Invitation to submit comments pursuant to Article 1(2) of Part I of Protocol 3 to the Surveillance and Court Agreement on State aid with regard to the taking over by the Icelandic State of pension-related liabilities of Sementsverksmiðjan hf.
Date: 2007-04-05
Institutions: EFTA Surveillance Authority
Subjects: EFTA, Iceland, State aid, aid for restructuring, cement, control of State aid, exchange of information, pension scheme

5.4.2007

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NOTICES CONCERNING THE EUROPEAN ECONOMIC AREA

EFTA SURVEILLANCE AUTHORITY

Invitation to submit comments pursuant to Article 1(2) of Part I of Protocol 3 to the Surveillance
and Court Agreement on State aid with regard to the taking over by the Icelandic State of pension-
related liabilities of Sementsverksmiðjan hf.

(2007/C 77/09)

By means of Decision No 367/06/COL of 29 November 2006, reproduced in the authentic language on the
pages following this summary, the EFTA Surveillance Authority initiated proceedings pursuant to Article 1
(2) of Part I of Protocol 3 of the Agreement between the EFTA States on the establishment of a Surveillance
Authority and a Court of Justice (Surveillance and Court Agreement). The Icelandic authorities have been
informed by means of a copy of the decision.

The EFTA Surveillance Authority hereby gives the EFTA States, EU Member States and interested parties
notice to submit their comments on the measure in question within one month from the publication of this
notice to:

EFTA Surveillance Authority
Registry
35, Rue Belliard
B-1040 Brussels

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

SUMMARY

PROCEDURE

By letter of 19 August 2003 from the Icelandic Mission to the European Union forwarding a letter from the
Ministry of Finance dated 19 August 2003, both received and registered by the Authority on the same date
(Doc No 03-5685 A), the Icelandic authorities notified the sale of the State's shares in Sementsverksmiðjan
hf., pursuant to Article 1(3) of Part I of Protocol 3 to the Surveillance and Court Agreement.

On 17 December 2003, the company Aalborg Portland Íslandi ehf. lodged a complaint with the Authority
against the terms and conditions of the sale by the Icelandic State of its shares in Sementsverksmiðjan hf.

After various exchanges of correspondence with the Icelandic authorities (1), the Authority adopted Decision
No 421/04/COL to initiate the procedure laid down in Article 1(2) of Part I of Protocol 3 to the Surveillance
and Court Agreement in respect of the sale by the Icelandic State of its shares in Sementsverksmiðjan hf.

The Icelandic authorities submitted comments on this Decision by letter dated 24 February 2005. On 20
June 2005, the Authority received comments from Islenskt Sement ehf., the purchaser of the State's shares
at Sementsverksmiðjan hf. On 2 September 2005, Aalborg Portland Íslandi ehf. submitted further comments
and pointed out that the Authority had not addressed the taking over by the State of pension obligations
incumbent on Sementsverksmiðjan hf.

(1) For more detailed information on the various correspondence between the Authority and the Icelandic authorities, refer-
ence is made to the Authority's Decision to open the formal investigation procedure, Decision No 421/04/COL (OJ C 117,
19.5.2005, p. 17).

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After further correspondence with the Icelandic authorities, the Authority has decided to extend the formal
investigation procedure with regard to the taking over by the State of pension-related obligations of
Sementsverksmiðjan hf.

ASSESSMENT OF THE MEASURE

With an agreement dated 23 October 2003 between the Ministry of Finance and the Pension Fund of State
Employees, on behalf of the State Treasury, fulfilling the obligation laid down in Article 4 of the Share
Purchase Agreement between the Ministry of Industry and Islenskt Sement ehf., the Ministry of Finance took
over the remainder of the bonds issued to pay the accrued obligations of Sementsverksmiðjan hf. as settled
in the agreement of 1997.

The agreement signed in October 2003 also refers to the agreement dated 30 March 1999 between the
Pension Fund of State Employees and Sementsverksmiðjan hf.
in which it was stated that obligations
regarding employees of Sementsverksmiðjan hf. were to be paid and settled annually. With the agreement of
October 2003, the Ministry of Finance also took over the obligations of Sementsverksmiðjan hf. according
to the referred agreement of March 1999.

According to the information provided by the Icelandic authorities in their letter dated 12 November 2003,
the pension obligations for employees already retired were estimated at ISK 412 million in 2003. As far as
the future obligations for the employees of Sementsverksmiðjan hf. still affiliated to Section B of the Pension
Fund of State Employees are concerned, they were estimated to amount to ISK 10-15 million, depending on
the time the employees will remain in the company.

In the preliminary view of the Authority, the taking over by the Icelandic State of pension-related obligations
of Sementsverksmiðjan hf. without paying a market price for it granted a selective advantage to the
company by which State resources in the amount of the obligations taken over were involved. This advan-
tage has the effect of distorting competition and has an effect on trade since there is competition in the
market for cement within the EEA. Therefore, in the preliminary opinion of the Authority, this measure
constitutes State aid within the meaning of Article 61(1) of the EEA Agreement.

The Authority preliminary considers that it can only be assessed whether the taking over by the State of
pension-related liabilities of Sementsverksmiðjan hf. can be considered compatible with the State aid rules of
the EEA Agreement on the basis of the provisions of Chapter 16 of the State Aid Guidelines, on Rescue and
Restructuring Aid. It has however doubts whether the information provided in the restructuring plan
presented by the Icelandic authorities as it stands now fulfils the necessary requirements.

CONCLUSION

In the light of the foregoing considerations, the Authority decided to open the formal investigation proce-
dure in accordance with Article 1(2) of Part I of Protocol 3 to the Surveillance and Court Agreement. Inter-
ested parties are invited to submit their comments within one month from publication of this decision in
the Official Journal of the European Union.

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EFTA SURVEILLANCE AUTHORITY DECISION

No 367/06/COL

of 29 November 2006

on the taking over by the Icelandic State of pension-related liabilities of Sementsverksmiðjan hf.
(Iceland)

THE EFTA SURVEILLANCE AUTHORITY (1),

Having regard to the Agreement on the European Economic Area (2), in particular to Articles 61 to 63 and
Protocol 26 thereof,

Having regard to the Agreement between the EFTA States on the establishment of a Surveillance Authority
and a Court of Justice (3), in particular to Article 24 thereof,

Having regard to Article 1(2) of Part I and Articles 4(4), and 6 of Part II of Protocol 3 to the Surveillance
and Court Agreement,

Having regard to the Authority's Guidelines (4) on the application and interpretation of Articles 61 and 62
of the EEA Agreement,

Having regard to the Authority's Decision of 14 July 2004 on the implementing provisions referred to
under Article 27 of Part II of Protocol 3 to the Surveillance and Court Agreement,

Having regard to the Authority's Decision No 421/04/COL on the sale of the Icelandic State's shares in
Sementsverksmiðjan hf. and having called on interested parties to submit their comments pursuant to those
provisions (5),

Whereas:

I. FACTS

1. Procedure

By letter of 19 August 2003 from the Icelandic Mission to the European Union forwarding a letter from the
Ministry of Finance dated 19 August 2003, both received and registered by the Authority on the same date
(Doc No 03-5685 A), the Icelandic authorities notified the sale of the State's shares in Sementsverksmiðjan
hf., pursuant to Article 1(3) of Part I of Protocol 3 to the Surveillance and Court Agreement.

On 17 December 2003, the company Aalborg Portland Íslandi ehf. lodged a complaint with the Authority
against the terms and conditions of the sale by the Icelandic State of its shares in Sementsverksmiðjan hf.
The Authority received and registered this letter on 23 December 2003 (Doc No 03-9059 A). The complai-
nant requested this complaint to be processed simultaneously to the notification of the sale made by the
Government.

After various exchanges of correspondence (6), by letter dated 21 December 2004 the Authority informed
the Icelandic authorities that it had decided to initiate the procedure laid down in Article 1(2) of Part I of
Protocol 3 to the Surveillance and Court Agreement in respect of the sale by the Icelandic State of its shares
in Sementsverksmiðjan hf. (Event No 296878). The Authority raised doubts regarding the market value of
Sementsverksmiðjan hf. at the time the State's shares were sold, the market value of the assets repurchased
by the State, the right of Sementsverksmiðjan hf. to use some of the assets located in Reykjavik sold to the
National Treasury without any payment as well as its right to reacquire certain properties and ground rights
in Reykjavik for an already predetermined price.

(1) Hereinafter referred to as the Authority.
(2) Hereinafter referred to as the EEA Agreement.
(3) Hereinafter referred to as the Surveillance and Court Agreement.
(4) Guidelines on the application and interpretation of Articles 61 and 62 of the EEA Agreement and Article 1 of Protocol 3 to
the Surveillance and Court Agreement, adopted and issued by the EFTA Surveillance Authority on 19 January 1994,
published in OJ L 231, 3.9.1994, p. 1, EEA Supplements 3.9.94 No 32. The Guidelines were last amended on 25 October
2006. Hereinafter referred to as the State Aid Guidelines.

(5) Published in OJ C 117, 19.5.2005, p. 17 as well as in the EEA Supplement to the Official Journal of the EU No 24 of

19.5.2005.

(6) For more detailed information on the various correspondence between the Authority and the Icelandic authorities, refer-
ence is made to the Authority's Decision to open the formal investigation procedure, Decision No 421/04/COL (OJ C 117,
19.5.2005, p. 17).

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The Authority's Decision No 421/04/COL to initiate the procedure was published in the Official Journal of
the European Union and the EEA Supplement thereto (7). The Authority called on interested parties to submit
their comments thereon. The Icelandic authorities submitted comments on this Decision by letter dated
24 February 2005 (Event No 311243). On 20 June 2005, the Authority received comments from Íslenskt
sement ehf., the purchaser of Sementsverksmiðjan hf. (Event No 323552). On 2 September 2005, Aalborg
Portland Íslandi ehf. submitted further comments (Event No 333018).

The Authority requested the assistance of an independent expert to find out whether the sale of the State's
shares in Sementsverksmiðjan hf. was done in accordance with the market investor principle. Based on the
independent expert's first assessment of the information on the sale available to the Authority, an informa-
tion request was sent to the Icelandic authorities on 12 July 2005 (Event No 326295). The Icelandic autho-
rities replied by letter from the Icelandic Mission to the EU forwarding a letter of the Ministry of Finance
dated 30 and 31 August 2005 respectively. This letter was received and registered by the Authority on
1 September 2005 (Event No 332274).

A second information request was sent to the Icelandic authorities in the framework of the formal investiga-
tion procedure on 28 October 2005 (Event No 347691). This request was followed by a meeting in Brussels
on 23 November 2005 between representatives of the Authority, the Icelandic authorities, the company and
one of the investors participating in the consortium which acquired Sementsverksmiðjan hf. The indepen-
dent expert engaged by the Authority attended this meeting as well.

By letter dated 6 December 2005, received and registered by the Authority on 7 December 2005 (Event No
353483), the Icelandic Mission to the EU forwarded a letter from the Ministry of Finance dated 2 December
2005, replying to the above-mentioned information request as well as to some pending issues raised during
the meeting.

On 31 January 2006, the independent expert presented to the Authority his final report on whether the sale
by the Icelandic State of its shares in Sementsverksmiðjan hf. had been accomplished on market terms
(Event No 360438).

On 16 February, 9 March and 4 August 2006, the Authority sent letters to the Icelandic authorities
requesting further information and clarifications on still unclear points (Event No 363213, 365145 and
383227). The Icelandic authorities replied with letters dated 20 February, 19 April and 26 September 2006
respectively (Event No 363608, 370425 and 390092).

On 12 October 2006 in the annual State Aid Package Meeting in Reykjavik, this case was discussed. As a
follow-up to this discussion, the Icelandic authorities sent a letter to the Authority on 2 November 2006
(Event No 396476).

2. Description of the measure under assessment

With an agreement dated 23 October 2003 between the Ministry of Finance and the Pension Fund of State
Employees, on behalf of the State Treasury, the Ministry of Finance took over the pension obligations of
Sementsverksmiðjan hf. taken over by the company with a special agreement from 1997, and those
regarding the annual compensation settlement for employees affiliated to the B-Section of the Pension Fund
of State Employees.

a) Introduction: the affiliation of employees of Sementsverksmiðjan hf. to the Pension Fund of State Employees

In a letter dated 18 April 2006, the Icelandic authorities explained that white-collar employees of Sements-
verksmiðjan hf. had access to the Pension Fund of State Employees. For their part, blue-collar employees
were affiliated to the private pension fund system, i.e. the pension funds of their trade unions. According to
the explanations of the Icelandic authorities, at the time of the incorporation of the company in 1993, 6
employees were affiliated to the Pension Fund of State Employees and 93 to private pension funds. Although
after the incorporation of the company in 1993, new white-collar employees could still affiliate to the
Pension Fund of State Employees, after the sale of the State's shares in Sementsverksmiðjan hf. carried out in
2003, all new employees have to affiliate to a private pension fund.

(7) Published in OJ C 117, 19.5.2005, p. 17 as well as in the EEA Supplement to the Official Journal of the EA No 24 of

19.5.2005.

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b) General information on the functioning of the Pension Fund of State Employees

The Pension Fund of State Employees was originally governed by the provisions of Act No 29/1963. In
1997, given that the premiums to the Pension Fund of State Employees seemed insufficient to cover its
pension payments, the State decided to reform the system and adopted Act No 1/1997 ‘The Government
Employees Pension Fund Act’. The Pension Fund of State Employees was divided into two Sections: a new
Section A was created and the existing pension fund changed into Section B. All new employees were to
join Section A whereas existing employees could choose between membership in Section A or retaining
their right to membership in Section B, closed henceforth to new members. According to the Icelandic
authorities, with the splitting of the former Pension Fund of State Employees into Section A and B, the fund
was made self-sustaining and would no longer cumulate a negative balance between premiums and commit-
ments which would eventually have to be made up by the National Treasury.

The main differences between Section A and B of the Pension Fund of State Employees are:

— Premiums to Section A of the Pension Fund of State Employees are paid on the basis of the total income
of the affiliated employees who earn retirement rights on the basis of total premiums paid. The pension
rights are linked to the consumer price index. The rights of the affiliated employees to a pension are
bound by law and employers must periodically adjust their premiums to ensure that the Fund's premium
income matches its commitments.

— In contrast, premiums to Section B of the Pension Fund of State Employees are only paid on the basis of
the basic salary of the affiliated employees, not on their total pay. The affiliated employees acquire
pension rights in a way that at retirement they receive a certain percentage of the basic pay for the post
from which they retired. Thereafter, the pension is linked to the average rise in the pay of government
employees. As a result of the provisions for Section B, there is normally a deficit which has to be
covered on a regular basis. By virtue of Article 32 of Act No 1/1997, the Treasury guarantees the
payment of a pension according to the Act. Notwithstanding this guarantee of the State on the paying-
out of pensions to affiliates to the Fund, it is the employer of the members of Section B of the Pension
Fund of State Employees who must cover this difference on the basis of Article 33 Act No 1/1997.

c) The establishment of a debt from Sementsverksmiðjan hf. towards the Pension Fund of State Employees

Article 33 of Act No 1/1997 provides that ‘in the case where a previously determined […] pension increases due to
a general increase in the salary of public employees, the Treasury and other employers who insure their employees in the
Fund refund (8) the increase which thus takes place in pension payments. […] The board of the Fund may […] accept
a debenture in payment of accrued commitments. […] The commitment thus settled shall be based on an actuarial
assessment as at the settlement date. An employer who has settled his/her commitment with the issue of a debenture in
accordance with this paragraph shall have no further responsibility for the Fund's commitments […] in respect of the
period and those employees to which the settlement applies’.

On 8 October 1997, the Ministry of Finance signed an Agreement with the Civil Servants' Pension Fund on
payment of National Treasury obligations pursuant to Article 33 of Act No 1/1997 on the Civil Servants'
Pension Fund with respect to employees of the Iceland State Cement Works to year-end 1996. These obliga-
tions corresponded to the accrued unpaid pension obligation for Sementsverksmiðjan hf.'s employees minus
the share of the company in the Fund's assets.

Article 3 of this Agreement reads as follows: ‘Using an imputed interest rate of 3,5 %, the present value of the
LSR( (9))'s accrued obligations with respect to employees of the Iceland State Cement Works at year-end 1996 was
assessed as ISK 494 816 380. LSR's assets for payment of obligations are considered to be 19 % of the Fund's
accrued unsettled obligations. The State's obligations on behalf of Iceland Cement Ltd. is thus ISK 400 801 268’.

According to Article 4 of the same agreement ‘The National Treasury will make payment to LSR of its obligation
pursuant to Article 2 by presenting it with Iceland Cement Ltd. bonds for a total amount of ISK 326 488 714 […].
This will take the form of five bonds, each in the amount of ISK 50 000 000, and one bond in the amount of ISK
76 488 714. the bonds are to be paid in 49 equal instalments of the principal and interest, with the first instalment
due 1 March 1998 and the remainder at six-month intervals after that. The bonds are inflation-indexed to the
Consumer Price Index (CPI) with the base index 178,6. Annual interest is 5,5 % (2,75 % for half-year) and shall be
calculated as of 1 January 1997. Interest for the period 1 January 1997 to 30 August 1997 shall be paid separately
on 1 November 1997. The present value of the bonds as of 1 September 1997, at 3,5 % imputed interest, is ISK
400 801 268. The National Treasury shall guarantee LSR of payment of instalments and interest of these bonds.
With these bonds the National Treasury has fully settled its obligations towards LSR with respect to pension supple-
ments pursuant to Article 33 of Act No 1/1997 on the Civil Servants' Pension Fund, arising from membership of
employees of the Iceland State Cement Works to LSR until the end of 1996’.

(8) Emphasis added by the Authority.
(9) Acronym in Icelandic for Pension Fund of State Employees.

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Therefore, following the application of Article 33 last paragraph of Act No 1/1997, once Sementsverks-
miðjan hf. settled its commitment with the issue of bonds for the amount determined in the Agreement of
8 October 1997, the company would have no further responsibility for the Fund's commitments regarding
the period until end of 1996 for the employees to which the settlement applied. These bonds are thus
simply a postponement of the payment of the debt.

On 30 March 1999, Sementsverksmiðjan hf. and the Pension Fund of State Employees signed a second
agreement pursuant to Article 33 of Act No 1/1997. On the basis of this agreement, the Fund would assess
yearly the accrued pension obligation arisen during the year with respect to the employees of the company
affiliated to Section B of the Fund remaining at the time. According to this Agreement, the company would
settle the accrued obligations arisen during the year with respect to the employees still affiliated to Section B
at the end of each year, after deducting all contributions already paid by the employees and the company
with respect to the rights earned during the year. According to the information provided by the Icelandic
authorities,
in 2003, five employees of Sementsverksmiðjan hf. were still affiliated to Section B of the
Pension Fund of State Employees.

d) The taking over by the State of Sementsverksmiðjan hf.'s pension liabilities

With an agreement dated 23 October 2003 between the Ministry of Finance and the Pension Fund of State
Employees, on behalf of the State Treasury, fulfilling the obligation laid down in Article 4 of the Share
Purchase Agreement between the Ministry of Industry and Íslenskt sement ehf., the Ministry of Finance took
over the remainder of the bonds issued to pay the accrued obligations of Sementsverksmiðjan hf. as settled
in the agreement of 1997.

The agreement signed in October 2003 also refers to the agreement dated 30 March 1999 between the
Pension Fund of State Employees and Sementsverksmiðjan hf.
in which it was stated that obligations
regarding employees of Sementsverksmiðjan hf. were to be paid and settled annually. With the agreement of
October 2003, the Ministry of Finance also took over the obligations of Sementsverksmiðjan hf. according
to the referred agreement of March 1999.

With this Agreement, the Ministry of Finance fulfilled the obligation entered into under Article 4 of the
Share Purchase Agreement signed on 2 October 2003 with the investors group, Íslenskt sement ehf.,
according to which ‘[t]he Seller shall take over the pension debts and obligations of the Company, which carry
Government guarantee, and were taken over by the Company in 1997 with a special agreement. The Seller shall as
well take over all existing and future obligations regarding the annual compensation settlement for the individuals who
are now paying in the B-Section of the Pension Fund of State Employees as long as they are employees of the
Company’.

Even if the Ministry of Finance engaged itself into taking over these debts and obligations of Sementsverks-
miðjan hf. in the Share Purchase Agreement with the investors group Íslenskt sement ehf., it is on the basis
of a distinct legal act, namely the agreement between the Ministry of Finance and the Pension Fund of State
Employees, that Sementsverksmiðjan hf. is relieved of these obligations.

According to the information provided by the Icelandic authorities in their letter dated 12 November 2003,
the pension obligations for employees already retired were estimated at ISK 412 million in 2003. As far as
the future obligations for the employees of Sementsverksmiðjan hf. still affiliated to Section B of the Pension
Fund of State Employees are concerned, they were estimated to amount to ISK 10-15 million, depending on
the time the employees will remain in the company.

3. Comments to the Authority's Decision No 421/04/COL relevant to the present decision

a) The Icelandic authorities

In their letter dated 18 April 2006, the Icelandic authorities explained that the Ministry of Finance and the
Pension Fund of State Employees signed an agreement on 8 October 1997 on the basis of which the
pension obligations of Sementsverksmiðjan hf. regarding all its employees were settled as they stood at the
end of year 1996.

Article 4 of the Agreement states that the State shall be liable as guarantor of collection towards the Pension
Fund of State Employees. A guarantee of collection implies that all legal remedies will have to be exhausted
before the guarantee can be activated.

The Icelandic authorities clarified that ‘[f]ollowing the Agreement, dated 8 October 1997, Sementsverksmiðjan hf.
was liable for the pension fund obligations. On the basis of this Agreement the said liabilities were accounted for in the
accounts of Sementsverksmiðjan hf. between 1997 and 2003. The legal liability of the State remained intact as a
secondary liability to the Company's as per art. 32 of Act No 1/1997 that defines the constitutional legal liability of
the State’.

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As far as the Agreement between the Pension Fund of State Employees and Sementsverksmiðjan hf. of
30 March 1999 is concerned, the Icelandic authorities have explained that obligations regarding employees
of Sementsverksmiðjan hf. will be paid and settled annually by the company.

According to the explanations of the Icelandic authorities,
‘[o]ther corporations under State ownership were
treated similarly in 1997 and bonds issued for a calculated future pension obligation pertaining to former and current
employees of said corporations. When these corporations have been privatized the bonds have in most cases been taken
over by the State or settled prior to the sale. The Icelandic government found that to be correct since the legal responsi-
bility for the payments is always the State. […] The obligation was in all cases to the greatest extent pertaining to
rights earned by employees prior to the incorporation of the companies, granted them as State employees. It would be
skewering the competitional standing of these companies by burdening them with a bond for part pension obligations
in most part accrued prior to their incorporation and in most part resulting from the fact that the State did not at that
time collect pension premiums into a fund in [the Pension Fund of State Employees] resulting in the fact that there
were no investments made for the premiums and no interest accrued to meet the future pension obligations’.

In a letter dated 25 September 2006, the Icelandic authorities first made reference to the Authority's Deci-
sion No 421/04/COL to open the formal investigation procedure which ‘did not’ set out any doubts as to its
compatibility with the functioning of the EEA Agreement ‘concerning the pension obligations’. Further, they argued
that ‘the Authority is not authorised by law to add new “doubts” which are not on the list of the doubts set out by the
Authority in the decision to initiate the formal investigation procedure, after the decision has been published. This is
clear from Article 6 of Part II to Protocol 3 to the Surveillance and Court Agreement’.

In this letter, the Icelandic authorities explained in further detail the three pillar structure of the Icelandic
pension system: pillar one corresponds to public pensions, pillar two to occupational pension funds and
pillar three to voluntary private pension saving. The Pension Fund of State Employees is the biggest public
sector pension fund in Iceland.

As far as the Agreement signed in 1997 regarding Sementsverksmiðjan hf.'s pension-related liabilities
towards the Pension Fund of State Employees is concerned, the Icelandic authorities consider that the 1997
Agreement did not alter the obligation of the State. ‘The legal liability of the State remained intact as a secondary
liability. […] The obligations of the State with regard to pensions are towards the individuals and not the company.
The obligations are due to the previous ownership and structure of the company and would not have occurred if the
State would not have owned the company. The obligations can thus only be towards the State’.

The Icelandic authorities finally pointed out that ‘even if the conclusion would be that the pension obligations were
the liability of the company, then this had to be taken into account in the experts assessment on the market value of
the company. If the determined market value of the company shows that no State aid was involved then it would, in the
opinion of the Icelandic authorities, be difficult to maintain the handling of the pension obligation contains State
measures. The determination of the market value therefore has to be closely linked to the question of the pension liabil-
ities’.

b) Aalborg Portland Íslandi ehf.

In the complaint letter dated 17 December 2003, Aalborg Portland Íslandi ehf. referred to three points
regarding the terms and conditions of the sale which had been disclosed to the public. One of these points
was the take-over by the Icelandic State of Sementsverksmiðjan hf.'s pension obligations amounting to over
ISK 400 million. The complainant considered that the terms of the sale of Sementsverksmiðjan hf. consti-
tuted a violation of the State aid rules of the EEA Agreement. In the opinion of Aalborg Portland Íslandi
ehf. none of the compatibility grounds foreseen under Article 61(2) and (3) are applicable to the case at
hand.

1. The scope of the initial formal investigation and the need to extend it

II. APPRECIATION

The Authority had not addressed the taking over by the State of Sementsverksmiðjan hf.'s pension-related
liabilities in the decision to open the formal investigation procedure on the sale of the Icelandic State's
shares in Sementsverksmiðjan hf. (Decision No 421/04/COL) adopted in December 2004. In light of the
comments made by the complainant and in light of the further information and clarifications made by the
investigation procedure, the Authority considers it necessary to
Icelandic authorities during the formal
extend the formal investigation procedure opened with Decision No 421/04/COL to cover the take-over by
the Icelandic State of pension-related liabilities of Sementsverksmiðjan hf. In Decision No 421/04/COL, the
Authority identified two possible aid beneficiaries, Íslenskt sement ehf. and Sementsverksmiðjan hf. The
potential beneficiary of State aid in the case of the sale of the State's shares in Sementsverksmiðjan hf.
would be Íslenskt sement ehf. In contrast, the potential beneficiary of any possible State aid granted in the
context of the assets-liabilities restructuring of the company made by the State in connection to the sale of
shares would be the cement producer itself, i.e. Sementsverksmiðjan hf. It is from the latter that the State
purchased various assets and took over pension liabilities. The potential aid beneficiary with regard to the
take-over by the Icelandic State of pension-related liabilities of Sementsverksmiðjan hf. would therefore be
Sementsverksmiðjan hf.

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Article 61(1) of the EEA Agreement provides that:

2. State aid assessment

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

Thus, in order for a measure to be considered State aid, it must constitute an advantage in favour of certain
trade between the
undertakings, be granted through State resources, distort competition and affect
Contracting Parties to the EEA Agreement.

In the following, the Authority will make a preliminary assessment of whether the taking over by the State
of Sementsverksmiðjan hf.'s pension-related liabilities constitutes State aid.

a) Market economy investor principle

In accordance with established case law (10), the Authority will firstly assess whether, in similar circum-
stances, a private investor operating in normal conditions of a market economy would have entered into the
transaction in question on the same terms the State had and, if not, on which terms he might have done so.
If the behaviour of the State complies with the market economy investor principle there is no State aid
within the meaning of Article 61(1) of the EEA Agreement. The comparison between the conduct of public
and private investors must be made by reference to the attitude which a private investor would have had at
the time of the transaction in question, having regard to the available information and foreseeable develop-
ments at that time (11). Had the State acted as a private market investor, no State aid would have been
granted by the State with the taking over of pension-related liabilities.

The behaviour of the State as owner of a company, supposed to act in accordance with market principles,
should be distinguished from the behaviour of the State as public authority, which takes into account other
considerations such as regional development, unemployment, etc. which are not strictly linked to the maxi-
misation of profits a market investor would theoretically pursue. In the case at hand, a distinction can be
made between the role of the State as owner of Sementsverksmiðjan hf., the State as guarantor of the
Pension Fund of State Employees and the State as authority.

In principle, a private market investor whose company faced a difficult financial and operational situation
like the one Sementsverksmiðjan hf. had experienced, would try to turn it around, stop losses of the under-
taking and make it function in a way to obtain revenue. If it were to be unsuccessful, some legislations
would leave it no option but to file for bankruptcy. Otherwise, it would seem reasonable to try to sell the
company with the aim of obtaining a price over its liquidation value.

Had the owner of Sementsverksmiðjan hf. let the company go bankrupt, the State as guarantor of the
Pension Fund of State Employees would have had to cover the missing payments from the former company
in order to guarantee the payment of monthly pensions to the former affiliates of the Fund.

In this case, the State decided to take over pension liabilities amounting to ISK 422-427 million (ISK
412 + 10~15 million) and sold the company, now released from these obligations, for ISK 68 million. An
outlay of more than ISK 400 million for a receipt of less than ISK 70 million does not appear to be in
accordance with the market criteria. Therefore, the Authority has the preliminary view that it cannot be
considered that the State acted in accordance with the private market investor principle.

In the following, the Authority will assess whether the conditions laid down under Article 61(1) of the
EEA Agreement for a measure to constitute State aid have been fulfilled.

b) Selective advantage

The Authority preliminarily considers that the State granted a selective advantage to Sementsverksmiðjan hf.
by taking over its pension-related liabilities with the Agreement signed in October 2003. Sementsverks-
miðjan hf. obtained an advantage because the State relieved it from some of its debts corresponding to past
pension-related liabilities. Moreover, by virtue of this agreement, Sementsverksmiðjan hf. has also been
relieved of future, still undetermined, pension-related liabilities due in application of Article 33 of Act No
1/1997 with respect to its employees still affiliated to the Pension Fund of State Employees. The measure is
selective because it is granted exclusively to Sementsverksmiðjan hf., due to the very specific circumstances
of the company, by means of the Agreement signed in 2003 between the Ministry of Finance and the
Pension Fund, a particular act from which no other undertaking could benefit.

(10) Case T-16/96 Cityflier Express v Commission [1998] ECR II-757, paragraph 51 and Case T-228/99 and T-233/99 West-

deutsche Landesbank Girozentrale a.o. v Commission [2003] ECR II-435, paragraph 245.

(11) Case T-16/96 Cityflier Express v Commission [1998] ECR II-757, paragraph 76.

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The Icelandic authorities have argued that by taking over Sementsverksmiðjan hf.'s pension liabilities the
Treasury acted as the guarantor of the Pension Fund of State Employees on the basis of Article 32 of Act No
1/1997, according to which ‘[t]he Treasury guarantees the payment of a pension according to this act and it shall be
paid with 1/12 of the annual pension in advance each month’.

The preliminary opinion of the Authority is that the guarantee of the State laid down in Article 32 of Act
No 1/1997 is directed towards the employees of companies affiliated to the Pension Fund and has the object
of guaranteeing that these employees obtain their pensions even in the situation where their former
employer does not pay its due contributions in full. In the Authority's opinion, this guarantee does not
constitute a secondary guarantee for the payment of Sementsverksmiðjan hf.'s pension obligations to the
fund. Therefore, the Authority has difficulties in understanding that the State acted as guarantor when taking
over Sementsverksmiðjan hf.'s pension liabilities towards the Pension Fund.

Article 33 of Act No 1/1997 determines the obligation of employers to refund the Pension Fund of State
Employees in case the pension payments done in the past by the company and the employees themselves do
not suffice to cover the full payment of pensions. As mentioned above, according to Article 33 of Act No
1/1997, ‘[i]n the case where a previously determined old age, disability or spouse's pension increases due to a general
increase in the salary of the public employees, the Treasury and other employers who insure their employees in the Fund
refund the increase which thus takes place in pension payments.[…] An employer who has settled his/her commitment
with the issue of a debenture […] should have no further responsibility for the Fund's commitments […]’.

In the view of the Authority, this places an obligation on employers, in the case at hand, on Sementsverks-
miðjan hf. Thus, by taking over these various liabilities on the basis of the Agreement signed in October
2003, the Ministry of Finance, on behalf of the Treasury, did not act as the guarantor of the individual
pension payment to pensioners affiliated to the Pension Fund of State Employees. The Ministry of Finance
relieved the undertaking of debts and obligations it had towards the Fund and accordingly granted it a selec-
tive advantage.

The Icelandic authorities have claimed in their letter dated 18 April 2006 that other corporations under
State ownership were treated similarly in 1997 and that the Pension Fund for State Employees accepted a
debenture in the payment by means of a bond. According to the Icelandic authorities, when these corpora-
tions were privatised, in most cases, the State took over similar bonds. Even if this is the case, it does not
modify the selective nature of the measure at hand. In this case, the Authority is not addressing the lawful-
ness of issuing in 1997 a bond as a debenture for the payment of due contributions to the Pension Fund of
State Employees but the taking over by the State in 2003 of the remainder of the bonds issued to cover the
debt assessed in 1997 (as well as other past and future pension-related liabilities).

Some case law from the European Courts as well as from the practice of the European Commission has
concluded that, under certain conditions, a financial contribution from the State to cover its obligations
towards civil servants does not constitute State aid in as far as these obligations do not constitute a ‘normal’
burden of a company (12). At this stage of the procedure, the Authority doubts that this approach can be
applicable to the case at hand.

c) State resources

Secondly, in order to constitute State aid within the meaning of Article 61(1) of the EEA Agreement, the
advantage must be granted by the State or through State resources.

On the basis of the Agreement between the Ministry of Finance and the Pension Fund of State Employees
signed in October 2003, the Treasury will pay, on behalf of Sementsverksmiðjan hf., to the Pension Fund,
the amounts due by the company. Thus, by so doing, resources from the State budget will be expended. At
this point, the Authority would like to ask the Icelandic authorities for a clarification on the figures of ISK
412 million and ISK 10-15 million. It is not clear from the information provided, what kind of pension
obligations are covered under each of these estimates, i.e. what are the obligations already estimated and
what corresponds to future obligations.

Alternatively, if Sementsverksmiðjan hf. had paid a market price to the State for the take-over of these debts,
it could be considered that no State resources would have been involved (13). No such market price was
paid.

Therefore, the Authority takes the preliminary view that there were State resources involved in the taking
over of pension-related liabilities of Sementsverksmiðjan hf. by the State.

(12) Case T-175/01 Danske Busvognmaend v Commission ECR [2004] II-917, Commission's decision of 12 October 2006 on

the reform of the mode of financing of civil servants' pensions attached to La Poste.

(13) Commission Decision of 21 January 2004 on the transfer to the Belgian State of pension obligations of Belgacom

pertaining to the ‘first pillar’ (Case N 567/2003).

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d) Distortion of competition

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

There is competition in the market for cement within the EEA. Currently there are two companies active in
the Icelandic market of cement: Sementsverksmiðjan hf. and Aalborg Portland Íslandi ehf. Any advantage
granted to Sementsverksmiðjan hf. which reduces the costs it should normally incur, places this undertaking
in a better competitive position vis à vis the other market player in the Icelandic cement market which does
not receive this advantage. Thus, the support granted by the State to Sementsverksmiðjan hf. has the effect
of distorting competition since the other competitor neither had access to nor obtain such support from the
State.

e) Effect on trade

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

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

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

f) Conclusion

For the above mentioned reasons, the Authority preliminarily considers that the take-over by the State of
pension-related liabilities of Sementsverksmiðjan hf. constitutes State aid within the meaning of Article 61
(1) of the EEA Agreement.

3. Procedural requirements

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

The Icelandic authorities notified to the Authority the sale of the Icelandic State's shares in Sementsverks-
miðjan hf. with a letter dated August 2003. The take-over by the State of Sementsverksmiðjan hf.'s pension-
related liabilities was agreed in Article 4 of the Share Purchase Agreement between the Ministry of Finance
and the investors group Íslenskt sement ehf. for the sale of the State's shares.

This notwithstanding, the Icelandic authorities put the measure into effect in October 2003 before the State
aid procedure had resulted in a final decision. The Icelandic authorities did not respect the standstill obliga-
tion further laid down under Article 3 of Part II of Protocol 3 to the Surveillance and Court Agreement
according to which ‘[a]id notifiable […] shall not be put into effect before the […] Authority has taken, or is
deemed to have taken, a decision authorising such aid’. Hence, the Authority takes the preliminary view that the
State's take-over of Sementsverksmiðjan hf.'s pension-related liabilities would constitute unlawful aid within
the meaning of Article 1(f) of Part II of Protocol 3 to the Surveillance and Court Agreement and, thus,
possible subject to recovery. According to Article 13 in Part II of Protocol 3 to the Surveillance and Court
Agreement, in cases of possible unlawful aid the Authority shall not be bound by the time-limits set out in
Articles 4(5), 7(6) and (7).

4. Compatibility of the aid

In the Authority's preliminary view, a distinction has to be made between the take-over by the State of the
old pension-related liabilities of Sementsverksmiðjan hf. which constitutes a so-called one-off measure, and
the take-over of future pension-related liabilities in application of Article 33 of Act No 1/1997 regarding the
affiliated to the Pension Fund of State Employees still employed at Sementsverksmiðjan hf. The Authority
further considers, that the take-over (yearly or periodically) of future pension-related liabilities of Sements-
verksmiðjan hf. will entail a reduction in the running costs of an undertaking. This constitutes operating aid,
which is in principle prohibited. The assessment of the compatibility of these measures with the rules of the
EEA Agreement may therefore differ.

The Authority is of the opinion that none of the derogations mentioned in Article 61(2) of the EEA Agree-
ment can be applied to the case at hand.

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These measures cannot be considered within the framework of Article 61(3)(a) of the EEA Agreement since
none of the Icelandic regions qualify for this provision which requires an abnormally low standard of living
or serious underemployment.

The take-over by the State of pension liabilities of a given undertaking does not seem to promote the execu-
tion of an important project of common European interest or remedy a serious disturbance in the economy
of a State, as it is requested for compatibility on the basis of Article 61(3)(b) of the EEA Agreement.

According to Article 61(3)(c) of the EEA Agreement, aid to facilitate the development of certain economic
activities or of certain economic areas, where such aid does not adversely affect trading conditions to an
extent contrary to the common interest, may be considered compatible. Regional aid or rescue and restruc-
turing aid can be considered compatible on the basis of this provision.

Concerning Article 61(3)(c) of the EEA Agreement, the site of Sementsverksmiðjan hf. is located in Akranes,
an area covered by the regional aid map of Iceland. However, this financial support does not seem to be
linked to any investment and, in particular as far as the refund for future pension obligations is concerned,
it seems to cover a running cost. The Regional Aid Guidelines applicable at the time of the sale did not
foresee the possibility to grant operating aid. For this reason, the Authority has doubts that the measures
can be considered compatible on the basis of the Regional Aid Guidelines.

The Authority preliminarily considers that it can only be assessed whether the take-over by the State of
pension-related liabilities of Sementsverksmiðjan hf. can be considered compatible with the State aid rules of
the EEA Agreement on the basis of the provisions of Chapter 16 of the State Aid Guidelines on Rescue and
Restructuring Aid.

The Icelandic authorities took over Sementsverksmiðjan hf.'s pension-related liabilities on the basis of an
agreement signed between the Ministry of Finance and the Pension Fund of State Employees in October
2003. According to Point 16.6.5 of Chapter 16 of the Authority's State Aid Guidelines as adopted on
16 December 1999, ‘[t]he EFTA Surveillance Authority will examine the compatibility with the functioning of the
EEA Agreement of any rescue or restructuring aid granted without its authorisation and therefore in breach of Article 1
(3) of Protocol 3 to the Surveillance and Court Agreement […] on the basis of the Guidelines in force at the time the
aid is granted […]’. For this reason, although new guidelines were adopted on 1 December 2004, the
Authority considers that the 1999 Guidelines are the applicable rules in the case at hand.

As far as the application of the provisions of Chapter 16 of the State Aid Guidelines ‘Rescue and Restruc-
turing Guidelines’ is concerned, it is questionable whether the information provided in the restructuring
plan presented by the Icelandic authorities as it stands now fulfils the necessary requirements.

This is so even if reference is made to the recitals of the Guidelines according to which, ‘[s]tate aid for rescuing
firms in difficulty from bankruptcy and helping them to restructure may be regarded as legitimate only under certain
conditions. It may be justified […] exceptionally by the desirability of maintaining a competitive market structure when
the disappearance of firms could lead to a monopoly or tight oligopoly situation’ (14).

The grant of restructuring aid is conditional on the implementation of a restructuring plan, the duration of
which must be as short as possible and which 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. According
to Point 16.3.2.2 of the Guidelines, this plan must be submitted in all relevant detail and include a market
survey.

Amongst the restructuring measures implemented, the Icelandic authorities have referred to the financial
restructuring of the company consisting of the reduction of debts through sale of assets and renegotiation
of long term debts, the restructuring of workforce consisting of the laying off of 22 employees, the restruc-
turing of production costs with the renegotiation of prices of raw materials and changes in the composition
of cement to reduce energy costs, and finally to the search for an alternative revenue source from burning
waste.

Despite this general description of the adopted measures, the Authority has doubts whether the restructuring
plan submitted by the Icelandic authorities complies with the requirements of the guidelines since it neither
foresees a timetable for the return to viability nor makes a direct link between restructuring costs and aid
amount. According to Point 16.3.2.2.(b) of Chapter 16 of the State Aid Guidelines, ‘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 assumptions as to future operating conditions. Restructuring aid must therefore be
linked to a viable restructuring plan to which the EFTA State concerned commits itself. The plan must be submitted in
all relevant detail to the EFTA Surveillance Authority and include, in particular, a market survey’.

(14) See also Commission Decision of 13 July 1996 concerning aid granted by the Austrian Government to Head Tyrolia
Mares in form of capital injections (C60/95 (ex NN169/95)) and Case T-110/97 Kneissl Dachstein Sportartikel AG v Commis-
sion, ECT [1999] II-2881.

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Moreover, the Authority needs more detailed information on all the restructuring measures adopted to make
the return to viability of Sementsverksmiðjan hf. possible. This should also include the sale to the State of
financial assets in other companies, as well as the sale of those assets which were not necessary to the opera-
tion of cement production. Therefore, the Authority will deal together with the remaining aspects of the
formal investigation.

For these reasons, the Authority has doubts that the taking over by the State of Sementsverksmiðjan hf.'s
liabilities can be considered compatible with the State aid rules of the EEA Agreement.

5. Conclusion

Based on the information submitted by the Icelandic authorities, the Authority preliminarily concludes that
the take-over by the Icelandic State of Sementsverksmiðjan hf.'s pension-related liabilities constitutes State
aid within the meaning of Article 61(1) of the EEA Agreement. The Authority has doubts whether any of
the exceptions to the general prohibition of State aid under Article 61(1) of the EEA Agreement foreseen
under Article 61(2) or (3) of the EEA Agreement apply to the case at hand.

Furthermore, even if the Icelandic authorities notified the Authority of the take-over by the State of
Sementsverksmiðjan hf.'s pension-related liabilities as part of the sale of the Icelandic State's shares with a
letter dated August 2003, it was put into effect in contravention of Article 1(3) of Part I of Protocol 3 to the
Surveillance and Court Agreement. Therefore, should this investigation lead the Authority to the conclusion
that the measures under assessment constitute State aid within the meaning of Article 61(1) of the EEA
Agreement, the aid would be considered unlawful and may be subject to possible recovery, should the aid
not be deemed compatible with the EEA Agreement.

Consequently, and in accordance with Articles 13(1) and 4(4) of Part II of Protocol 3 to the Surveillance and
Court Agreement, the Authority is obliged to open the procedure provided for in Article 1(2) of Part I of
Protocol 3 to the Surveillance and Court Agreement. The decision to open proceedings is without prejudice
to the final decision of the Authority.

In the light of the foregoing considerations, the Authority, acting under the procedure laid down in Article
1(2) of Part I of Protocol 3 to the Surveillance and Court Agreement, requests Iceland to submit its
comments and to provide all documents, information and data needed for the assessment of the compat-
ibility of the taking over by the Icelandic State of Sementsverksmiðjan hf.'s pension-related liabilities.

The Authority requests the Icelandic authorities to forward a copy of this letter to the potential aid recipient
of the aid immediately.

HAS ADOPTED THIS DECISION:

Article 1

The EFTA Surveillance Authority has decided to open the formal investigation procedure provided for in
Article 1(2) of Part I of Protocol 3 to the Surveillance and Court Agreement against Iceland regarding the
taking over by the State of Sementsverksmiðjan hf.'s pension-related liabilities.

Article 2

The Icelandic authorities are requested, pursuant to Article 6(1) of Part II of Protocol 3 to the Surveillance
and Court Agreement, to submit their comments on the opening of the formal investigation procedure
within one month from the notification of this Decision.

The Icelandic authorities are required to provide within one month from notification of this decision, all
documents, information and data needed for assessment of the compatibility of the aid measure.

Article 3

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This Decision is addressed to the Republic of Iceland.

Article 4

Article 5

Only the English version is authentic.

Done at Brussels, 29 November 2006.

For the EFTA Surveillance Authority,

Bjørn T. GRYDELAND

President

Kristján A. STEFÁNSSON

College Member