2008/315/EC: Commission Decision of 11 December 2007 on State aid C 32/07 (ex N 389/06) temporary Defensive Mechanism to Shipbuilding — Portugal (notified under document number C(2007) 6063) (Text with EEA relevance)
Date: 2007-12-11
Institutions: European Commission
Subjects: Portugal, State aid, control of State aid, shipbuilding

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(Acts adopted under the EC Treaty/Euratom Treaty whose publication is not obligatory)

II

DECISIONS

COMMISSION

COMMISSION DECISION

of 11 December 2007
on State aid C 32/07 (ex N 389/06) temporary Defensive Mechanism to Shipbuilding — Portugal

(notified under document number C(2007) 6063)

(Only the Portuguese version is authentic)

(Text with EEA relevance)

(2008/315/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

on a previous similar notification by Portugal that was
under assessment (3). Portugal, by letter dated 25 July
2006, accepted this proposal.

Having regard to the Treaty
Community,
and in particular
Article 88(2) thereof,

establishing the European
subparagraph of
the

first

Having regard to the Agreement on the European Economic
Area, and in particular Article 62(1)(a) thereof,

Having called on interested parties to submit their comments
to those provisions (1) and having regard to their
pursuant
comments,

Whereas:

I. PROCEDURE

(1)

Portugal notified the measure on 20 June 2006. The
Commission, by letter dated 6 July 2006, requested addi-
tional information from Portugal and proposed to extend
the period within which the Commission would take a
Decision on the notified measure,
in conformity with
Article 4(5) of Regulation (EC) No 659/1999 (2), until
such time as the Commission would reach a Decision

(2)

(3)

(4)

(5)

The Commission, by letter dated 11 May 2007, resumed
the assessment of the notification and reminded Portugal
that the notification was incomplete. Portugal provided
additional information by letters dated 5 July 2007 and
26 July 2007.

the Commission
By letter dated 10 August 2007,
informed Portugal
it had decided to initiate the
procedure laid down in Article 88(2) of the EC Treaty
in respect of the aid.

that

By letter dated 17 September 2007 the Portuguese auth-
orities presented their comments in the context of the
above-mentioned procedure.

The Commission Decision to initiate the procedure was
published in the Official Journal of the European Union (4).
The Commission called on interested parties to submit
their comments. There were no comments from third
parties.

(1) OJ C 221, 21.9.2007, p. 8.
(2) Council Regulation (EC) No 659/1999 laying down detailed rules for
the application of Article 93 of the EC Treaty, (OJ L 83, 27.3.1999,
p. 1).

(3) Case C 26/2006 (ex N 110/2006) on which the Commission took a
final negative decision on 24 April 2007 (OJ L 219, 24.8.2007,
p. 25).

(4) See footnote 1 above.

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II. DESCRIPTION OF THE AID MEASURE

(7)

(6)

The beneficiary of the aid would be Estaleiros Navais de
(‘ENVC’) a Portuguese shipyard
Viana do Castelo S.A.
employing about 1 000 people.

Portugal proposes to grant ENVC direct aid amounting to
EUR 6 575 558 in relation to seven shipbuilding
contracts,
signed between 4 February 2005 and
31 March 2005. The details concerning the contracts
and the corresponding proposed aid are the following:

Multipurpose heavy
lift vessel

Date of signature of the
contract

Ship owner

Proposed State aid (EUR)

C 228

C 229

C 230

C 231

C 232

C 233

C 210

24.2.2005

JMS Schiffahrtsgesellschaft mbH & CO KG MS

1 212 766

24.2.2005

JMS Schiffahrtsgesellschaft mbH & CO KG MS

1 212 766

4.2.2005

MARE Schiffahrtsgesellschaft

1 212 766

4.2.2005

MARE Schiffahrtsgesellschaft

4.2.2005

MARE Schiffahrtsgesellschaft

4.2.2005

MARE Schiffahrtsgesellschaft

31.3.2005

Mutualista Açoreana

661 102

630 328

433 064

1 212 766

(8)

the request

According to the information supplied in the notifi-
cation,
for aid in relation to all seven
contracts was submitted by the shipyard in July 2005,
i.e. after
contracts. Portugal
authorized the aid, on condition of approval by the
the Ministry of Finance,
Commission, by decision of
Public Administration, Economy and Innovation of
7 August 2006.

signature of

the

the

(9)

The vessels were delivered, or are expected to be
delivered, at the following dates:

Vessel

Delivery date

C 228

C 229

C 230

C 231

C 232

C 233

C 210

30 September 2007

30 December 2007

28 July 2006

30 October 2006

3 January 2007

24 April 2007

10 July 2007

(10)

Portugal proposes to grant
the aid on the basis of
Council Regulation (EC) No 1177/2002 concerning a
temporary defensive mechanism to shipbuilding (5) as
amended by Council Regulation (EC) No 502/2004 (6)

(5) OJ L 172, 2.7.2002, p. 1.
(6) OJ L 81, 19.3.2004, p. 6.

(the ‘TDM-regulation’). The TDM-regulation entered into
force on 3 July 2002 and expired on 31 March 2005.
This Regulation was, thus, no longer in force at the time
when Portugal approved and notified the aid.

(11)

Portugal argues that the contracts fall within the scope of
the TDM-regulation because they were
application of
signed while this regulation was still in force.

(12)

(13)

III. GROUNDS FOR INITIATING THE FORMAL
INVESTIGATION PROCEDURE

The Commission,
in its decision to initiate the formal
investigation procedure in the present case, noted that
it had doubts on the compatibility of the aid with the
common market based on the TDM-regulation for the
following reasons.

First, the Commission had doubts regarding the incentive
effect of the aid. The Commission noted that the appli-
cation for aid was only submitted after the contracts had
been signed. Also Portugal only approved the aid
internally (on condition of approval by the Commission)
more than a year after the application for aid was
submitted. Portugal had not provided evidence that at
the time ENVC signed the contracts there were any
assurances that the shipyard would obtain the aid. The
that ENVC was
Commission,
therefore, had doubts
induced in any way by State aid to carry out
the
projects concerned.

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(14)

(15)

(16)

Second, the Commission questioned the legal basis for
approving the aid. The Commission noted that the TDM-
regulation expired on 31 March 2005 and was therefore
no longer in force at the time Portugal approved and
notified the aid. The Commission also noted that in its
decision concerning Case C 26/2006 (ex N 110/2006) (7)
it had explained in detail why it considers that the TDM-
regulation can no longer be a valid legal basis for
approving new operating aid to shipbuilding. Portugal,
in the present case, had not submitted any new infor-
mation that would modify the Commission's assessment
in this respect and therefore the Commission could not
consider at that stage that the aid was compatible with
the common market.

IV. COMMENTS SUBMITTED BY PORTUGAL

Portugal noted, in general terms, that for the contracts in
question the yard was mainly competing with non-
Community shipyards, notably with regard to unfair
competition from Korean shipyards which was
the
subject of
the contracts
the TDM regulation. Further,
did not affect or threatened to affect competition in
the EU because all shipyards in the EU had equal
access to aid under the TDM regulation that had direct
application in all Member States. As a consequence, the
notified measures could not be considered to affect trade
between Member States.

Regarding the incentive effect of the aid, Portugal argued
that it was not materially possible for ENVC to submit a
request
for aid duly motivated, prior to signing the
contracts, because of aspects linked to the negotiation.
The contacts with the ship owners were initiated prior to
ENVC requesting the aid. Also, Portugal sustains that,
although ENVC signed the contracts without public
assurances that it would receive the aid, the shipyard
negotiated and signed the contracts and built
the
vessels on the expectation of both the Portuguese auth-
orities and the Commission authorizing the aid, given
that the objective conditions for receiving the aid were
fulfilled in this case.

the TDM-regulation because the
before the expiry of
contracts were only signed in February and March
2005 (i.e. just before the expiry of the TDM-regulation).
However,
the
validity of these contracts which fulfilled the objective
conditions of the TDM-regulation at the time they were
signed.

in Portugal's view this does not annul

V. ASSESSMENT

Existence of aid

(18) According to Article 87(1) of the EC Treaty, any aid
granted by a Member State or through state resources
in any form whatsoever which distorts or threatens to
distort competition by favouring certain undertakings or
in so far as it
the production of certain goods shall,
affects trade between Member States, be incompatible
with the common market.

(19)

The Commission considers that the proposed measures
constitute State aid within the meaning of Article 87(1)
of the EC Treaty. The measures take the form of a grant
financed by State resources. Even if the TDM-regulation
applied in all Member States, and all shipyards were
eligible for aid under the TDM-regulation, as argued by
Portugal, the measures are selective as in this case they
are limited to ENVC. This selective grant is likely to
distort
competition, by providing ENVC with an
advantage over other competitors not receiving the aid.
In this respect, the fact that ENVC might be competing
with shipyards in Korea does not detract from the fact
that it was also competing with other shipyards in the
common market. Finally, shipbuilding is an economic
activity involving extensive
trade between Member
States and the measures are thus likely to affect trade
between Member States.

(20)

The Commission thus confirms that
the notified aid
measure falls within the scope of Article 87(1) of the
EC Treaty.

(17)

Concerning the legal basis for approving the aid Portugal
referred to its comments submitted in the context of
Case C 26/2006 (8) that it considers applicable to the
present case. Portugal noted that
in
question were signed during the period of application
of the TDM regulation, i.e. before 31 March 2005 and
before the WTO Dispute Settlement Body adopted the
panel report condemning the TDM-regulation. Portugal
also stated that it was not possible to notify the aid

the contracts

(7) See footnote 3.
(8) See footnote 3.

Compatibility with the common market

The incentive effect

(21) As a general principle, State aid may only be considered
compatible with the common market if it is necessary to
induce the recipient firm to act in a manner which assists
attainment of the objectives envisaged by the relevant
derogation (9).

(9) See judgment in Case 730/79 Philip Morris v Commission [1980]

ECR 2671, paragraphs 16 and 17.

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(22)

(23)

The Commission notes in this respect that the objective
of the TDM-regulation was to ‘effectively enable Community
shipyards to overcome unfair competition from Korea’
(see
paragraph 6 of the preamble). Direct aid up to 6 % of
contract value before aid could thus be authorized
provided there had been competition for
the same
contract
from a shipyard in Korea offering a lower
price (Article 2).

receiving the aid when it

Portugal argues in this case that even if ENVC had no
signed the
assurances of
contracts,
receiving the aid
because the contracts fulfilled the objective conditions
to be eligible for aid under the TDM-regulation.

it had expectations of

aid after the expiry of the TDM-regulation which appears
to confirm that the shipyard was prepared to carry out
the projects at the risk of not receiving aid.

(27) Also, generally, the Commission considers that the aid
has an incentive effect
if an application for aid was
submitted before the start of the project (11). This was
the case here. The application for aid was only
not
in
submitted after the contracts had been signed (i.e.
signed in
July 2005, whereas
February
Portugal only
approved the aid internally (on condition of approval
by the Commission) more than a year after the request
for aid was presented. So, also from a formal point of
view, the incentive effect is not fulfilled

the
and March 2005). Also,

contracts were

(24) However, the Commission considers that

in this case
there is not sufficient evidence that the aid was deter-
minant for ENVC to sign the contracts.

(25) As already noted in the decision to initiate the investi-
gation procedure, Portugal submitted copy of a letter
from a ship owner stating that for six of the contracts
in question (vessels C 228 to C 233) the ship owner had
received lower offers from Korean shipyards. However,
this letter is dated 9 March 2005, i.e., it was only sent to
ENVC after the shipyard had already signed the contracts
relating to these offers. Thus, it appears that the shipyard,
when it signed the first six contracts, could not have had
the certitude that the contracts fulfilled all the eligibility
conditions. As regards the seventh contract
(vessel C
210) the situation also appears doubtful, since the indi-
cation that lower offers were received from Korea was
also only sent to ENVC on 31 March 2005, i.e. the very
same day when ENVC signed the contract.

(28)

The Commission therefore concludes that Portugal has
not submitted sufficient evidence to prove the incentive
effect of the aid.

The legal basis

(29)

Regarding the legal basis for approving the aid, Portugal
has not submitted any new arguments that would allay
the doubts expressed by the Commission in its Decision
to initiate the formal investigation procedure. Portugal's
main argument in this respect is that the contracts are
eligible for aid because they were signed during the
period of application of the TDM-regulation. Portugal
also notes that the fact that the aid was only notified
after the expiry of the TDM-regulation has no impact on
the eligibility of the contracts for aid.

(30) However, the Commission, in a previous Decision (12) has
already explained why it does not consider that the TDM-
regulation is still a valid legal basis for approving new
operating aid to shipbuilding.

(26)

Portugal has not submitted any evidence that, formally or
informally, ENVC had received indication from the
Portuguese authorities, prior to signing the contracts,
the aid could be granted in relation to these
that
contracts (10). Rather,
it would appear that ENVC was
prepared to undertake these contracts even without guar-
antees of receiving aid. For example, Portugal
in its
submission following the initiation of the investigation
procedure also stated that ENVC was legally bound to
build the vessels even if the aid would not be authorized.
It adds that in the present case, ENVC only applied for

(10) See, by contrast, case C 26/06 (footnote 3).

In this case the
Commission concluded that the incentive effect was shown by a
letter from the Portuguese authorities to the shipyard acknowl-
edging receipt of the request for aid prior to the signature of the
contracts and indicating willingness to grant the aid if the eligibility
conditions were fulfilled. This type of evidence was not submitted
with regard to the present case.

(31)

The Commission notes that the temporal application of
the TDM-regulation is defined in Article 5 (13) of the
regulation, which states the regulation ‘shall expire on
31 March 2005’. The fact that Article 4 of the TDM-
regulation states that this regulation ‘shall be applied to
final contracts signed from the entry into force of this Regu-
lation until its expiry (…)’ is, in the Commission's view, a
condition of compatibility and not a definition of the
application in time of the regulation.

(11) See, by analogy, Article 38 of the Guidelines on National Regional
‘aid may only be
Aid 2007-2013 (OJ C 54, 4.3.2006, p. 13):
granted (…)
if the beneficiary has submitted an application for
aid and the authority responsible for administering the scheme
has subsequently confirmed in writing that subject to detailed veri-
fication, the project in principle meets the conditions of eligibility
(…) before the start of the work on the project’.
(12) Case C 26/2006 (ex N 110/2006) — footnote 3.
(13) As modified by Council Regulation (EC) No 502/2004, see footnote

4 above.

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(32)

(33)

(34)

(35)

(36)

(37)

apply to ‘final

The above is also confirmed by the second part of
Article 4, which provides that the TDM-regulation shall
not
signed before the
contracts
Community gives notice in the Official Journal of the
initiated dispute
that
European Communities
settlement proceedings against Korea (…) and final
contracts
the
signed on month or more
Commission gives notice in the Official Journal of the
European Communities that
these dispute settlement
proceedings are resolved or suspended’.

it has

after

From the above, it is clear that the TDM-regulation was
only to be applied as long as there was a pending dispute
with Korea (14)
than
31 March 2005.

and in any event, no later

(38)

This interpretation is supported by the very objective of
it was designed ‘as an exceptional
the TDM-regulation:
and temporary measure,
in order to assist Community
shipyards in those segments that have suffered adverse
effects
injury and serious
prejudice caused by unfair Korean competition (…)
[which]
limited market
segments and for a short period only’ (15) (recital 3).

in the form of material

authorised for

should be

In the present case, the application for aid was only
submitted by ENVC to the Portuguese authorities,
approved by Portugal and notified to the Commission
after the expiry of the TDM-regulation, so clearly, the
measures fall outside the temporal application of
the
TDM-regulation.

The Commission further notes that, as already explained
in the decision to initiate the formal
investigation
procedure in the present case, the interpretation of the
TDM-regulation must also be seen in the light of the
Community's international obligations. According to the
settled case law of the Court of Justice, Community legis-
lation must, so far as possible be interpreted in a manner
including the
that is consistent with international
EC's WTO obligations. (16)

law,

In this context, the Commission recalls that Korea chal-
the TDM-regulation with
lenged the compatibility of
WTO rules. On 22 April 2005, a Panel
issued its
the TDM and several national
report concluding that
TDM schemes — existing at
the time when Korea
initiated the WTO dispute — were in breach of
and
Article 23.1 of

the Understanding on rules

(14) Recital 7 confirms

this assessment:

‘the temporary defensive
the Community
mechanism should only be authorised after
initiates dispute settlement proceedings against Korea (…) and
may no longer be authorised if these dispute settlement proceedings
are resolved or suspended (…)’.

(15) Emphasis added.
(16) Case C-53/96, Hermes, [1998] ECR I-3603, para. 28; Case C-76/00

P, Petrotub, [2003] ECR I-79, para. 57.

of

the

(DSB)

settlement

adopted the

recommendation that

disputes
governing
procedures
(DSU) (17). On 20 June 2005,
the WTO Dispute
report
Panel
Settlement Body
the Community
including its
the TDM-regulation and the national TDM
brings
schemes into conformity with its obligations under the
WTO Agreements (18). On 20 July 2005, the Community
informed the DSB that
its
measures into conformity with the DSB ruling and
recommendations since the TDM-regulation had expired
on 31 March 2005 and Member States could no longer
grant operating aid under this regulation.

it had already brought

The Panel report and the DSB ruling adopting that report
condemned the TDM-regulation per se for being in breach
of WTO rules and oblige the Community to no longer
apply
the
the TDM-regulation. The obligation of
Community to implement the DSB ruling also covers
future decisions to grant new aid in application of the
TDM-regulation (19). The Community, by informing the
into
DSB that
conformity with the DSB ruling and recommendations,
since the TDM-regulation had expired on 31 March 2005
and Member States could no longer grant operating aid
under this regulation, took a commitment to no longer
apply this regulation for allowing the granting of new
aid. Accordingly, approving the present aid would result
in
international
breach
commitments.

it had already brought

the Community's

its measures

of

a

(39)

The fact that the Council did not renew this Regulation
following its expiry is a clear indication that the Council
did not intend to continue to authorize the Commission
to approve aid under the TDM-regulation. This corre-
sponds with the fact that the Community informed the
the Member States could no longer grant
DSB that
operating aid under this regulation.

(40)

There were no new arguments from Portugal to counter
the Commission's views as expressed in the decision to
initiate the formal investigation procedure and reiterated
above.

(41)

The Commission, therefore, concludes that the notified
aid cannot be approved under the TDM-regulation. Since
no other exemption clause under Article 87(2) or (3) of
the EC Treaty applies, the aid is thus incompatible with
the common market,

(17) See EC — Measures affecting trade in commercial vessels, WT/DS301/R,

paragraphs 7.184-7.222 & 8.1(d).
(18) See WTO document WT/DS301/6.
(19) See EC — Measures affecting trade in commercial vessels, WT/DS301/R,

para. 7.21.

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HAS ADOPTED THIS DECISION:

Article 1

The notified aid of EUR 6 575 558 proposed by Portugal to
Estaleiros Navais de Viana do Castelo S.A. in relation to seven
contracts signed by this shipyard cannot be authorized under
a
Council Regulation (EC) No 1177/2002 concerning
shipbuilding (20)
as
temporary
amended by Council Regulation (EC) No 502/2004 (21) and is
therefore incompatible with the common market. The aid must
not be implemented.

defensive mechanism to

Article 2

This Decision is addressed to Portugal.

Done at Brussels, 11 December 2007.

For the Commission

Neelie KROES
Member of the Commission

(20) OJ L 172, 2.7.2002, p. 1.
(21) OJ L 81, 19.3.2004, p. 6.