2007/257/EC: Commission Decision of 20 December 2006 on State aid No C 44/05 (ex NN 79/05, ex N 439/04) partially implemented by Poland for Huta Stalowa Wola S.A. (notified under document number C(2006) 6730) (Text with EEA relevance )
Date: 2006-12-20
Institutions: European Commission
Subjects: Poland, State aid, aid for restructuring, arms industry, control of State aid, tax debt write-off

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COMMISSION DECISION

of 20 December 2006

on State aid No C 44/05 (ex NN 79/05, ex N 439/04) partially implemented by Poland for Huta
Stalowa Wola S.A.

(notified under document number C(2006) 6730)

(Only the Polish version is authentic)

(Text with EEA relevance)

(2007/257/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Commu-
nity, 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.

PROCEDURE

(1)

(2)

(3)

(hereinafter

referred to as

By letter of 8 October 2004, Poland informed the
Commission of restructuring aid granted to Huta Stalowa
Wola S.A.
‘the
recipient’) with a view to obtaining legal certainty that the
aid was granted before accession and was, as a result, not
applicable after accession and that it did not constitute new
aid which could be examined by the Commission under
Article 88 of the EC Treaty. In the event of the Commission
finding that this aid constituted new aid, Poland asked for it
to be approved as restructuring aid.

‘HSW’ or

The Commission requested Poland to provide further
information by letters dated 11 November 2004, 1 March
2005, 27 April 2005 and 26 July 2005, to which Poland
replied by letters dated 31 January 2005, registered as
received on 2 February, 4 April 2005, registered as received
on 8 April, 7 June 2005, registered as received on 9 June,
registered as received on 6
and 2 September 2005,
September.

this exchange of correspondence it
In the course of
emerged that some of the notified aid had been put into
effect in contravention of Article 88(3) of the EC Treaty.
The case was therefore classified as unlawful aid and a new
case number was attributed (NN 79/2005).

(1) OJ C 34, 10.2.2006, p. 5.

(4)

(5)

(6)

By letter of 23 November 2005, the Commission informed
Poland that it had decided to initiate the procedure laid
down in Article 88(2) of the EC Treaty in respect of the aid.

The Commission's decision to initiate the Article 88(2)
procedure was published in the Official
the
European Union. (2) The Commission invited interested
parties to submit their comments on the aid.

Journal of

The Polish authorities submitted their observations by letter
of 7 March 2006, registered as received on 9 March. No
comments from third parties have been received.

2.

DETAILED DESCRIPTION OF THE AID

2.1

The company

(7) HSW, the aid recipient and parent company of the HSW
holding company, is based in Stalowa Wola in Podkarpackie
province. This region is eligible for aid under Article 87(3)
(a) of the EC Treaty. In February 2006 the holding company
comprised eight companies in which HSW held at least
51 % of the shares (which it controlled) and ten in which it
held less than 51 %. The companies which make up the
HSW holding company operate as mutual suppliers of
goods and services. Apart from the parent company itself,
the companies with the largest stake in the holding
company
are HSW-Zakład Zespołów Napędowych
Sp. z o.o and HSW-Zakład Zespołów Mechanicznych
Sp. z o.o. HSW's share of sales to the companies forming
part of the holding company as a percentage of its total
sales amounts to 20-30 %.

(8) HSW was set up in 1937 and initially produced guns and
stainless steel. Unlike its subsidiary HSW–Zakład Metalur-
giczny, it is not a steel producer. In 1991 it was converted
into a joint stock company. The State still owns 76 % of the
shares and employees hold 9 %. The remainder is accounted
for by private and public shareholders none of which has a
holding in excess of 5 %. The company manufactures
construction equipment and machinery and military
equipment (guns, howitzers, etc.).

(9) HSW had about 2 400 employees in 2005, down from

3 173 in 2002.

(2) See footnote 1.

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(10) One of the subsidiaries of HSW is the distribution company
Dressta Sp. z o.o. (hereinafter ‘Dressta’). Since September
2006 Dressta has been fully controlled by HWS S.A. In the
past, however, 51 % of its shares were owned by Komatsu
American International Company USA (‘KAIC’), a compe-
titor of HSW. In 1995 HSW transferred licences and assets
pertaining to the sale of its goods on foreign markets to
Dressta for a twelve-year period.

2.2

Difficulties faced by the company

(11) The recipient started to experience difficulties in 2002
following a decline in turnover from PLN 494,9 million
(EUR 130,2 million (3)
in 2000 to PLN 352,6 million
(EUR 92,7 million), i.e. a fall of 29 %. Its exports decreased
from PLN 505 million (EUR 132,8 million)
to PLN
279 million (EUR 73,4 million). The decline in turnover
on foreign markets was caused mainly by a business slump
and by the fact that Dressta, under the influence of its
principal shareholder, which was a major competitor of
HSW, had significantly reduced sales of HSW goods on the
North American market.

(12)

recipient

faced operating

In 2002 the
losses of
PLN 44,2 million (EUR 11,6 million) that were due mostly
to low utilisation of production capacity. Since most of the
sales on foreign markets were effected in US dollars and
most of the company's costs were expressed in PLN, the
appreciation in the zloty adversely affected sales and the
recipient's viability.

majority shareholder, the Treasury. HSW-Trading received a
capital injection of PLN 40 million (EUR 10,5 million) from
the Treasury; the Polish authorities gave notification of this
measure within the framework of the aid granted to HSW
(see Table 1).

(18) Whereas HSW-Trading was responsible for the production
and sales of industrial machinery, logistics management,
quality management and supplies of materials for machine
production, HSW retained R & D activities, financing of
production assets, strategic marketing, sales of spare parts,
repairs, and production and sales of military equipment and
was responsible for organisational restructuring. In exercis-
ing its activities, HSW-Trading leased from HSW assets that
were directly related to production. The necessary work-
force was also transferred temporarily to HSW-Trading.

(19) This division was

i.e.
throughout HSW's restructuring. HSW-Trading was to
merge again with HSW at the end of 2006.

to continue during 2004-05,

(20) The plan states that major employment

restructuring
should be undertaken. HSW plans to employ 2 100
workers by the end of the restructuring exercise in 2007,
down from 3 173 at the end of 2002.

(13) HSW was heavily indebted. Its average level of debt in
2000-02 was PLN 169,1 million (EUR 44,5 million).

(21) Another area of restructuring was the organisation of a
network for distributing building machinery and spare
parts on the world market, the aim being to give the
recipient access to new markets.

(14) Nor were the company's operating activities profitable, i.e.
from PLN 6,4 million
in 2000 to PLN 33,9 million

losses on sales
(EUR 1,68 million)
(EUR 8,60 million) in 2002.

increased

(15) The HSW Capital Group recorded net
PLN 137,7 million (EUR 36,2 million)
PLN 123,9 million (EUR 32,5 million) in 2003.

losses of
in 2002 and

2.3

The restructuring operation

(16) With a view to addressing these difficulties, the recipient
drew up in 2002 a restructuring plan for the period
2003-07. This plan was amended in February 2006.

(17) One of the restructuring plan's principal measures entailed
amending the recipient's organisational structure. The main
idea of the restructuring process was to separate the part of
HSW directly linked to production from the assets to be
restructured. Accordingly, an independent company, HSW-
Trading Sp. z o.o. (‘HSW-Trading’) was set up by HSW's

(3) All amounts provided by the Polish authorities in PLN have been
converted for information purposes into euro using the exchange
rate as at 17 November 2006 of EUR 1 = PLN 3,8019.

(22) The restructuring of HSW also entailed selling off

its
subsidiaries and privatising departments providing services.
By 2006 HSW had sold HSW–Zakład Kuźnia Matrycowa
Sp. z o.o for PLN […] (*) million (EUR […] million). A
private investor was found for two HSW-Zaklad Metalur-
giczny subsidiaries (HSW-Walcownia Blach Sp. z o.o. and
Jakosciowych). In total, HSW generated
HSW-Huta Stali
receipts privatisation of PLN 112,2 million (EUR 29,5 mil-
lion). The sale of two subsidiaries, HSW–Zakład Spreży-
nownia and HSW–Tlenownia, was to be finalised by 2006.

(23) Asset restructuring entails reducing annual production
capacity from 1 500 to 1 200 items of construction
machinery. The size of HSW's assets was deemed clearly
excessive in relation to its needs. Since HSW planned to
focus mainly on producing construction machinery, a
significant number of its assets had to be sold. The actual
sale of assets from January 2003 to December 2005
generated revenue of PLN 52,1 million (EUR 13,7 million),
which by far exceeded the planned sale, estimated at
PLN 10,3 million (EUR 2,7 million). The following assets
were sold: some 248,4 hectares of land (including about

(*) Confidential information.

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153 hectares of woodland); real estate with a usable surface
area of about 76 000 m2 and 94 items of machinery and
equipment.

(24) Overall restructuring costs, including costs incurred prior
to
PLN 450,3 million
to
(EUR 118,5 million) and consist of the items indicated in
Table 1.

accession,

amount

Table 1:

Restructuring costs (PLN ‘000)

(28) An amount of PLN 27,9 million (EUR 7,3 million) in the
form of debt write-offs was granted on the basis of the
amended State Aid to Enterprises of Special Significance to
the Labour Market Act of 30 October 2002 (see Table 4
below). Restructuring under the Act was supervised by the
President of the Industrial Development Agency and was
based on a so-called restructuring decision within the
meaning of Articles 10(1)(4) and (19) of
the Act
(‘restructuring decision’). The restructuring decision approv-
ing the restructuring plan and allowing the restructuring of
public-law liabilities was issued on 29 April 2005 and
amended on 17 June 2005.

Restructuring measure

Restructuring of civil-law liabilities

Restructuring of public-law liabilities

Costs

95 648

113 213

(29) The different measures as originally notified to the

Commission are presented in the following table:

Table 2:

Organisation of supply and distribution system

151 241

Planned and granted aid (PLN ‘000), as notified

Continuity of supply of materials, spare parts and
components

Product restructuring

Asset restructuring

Employment restructuring

Organisational restructuring

Modernisation of production potential

40 000

11 666

871

5 170

2 013

30 524

Total

450 346

2.4

The aid measures

(25) The granting authorities are the Treasury, the Ministry of
local
Science and Information Technology,
authorities, the Social Insurance Fund (ZUS), the State Fund
for the Rehabilitation of the Disabled (PFRON), town halls
and the Industrial Development Agency.

tax offices,

(26) Poland has maintained that part of the aid granted to HSW
was linked to the need to protect essential national security
interests. The aid amounted to some PLN 19 million
(EUR 5 million) and was granted both before and after
Poland acceded to the European Union. The Polish
authorities maintain, with reference to Article 296 of the
EC Treaty, that the provisions of that Treaty do not preclude
Member States from granting aid deemed necessary to
protect essential national security interests.

(27) The most significant aid measures granted before accession
to the non-military part of HSW were two loans from the
Industrial Development Agency of PLN 75 million
(EUR 19,7 million). Another important aid measure was
injection by the Treasury of PLN 40 million
a capital
the subsidiary HSW–Trading
(EUR 10,5 million)
Sp. z o.o.

for

Category of aid

Nominal
amount

Aid amount

I. Restructuring aid granted before

30 April 2004

145 785,5 129 309,1

II. Restructuring aid granted on the

basis of the amended State Aid to
Enterprises of Special Significance
to the Labour Market Act of
30 October 2002

27 897,1

19 293,7

III. Restructuring aid to be awarded

after 30 April 2004

43 456,9

13 562,9

Total 217 139,5 162 165,7

3.

DECISION TO INITIATE PROCEEDINGS UNDER

ARTICLE 88(2) OF THE EC TREATY

(30) The Commission decided to initiate the formal investigation

procedure for two reasons.

(31) First, it doubted that the restructuring aid was compatible

with the common market.

(32) The Commission doubted that the measures provided for in
the restructuring plan were sufficient
to restore the
recipient's long-term viability as the plan seemed to focus
on debt servicing and covering operating costs.

(33) The Commission also expressed doubts as to whether
sufficient compensatory measures had been implemented.
Whereas, according to the Polish authorities, HSW planned

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to reduce production capacity by 20 %, the plan provided
for capacity utilisation to be increased from 27,7 % in 2002
to 66 % in 2007. The Commission had doubts about the
net effect of this operation.

(34) The Commission also had doubts as to whether the aid was
limited to the minimum necessary and whether
the
recipient's own contribution was significant, given that
Poland had not made a clear distinction between what it
regarded as the recipient's own contribution to restructur-
ing and what was funded by state aid.

(35) The Commission also had doubts regarding compliance
with the ‘one time, last time’ rule. In fact, a subsidiary of
HSW, HSW–Zakład Zespołów Mechanicznych,
had
received restructuring aid for 2003-07 before Poland had
joined the European Union. It was necessary to demon-
strate that this aid had had no spillover effects on the parent
company, HSW. Poland was also asked to provide the
Commission with an assurance that the restructuring aid to
HSW, if allowed, would not have any spillover effects on
HSW-Zakład Zespołów Mechanicznych.

(36) The second reason for initiating the formal investigation
procedure was that the Commission had doubts as to
whether subsidised special military production (guns) had
been kept sufficiently separate from civil production of
the
construction machinery.

assured

Poland

had

Commission in letters dated 7 June and 2 September
2005 that cross-subsidisation had been ruled out and the
Commission had noted that the ratio of aid allocated to
military production/total aid was small in comparison with
the ratio of military production to total production.
the Commission asked for more detailed
Nevertheless,
explanations on separate accounting.

4.

COMMENTS FROM POLAND

(37) First,

the Polish authorities disputed the Commission's
conclusion in the decision to initiate the formal investiga-
tion procedure that no aid had been granted on the basis of
the amended State Aid to Enterprises of Special Significance
to the Labour Market Act of 30 October 2002 (see Table 2,
row II) prior to accession. The Polish authorities repeated
their earlier submission that the consent of the recipient's
public creditors (so-called administrative promises), not the
the
restructuring decision issued by the President of
Industrial Development Agency, was crucial when it came
to granting state aid under the Act. Since HSW's public
creditors, whose receivables had been restructured under
the Act, had already given their consent regarding HSW
the Polish
before Poland joined the European Union,
authorities maintain that
the aid was granted before
accession and, as such, its compatibility with the common
market does not have to be assessed by the Commission.

(38) Second, the Polish authorities signalled two amendments to the aid as originally notified. The first and
most important amendment was that the planned state aid referred to in row III of Table 2 was partially
withdrawn and replaced by two measures which, it was claimed, did not constitute state aid. The second
amendment was of a factual nature and concerned the precise amount of the three aid measures referred
to in Table 3. The following tables list all the aid measures granted or to be granted to HSW throughout
the restructuring period, as amended after the decision to initiate the formal investigation procedure.

Table 3:

Aid granted before 30 April 2004 (PLN ‘000)

No

Assumed date
of agreement
or decision

Granting authority

Form of aid

Nominal
amount

Aid amount

1.

2003-12-12

Treasury Office in Sta-
lowa Wola

Write-off of VAT for September
2002

1 047,5

1 047,5

2.

2003-09-15

Treasury Office in Sta-
lowa Wola

Agreement on payment in instal-
ments of VAT for December 2002

4 769,8

155,0

3.

2003-09-15

Treasury Office in Sta-
lowa Wola

Agreement on payment in instal-
ments of VAT for March 2003

1 771,8

52,2

4.

2003-09-15

Treasury Office in Sta-
lowa Wola

Agreement on payment in instal-
ments of VAT for May 2003

2 175,2

77,4

5.

2003-09-15

Treasury Office in Sta-
lowa Wola

Agreement on payment in instal-
ments of PIT for March 2003

623,3

16,0

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No

Assumed date
of agreement
or decision

Granting authority

Form of aid

Nominal
amount

Aid amount

6.

2003-09-15

Treasury Office in Sta-
lowa Wola

Agreement on payment in instal-
ments of PIT for May 2003

463,4

5,0

7.

2003-02-04

Social Insurance Institu-
tion (ZUS), Rzeszów
branch

Agreement on payment in instal-
ments of contributions for June-
October 2002

6 252,1

1 211,6

8.

2003-08-28

Industrial Development
Agency

Loan

40 000,0

40 000,0

9.

2003-09-15

Treasury Office in Sta-
lowa Wola

Agreement on payment in instal-
ments of VAT for June 2002

696,9

77,1

10.

2003-09-15

Treasury Office in Sta-
lowa Wola

Deferral of payment of PIT
instalment for July 2002

183,9

15,3

11.

2003-09-15

Treasury Office in Sta-
lowa Wola

Change of payment dates of PIT
instalments for August 2002

211,5

26,8

12.

2003-12-02

Treasury Office in Sta-
lowa Wola

Agreement on payment in instal-
ments of VAT for August 2002

655,5

49,3

13.

2003-09-05

District Starost Office,
Stalowa Wola

Instalment scheme of payments
for perpetual usufruct

14.

2003-03-21

District Starost Office,
Nisko

Instalment scheme of payments
for perpetual usufruct

15.

2004-04-30

Industrial Development
Agency

Loan

172,7

20,5

8,0

0,3

35 000,0

35 000,0

16.

2004-04-30

Treasury

Initial capital increase

40 000,0

40 000,0

17.

2003-11-07

Ministry of Science and
Information Technology

Subsidy

18.

2003-05-20

District Starost Office,
Stalowa Wola

Refund of expenditure

19.

2003-05-20

District Starost Office,
Stalowa Wola

Refund of expenditure

637,0

465,0

3,3

3,3

2,4

2,4

20.

2002-12-06

Head of Podkarpackie
Province Tax Office,
Rzeszów

Write-off of VAT arrears

1 210

1 210

21.

2002-12-06

Stalowa Wola Town Hall Write-off of real estate tax arrears

496,8

496,8

22.

2002-12-11

Social Insurance Institu-
tion (ZUS), Rzeszów
branch

Write-off of unpaid contributions,
plus interest

11 088,1

11 088,1

Total I

147 482,6

131 006,2

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Table 4:

Aid granted under the amended State Aid to Enterprises of Special Significance to the Labour Market Act of
30 October 2002 (PLN ‘000)

No

Date of transfer
of debts and
receivables to the
operator

23.

2005-06-20

Restructuring of VAT and PIT

Type of restructured receivables

Nominal amount

Aid amount

10 696,6

5 826,5

7 333,2

996,5

3 044,3

Aid amount not
indicated by the
Polish author-
ities

’

’

’

’

24.

2005-06-20 Restructuring of environmental taxes, plus interest

25.

2005-06-20

Restructuring of Social Insurance (ZUS) contributions,
plus interest and extension fees

26.

2005-06-20

Restructuring of payments to the State Fund for the
Rehabilitation of the Disabled. (PFRON), plus interest

27.

2005-06-20

Restructuring of real estate tax, from September 2002 to
June 2003, payable to Stalowa Wola Town Council

(1) The Polish authorities have not provided information on the grant equivalent of the measure. The aid amount was calculated on
the basis that 30,84 % of the restructured debt under the amended State Aid to Enterprises of Special Significance to the Labour
Market Act of 30 October 2002 would be repaid to creditors using income obtained from the sale of the beneficiary's assets in the
proceedings provided for in that Act. The figure of 30,84 % is used in the amended restructuring decision of 17 June 2005. The
amount written off would then amount to 69,16 % of the total debts. The grant equivalent amounts to 100 % of the debts written
off.

Total 2

27 897,1

19 293,7 (1)

Table 5:

Aid granted after 30 April 2004 (PLN ‘000)

No

Planned date of
disbursement of
aid

28.

2004-12-21
—
2005-10-19

29. 2005-04-25

Granting authority

Form of aid

Nominal amount

Aid amount

Public bodies

Deferral of public-law liabilities

22 094,4

0,259

Social Insurance Institu-
tion (ZUS), Rzeszów
branch

Deferral of public-law liabilities

16 386,2

0,0

Total 3

38 480,6

0,259

Table 6:

Aid granted and planned (PLN ‘000), as updated following the comments received from the Polish authorities
after the formal investigation procedure was instituted (update of Table 2)

Category of aid

Nominal amount

Aid amount

I.

Restructuring aid granted before 30 April 2004

147 482,6

131 006,2

II.

Restructuring aid granted on the basis of the amended State Aid to
Enterprises of Special Significance to the Labour Market Act of 30 October
2002

27 897,1

19 293,7

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Category of aid

Nominal amount

Aid amount

III.

IV.

Deferral of public law liabilities — measures recognised as constituting de
minimis aid by Poland (1)

22 094,4

0,259

Deferral of public-law liabilities by the Social Insurance Institution (ZUS)
(2)

16 386,2

0,0

Total

213 860,3

150 300,2

(1) Granted after December 2004.
(2) Granted in 2005.

(39) With regard to the measures referred to in row III of Table
6, the Polish authorities claimed that the deferral and
payment
in instalments of public-law liabilities of
PLN 22,1 million (EUR 5,8 million) (row II of Table 2)
should be treated as de minimis aid. Of this amount, PLN
19 million (EUR 5,0 million) has already been granted. The
methodology used by the Polish authorities to calculate the
aid amount compares the interest rate applied to the
deferral with the Commission reference rate. Where the
applied interest rate is higher than the reference rate, the
Polish authorities concluded that the measure does not
constitute aid. According to the Polish authorities, this is
the case for the aid referred to in row IV of Table 6.

(40) Third,

company's viability,
the organisational

the Polish
regarding the
authorities claim that
restructuring
proved to be successful; HSW has regained control of
HSW-Dressta and will thus be able to expand on the
profitable North American market.

(41) With regard to the requirement to limit distortions of
competition, the Polish authorities have maintained that the
reduction of production capacity from 1 500 to 1 200
machines was a valid compensatory measure. They also
regarded the sale of HSW's subsidiaries as a compensatory
measure.

(42) Regarding the limitation of

the aid to the minimum
necessary,
the Polish authorities have provided various
details on the amounts considered as constituting an own
contribution.

(43) To conclude, the Polish authorities claim in their observa-
tions that no state aid was granted after accession and that
none
is planned. Should the Commission conclude
otherwise, they will provide additional elements to support
the conclusion that the state aid is compatible with the
common market.

5.

ASSESSMENT OF THE AID

5.1.

Competence of the Commission

1 May 2004,
the Commission first has to determine
whether it is competent to act with regard to the aid in
question.

(45) Aid which was implemented before accession and was not
applicable after accession cannot be examined by the
Commission, either under the so-called interim mechanism
procedure, regulated by Annex IV, point 3 of the Accession
Treaty, or under the procedures laid down in Article 88 of
the EC Treaty. Neither the Accession Treaty nor the EC
Treaty requires or empowers the Commission to examine
this aid.

(46) On the other hand, aid implemented after accession would
constitute new aid and would fall within the competence of
the Commission under
the procedure laid down in
Article 88. For the purpose of determining the moment
when a given aid measure was put into effect, the relevant
criterion is the legally binding act by which the competent
national authority undertook to grant aid (4).

(47)

Individual aid is not applicable after accession if the precise
economic exposure of the State was known when the aid
was granted.

(48) On the basis of the information provided by Poland, the
Commission was able to determine that the aid measures
listed in Table 3 above were granted before accession and
are not applicable thereafter. The Commission is therefore
not empowered to assess their compatibility with the
common market. However,
they must be taken into
account when determining the compatibility of aid granted
or to be granted after accession. This aid amounts to
PLN 147 million (EUR 38 million).

(49) With regard to the aid measures granted under

the
amended State Aid to Enterprises of Special Significance
to the Labour Market Act of 30 October 2002 and listed in
Table 4, the Commission's doubts as to the day on which
they were granted have not been resolved. In that respect,
the Polish authorities have not provided any new arguments
in their comments on the decision to initiate the formal
investigation procedure. The consent of individual granting
authorities to restructuring of their receivables under this

(44) Given that some of the events of relevance to this case took
place before Poland acceded to the European Union on

(4)

Judgment of the Court of First Instance of 14 January 2004 in Case
T-109/01 Fleuren Compost v Commission [2004] ECR II-127,
paragraph 74.

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itself sufficient

is necessary but not of

for such
Act
restructuring to take place. The decisive element of the
procedure under the Act
is the restructuring decision,
which was taken by the President of the IDA on 29 April
2005, i.e. after accession. The Commission therefore takes
the aid in question was granted after
the view that
accession. As such,
it is competent to assess the aid's
compatibility with the common market. It should be noted
that this aid was granted in contravention of the standstill
clause in Article 88(3) of the EC Treaty and that it therefore
PLN 27,897 million
constitutes
(EUR 7,34 million).

unlawful

aid

of

(50) Finally, with regard to the measures listed in Table 5, if it is
determined that they constitute state aid, the Commission is
competent to assess their compatibility with the common
market as they were clearly extended after accession.

nominal amount. The aid measures listed in Table 5 amount
to PLN 38,480 million (EUR 10 million).

(56) The Commission concludes that the measures listed in
Tables 4 and 5 were financed using state resources. They
favour an individual firm by conferring on it an advantage
not available to it on the market and are thus selective.
HSW is active in the production of construction machinery,
which is a sector involving intensive trade within the
European Union. These measures therefore constitute state
aid within the meaning of Article 87(1) of the EC Treaty
amounting to PLN 66,77 million (EUR 17,467 million).

5.3.

Compatibility of the aid: derogation under

Article 87(3) of the EC Treaty

5.2.

State aid within the meaning of Article 87(1)

of the EC Treaty

(51) Article 87(1) of the EC Treaty stipulates that 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 and affects trade between Member States is
incompatible with the common market.

(57) The exemptions referred to in Article 87(2) of the EC Treaty
do not apply in this case. As regards exemptions under
Article 87(3), given that the primary objective of the aid is
to restore the long-term viability of a firm in difficulty, only
the exemption set out in Article 87(3)(c), which authorises
state aid to promote the development of certain economic
activities where such aid does not adversely affect trading
conditions to an extent contrary to the common interest,
can be applied.

(52) The Polish authorities have not contested the fact that the
measures listed in Tables 3 and 4 constitute state aid.

5.3.1. Applicable legal basis

(53) As regards the aid in the form of deferrals of HSW's tax and
social security liabilities (Table 5), the Polish authorities
maintain that it does not constitute state aid as it is de
minimis aid or its aid component is equal to zero. They
therefore base their argument on the calculation of the aid
component of individual aid measures.

(54) The Commission cannot endorse the calculation method
used by the Polish authorities because the aid was granted
to a company in financial difficulties. The risk of debt
rescheduling is higher than for healthy companies, which
should be reflected in the interest charged. The reference
rate cannot therefore be applied as the benchmark. A
calculation method which compares the actual interest rate
charged with the reference rate is not appropriate in this
the
case and the Commission therefore cannot accept
argument put forward by the Polish authorities.

(58) The Commission will assess the measures constituting new
aid and the whole restructuring plan in accordance with the
Community guidelines on state aid for
rescuing and
restructuring firms in difficulty. The current Community
Guidelines on state aid for rescuing and restructuring firms
in difficulty (6) (‘the 2004 guidelines’) entered into force on
10 October 2004. In the case of measures notification of
which was registered before this date, the previous 1999
rescue and restructuring guidelines (7) (‘the 1999 guide-
lines’) apply. According to point 104 of
the 2004
guidelines, ‘the Commission will examine the compatibility
with the common market of any rescue and restructuring
aid granted without
its authorisation and therefore in
breach of Article 88(3) of the Treaty on the basis of those
Guidelines if some or all of the aid is granted the date of
their
the
European Union.’

publication in the Official

Journal

of

(55)

It is established Commission practice and Court of Justice
case-law (5)
in the case of
the aid component
companies in financial difficulties can be equivalent to the

that

(59)

In this case, notification of the measures described in Table
2 was given on 8 October 2004 (two days before the entry
into force of the 2004 guidelines). However, the Polish
authorities also informed the Commission by letter dated
7 March 2006 of additional aid granted unlawfully to HSW.

(5) Cf. cases Wildauer Kurbelwelle (OJ L 287, 13.12.2000) and Lautex

Weberei und Veredelung (OJ L 42, 20.7.1999).

(6) OJ C 244, 1.10.2004, p. 2.
(7) OJ C 288, 9.10.1999, p. 2.

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L 112/75

The measures described in Table 6, rows III and IV, were all
granted after December 2004, i.e. after 1 October 2004,
when the 2004 guidelines were published. The Commis-
sion therefore concludes that,
the 2004
guidelines should apply to both notified and non-notified
measures since they all concern the same restructuring
plan.

in this case,

the whole picture in order

(60) As already mentioned in the Commission decision to
initiate the formal investigation procedure, it is necessary to
look at
the
compatibility of the new restructuring aid. In order to
establish whether the plan will result in the restoration of
viability, all aid measures, not only new aid, must be taken
into account when assessing whether the aid is limited to
the minimum necessary and when determining the
appropriate compensatory measures.

to assess

5.3.2. Eligibility of the firm

(61) For all the reasons already set out in the decision to initiate
the formal investigation procedure (see in particular points
85 et seq.), the firm is a company in difficulty within the
meaning of points 9 et seq. of the 2004 guidelines and is
therefore eligible for restructuring aid.

5.3.3. Restoration of viability

(62) The guidelines indicate that ‘the restructuring plan, 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 assump-
tions as to future operating conditions. […] The improve-
ment
in viability must derive mainly from internal
measures […].’

(63) HSW's most fundamental problem was its high indebted-
ness. The Commission notes that financial restructuring has
almost been completed.

(64)

In the decision to initiate the investigation procedure, the
Commission expressed doubts that the restructuring was
mainly financial rather than industrial and noted that
insufficient attention had been given to aspects of industrial
restructuring. In their comments following the decision, the
Polish authorities provided sufficient evidence that
the
obsolete organisational structure genuinely was one of the
key problems facing the company. This problem was
addressed by separating the part of the company directly
linked to production (HSW-Trading)
from the parts
intended to be sold. This was the reason for the temporary
creation by HSW S.A. of the independent company HSW-
Trading.

(65) The sale of shares in subsidiaries and the ring-fencing and
sale of selected service departments was planned as one of
In the decision to
the main elements of restructuring.
initiate the
the Commission
investigation procedure,
expressed doubts as to whether the sales plan was realistic.
However, in fact, HSW realised more than four times the
forecast revenue from the sale.

(66) Another key component of the restructuring's success was
the ownership situation of Dressta. The controlling share in
Dressta held by one of HSW's competitors — KAIC —
constituted an obstacle to full access to the important
North American market. The problem has now been solved
as HSW has regained control of Dressta, and its expansion
on the growing North American market is no longer
blocked by its competitor. Indeed, the Commission notes
that the most crucial sales market, owing to its absorptive
power and size,
is the North American market, and in
particular the USA. The increase in sales in this market is a
great opportunity for HSW, particularly since it is to begin
using the Dressta brand name, which is well known on the
market.

(67) Employment restructuring designed to reduce the work-
force by more than 1 000 is a real and credible cost–cutting
measure.

(68) HSW recorded a profit for the first time in 2005. At the end
of the restructuring period (2007), the profit is expected to
decrease, but this is due to high restructuring costs and an
exceptionally inflated profit figure for 2005, resulting from
one-off sales of assets in that year. However, from 2007
onwards, the net result is expected to improve and to
double by 2012. By the end of the restructuring period the
liquidity problem should be resolved.

(69) On the basis of these elements, the Commission concludes
lead to

that
its doubts as to whether
restoration of viability have been allayed.

the plan will

5.3.4. Avoidance of undue distortions of competition

(70) According to the Polish authorities, HSW plans to reduce
annual production capacity from 1 500 to 1 200 con-
struction machines, i.e. by 20 %. The Commission takes the
view that this capacity reduction is insufficient as the
company plans in any case to use only 66 % of capacity at
the end of
in 2007. The
Commission has not received any information from Poland
to suggest that the company was actually selling more than
1 200 machines before the start of restructuring.

the restructuring period,

i.e.

(71) Furthermore,

the Polish authorities maintain that

the
recipient has sold a number of profitable production
companies, thereby limiting its activities and production
capacity. At least two big subsidiaries (HSW-Walcownia
Blach Sp. z o.o. and HSW-Huta Stali Jakosciowych) were
profitable and were sold at a profit. The combined turnover
of these two subsidiaries in 2005 was PLN 460 million
(EUR 121 million) with a workforce of 1 000, whereas the
core activity of HSW group (HSW and HSW-Trading)
achieved a turnover of PLN 430 million (EUR 113,1 mil-
lion) with 2 400 employees. The two subsidiaries that were
sold produced finished steel products. At the time of the
sale, according to an evaluation submitted to the Commis-

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30.4.2007

these two subsidiaries were profitable, with the
sion,
prospect of a return on sales of about 6 %. The two
subsidiaries formed a very significant part of the HSW
group, with profitable activities and good market prospects.

hand, Poland was asked to assure the Commission that the
restructuring aid to HSW, if approved by the Commission,
would not have any spill-over effects on HSW–Zakład
Zespołów Mechanicznych.

(72) The Commission therefore takes the view that the sale of
these subsidiaries can be regarded as a compensatory
measure and not simply as an action necessary to restore
HSW's viability.

5.3.5. Aid limited to the minimum

(73) The Polish authorities have provided various details on the
amounts regarded as constituting the recipient's own
contribution to the restructuring costs.

(74) First, the company plans to obtain bank loans to an amount
of PLN 46,9 million (EUR 12 million). The Polish
authorities have provided evidence that HSW will be able
to obtain such financing on the market, given that it
benefited from limited private financing of PLN 31,9 million
(EUR 8,4 million) in the period 2003-05. They also claim
that the recipient will be able to find market financing until
the end of the restructuring period.

(75) Second, HSW received revenue of PLN 112,2 million
(EUR 29,5 million) from the sale of its subsidiaries.

(76) Lastly,

the recipient has

sold assets

to a value of

PLN 52,1 million (EUR 13,7 million).

(77) To conclude, as regards the financing sources of

the
restructuring measures, PLN 243,1 million (EUR 64 million)
can be regarded as constituting the recipient's own
contribution or external resources free of state aid. Overall
restructuring costs,
to
including costs
accession, amount to PLN 450,3 million (EUR 118,5 mil-
lion). HSW's own contribution to the total restructuring
costs is therefore equivalent to 54 %.

incurred prior

(78) The 2004 guidelines set 50 % as the minimum level of the
own contribution to restructuring costs. The Commission
therefore concludes that the level of own contribution is
significant and that, in light of the information provided,
the aid is limited to the minimum necessary.

5.3.6. ‘One time, last time’ principle

(79)

the

formal

investigation
In the decision to initiate
the Commission noted that HSW–Zakład
procedure,
Zespołów Mechanicznych had received restructuring aid
that was granted before accession for the period 2003-07.
It was necessary to demonstrate that the aid had had no
spill-over effects on the parent company. On the other

relations

(80) The Polish authorities have assured the Commission that
bilateral
between HSW–Zakład Zespołów
Mechanicznych and HSW are based on market conditions
(including terms of payment and of delivery) and that the
companies, as distinct legal entities, have separate accounts.
The sole reason why HSW chose HSW–Zakład Zespołów
Mechanicznych as a supplier was its geographical proxi-
mity.

5.3.7. Separation between subsidised special military production

and civil production

(81) The Commission expressed doubts in the decision to
initiate the formal investigation procedure as to whether a
sufficient separation had been made between subsidised
special military production (guns) and civil production of
construction machinery in order to avoid cross-subsidisa-
tion between these two fields of activity. The Polish
authorities have assured the Commission that the current
system of cost accounting allows for a clear separation of
the costs of these two types of activities.

6.

CONCLUSIONS

(82) The Commission concludes that the partially unlawful and
partially notified state aid is compatible with the common
market,

HAS ADOPTED THIS DECISION:

Article 1

State aid amounting to PLN 66,377 million which has been
granted to or is planned for HSW and some of which Poland has
fully implemented in contravention of
already partially or
Article 88(3) of the EC Treaty and some of which Poland has not
yet implemented is compatible with the common market.

This Decision is addressed to the Republic of Poland.

Article 2

Done at Brussels, 20 December 2006.

For the Commission

Neelie KROES

Member of the Commission