its small market share.

(89)

(90)

4.7. Aid limited to the minimum necessary

In the decision to launch the investigation procedure, the
Commission expressed doubts as to whether all the aid
was necessary. In particular, the Commission observed
that the granting of certain measures had been made
conditional on finding an investor. The aid therefore
seemed to constitute a way to attract an investor rather
than being strictly limited to what the company really
needed to survive. The investigation procedure has
allayed these doubts. Indeed, the Commission finds that
without the support of an investor and a licensor the
company on its own could not have survived. FSO had
no model of its own to produce, nor did it have the
capability to develop a completely new one. Furthermore,
the lack of interest manifested by the 29 biggest car
manufacturers following the approaches made by FSO
in February 2004 shows that the firm was in a very
difficult situation and that even with the aid it did not
represent a manifestly viable and profitable firm. On the
basis of the foregoing, the Commission concludes that
the fact that part of the aid was made conditional on
finding an investor does not mean that this aid was in
excess of
the minimum necessary to restore FSO to
viability.

the Commission has

In order to assess whether the aid is limited to the
analysed
minimum necessary,
which parties have supported and will
the
restructuring costs. These are mainly made up of the
costs of restructuring the company’s liabilities. For a
smaller amount, the company also needed a guarantee
to get the investment loan to finance the modernisation
of the production line necessary to produce the new
model.

support

(21) The restraining effect is limited to two years and two months when
the production forecasts set out in Table 5 are used. If the increased
forecasts included in the letter of 3 October 2006 are used, the
restraining effect is limited to three years and two months.

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[…]

claims

creditors. Under
against

(91) As previously indicated (see Table 3), FSO signed an
this
its main
agreement with
FSO
converted
agreement, DMC
amounting to PLN [2-3] million (*)
into capital.
The State Treasury did the same for an amount of PLN
[400-800] million […]. As indicated in paragraph 55,
the Commission considers this conversion to be free of
aid. In this agreement of September 2003, private banks
undertook to waive claims against FSO amounting to
PLN [0,7-1,2] billion […], and more than half of this
commitment has already been implemented. Smaller
claims against FSO were also restructured, so that an
additional PLN [120-230] million […] was written off.
The debt conversions and write-offs directly reduce the
amount of aid necessary to save the company. Indeed, if
these creditors had not accepted the conversions and
write-offs of their claims, the reimbursement of these
liabilities would have been due immediately and addi-
tional aid would have been necessary to reimburse
them and thereby avoid the bankruptcy of FSO.
In
total, not counting the debt conversion by the State
contribution made by FSO’s private
Treasury,
creditors amounts to PLN [2,8-4,4] billion […].

the

(92)

the contribution just described, Poland has
Besides
recent years AvtoZAZ has pre-
indicated that over
financed its orders to FSO, which have represented
nearly the entire production of
the Polish firm. This
pre-financing permitted FSO, which had no liquidity
available, to finance the production (of the cars ordered
e.g. buying inputs). The pre-financed orders have made it
possible for the company to operate over the last few
years. This kind of pre-financing is not common practice
in the car industry, especially for a firm in difficulty. It
can then be concluded that AvtoZAZ,
through this
exceptional pre-financing to FSO, has contributed to
financing the company during its restructuring period.
This private contribution is a sign that
the market
believes in the viability of the firm. According to the
the
information submitted by the Polish authorities,
amount of advance payments from AvtoZAZ amounted
at some points in time to USD [10-50] million […].

(93) As indicated, at the exchange rate of 20 October 2006,
the maximum aid amount to be granted after accession is
EUR 82 million or PLN 318 million.
In assessing
whether the aid is limited to the minimum necessary,
the Commission has also to take into account the aid
granted before Poland’s accession in the framework of
the
the

restructuring. As

indicated before,

same

the maximum aid amount
Commission considers
granted in the quarters before accession to be PLN 201
million (EUR 51 million). The maximum total restruc-
turing aid therefore amounts to PLN 519 million (EUR
133 million). It may be concluded from the above that
the private sector contribution covers more than 85 % of
the restructuring costs, and the aid less than 15 %. Even
if the (aid-free) conversion of debt by the State were
considered a restructuring cost, the private sector contri-
the
bution amounts to more than three quarters of
restructuring costs. The Commission considers the contri-
bution from the private creditors to be substantial.

(94) On the basis of the foregoing, the Commission concludes
that the aid is limited to the minimum necessary.

4.8.

‘One time, last time’ principle

(95) On the basis of the information provided by the Polish
authorities, the Commission concludes that the company
has not received restructuring aid in the last ten years.
During the current restructuring, the first aid measures
were granted in the last quarter of 2003. This condition
is therefore respected.

5. CONCLUSION

(96)

The Commission concludes
compatible with the
conditions are fulfilled,

that

common market,

the notified aid is
certain
if

HAS ADOPTED THIS DECISION:

Article 1

The aid measures listed in Table 4, some of which Poland has
already partially or fully implemented and some of which
Poland has not yet
for Fabryka Samochodow
Osobowych are compatible with the common market, subject
to the obligations and conditions set out in Article 2.

implemented,

Article 2

(*) Clerical error — should be ‘billion’.

The plan for restructuring FSO, including the restructuring

1.
of FSO liabilities, must be fully implemented.

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Annual production of passenger cars, including all kinds
2.
of assembly kits, shall be limited to 150 000 units until the end
of February 2011. This limitation applies to each calendar year.
Production shall be limited to 25 000 units in the first two
months of 2011.

production and sales figures of the previous calendar year, to
be sent no later than at the end of January. The last report shall
be sent before the end of March 2011 and shall cover
production and sales in the first two months of 2011.

3.
Annual sales of these passenger cars in the EU (including
new Member States as soon as they join the EU) shall be limited
the end of February 2011. This
to 107 000 units until
limitation applies to each calendar year. Sales in the EU shall
be limited to 17 833 units in the first two months of 2011.

Article 3

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

The two conditions set out above shall apply to FSO, to
4.
all
its present and future subsidiaries, and to any company
controlled by the controlling shareholder of FSO to the extent
that
it uses productive assets (e.g. plant, production lines)
currently belonging to FSO or its subsidiaries.

5.
For the purpose of monitoring compliance with all the
above conditions, Poland shall provide the Commission with
six-monthly reports on the state of progress of FSO’s restruc-
turing. As regards the production and sales limitations, Poland
reports on
the Commission with annual
shall provide

Article 4

This Decision is addressed to the Republic of Poland.

Done in Brussels, 20 December 2006.

For the Commission

Neelie KROES
Member of the Commission