Invitation to submit comments pursuant to Article 1(2) in Part I of Protocol 3 to the Agreement between the EFTA States on the Establishment of a Surveillance Authority and a Court of Justice with regard to the reorganisation of the Norwegian Road Administration and the establishment of Mesta AS
Date: 2007-12-20
Institutions: EFTA Surveillance Authority
Subjects: EFTA, Norway, State aid, aid for restructuring, control of State aid, road building

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NOTICES CONCERNING THE EUROPEAN ECONOMIC AREA

EFTA SURVEILLANCE AUTHORITY

Invitation to submit comments pursuant to Article 1(2) in Part I of Protocol 3 to the Agreement
between the EFTA States on the Establishment of a Surveillance Authority and a Court of Justice
with regard to the reorganisation of the Norwegian Road Administration and the establishment of
Mesta AS

(2007/C 310/06)

By means of Decision No 350/07/COL of 18 July 2007, reproduced in the authentic language on the pages
following this summary, the EFTA Surveillance Authority initiated proceedings pursuant to Article 1(2) in
Part I of Protocol 3 of the Agreement between the EFTA States on the Establishment of a Surveillance
Authority and a Court of Justice (‘the Surveillance and Court Agreement’). The Norwegian 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
Rue Belliard 35
B-1040 Brussels

The comments will be communicated to the Norwegian 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

The EFTA Surveillance Authority (‘the Authority’) has decided to open the formal investigation procedure
following a complaint in respect of the establishment of Mesta AS. Mesta AS is a fully State owned
Norwegian road construction company established on 1 January 2003 for purposes of taking over the road
construction activities previously carried out within the ‘Production Department’ of the Public Road Admin-
istration in Norway. The complainant alleged that Mesta AS has been in receipt of State aid by means of
public funding for restructuring costs, a too low value assessment of assets, a too high price of transitional
contracts transferred to Mesta AS, and finally, by means of an exemption from paying document and regis-
tration duties in relation to the transfer of ownership to real estate.

I. FACTS

A. Restructuring measures

In terms of funding for restructuring measures to reduce the previous work force of the Production Depart-
ment transferred to Mesta AS, the State has paid Mesta AS NOK 993,6 million to finance three types of
pension packages, involving (i) the costs of early pension packages offered between 1 January 2003 and the
end of 2005; (ii) the additional costs of maintaining civil servant pensions (beyond that of an ordinary
pension scheme) between 1 January 2003 and the end of 2007; and (iii) the costs involved in maintaining
employees' entitlement to a special (early) retirement age. The State has also funded the costs related to
moving, commuting, transfer of archives and renovation of machines.

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Aside from this the State has injected NOK 512 million in Mesta AS in the form of equity as a means to
finance costs related to offering ‘compensation for salary’ (salary offered to dismissed civil servants until
another position within the State administration can be offered). While some of this equity has been spent
is uncertain if a provision of
on compensation for salary (and on certain cheaper alternatives)
NOK 158 million, set aside for future liabilities, has indeed been spent. In any event, it is clear that an
amount of NOK 211 million still remains to form part of the company's equity.

it

B. Value assessment

(i) Value assessment of assets separately

In terms of a value assessment of machinery, a report dated May 2002 entitled, Opening balance prepared by
Ernst & Young, shows that a book value of machinery of NOK 1 111 million per 1 January 2002 was
reduced to an estimate of NOK 866 million, which was subsequently adjusted to NOK 747 million per
1 January 2003. A later report dated December 2002 entitled Opening balance Supplement: Value assessment of
assets presented a new estimate of the value of machinery of NOK 572 million calculated by using two
points of reference, namely the estimated value of machinery of NOK 747 million and a book value of
NOK 1 035 million.

With regard to real estate a December 2002 report entitled ‘Opening balance Supplement: Value assessment of
assets’ shows how a book value of real estate of NOK 596 million was reduced to a real value of
NOK 331 million on the basis of (i) sales; and (ii) an evaluation carried out by the independent expert
OPAK. In a report dated 28 February 2002 OPAK assessed the value of 375 properties to approximately
NOK 336 million. In a follow-up report dated 21 October 2002 OPAK assessed the value to be approxi-
mately NOK 395 million.

(ii) Discounted cash flow and quality check

A separate value assessment was carried out and summarised in a report dated October 2002 and entitled:
‘Value assessment’
in which Ernst & Young concluded that the application of the discounted cash flow
method means that the employed capital in Mesta AS amounts to NOK 600 million (within an interval of
+/– 25 %). The rate of return on equity (calculated on the basis of the ‘capital asset pricing model’) was fixed
at 6,7 % nominal return on total assets after tax.

In a quality control report dated 12 December 2002 and entitled Evaluation of proposal for a value assessment
and the opening balance Deloitte & Touche found that a NOK 200 million reduction should be made in the
previous estimate of the value of total fixed assets of NOK 1 137 million.

(iii) Final opening balance

further

In the final opening balance of 1 January 2003 the total value of fixed assets is NOK 977 million of which
the value of (i) machinery is NOK 594 million; and (ii) real estate is NOK 281 million. The value of
machinery was reduced with NOK 200 million from NOK 747 million to NOK 547 million. The addition
of
the final value of machinery to
NOK 594 million. In terms of real estate the final opening balance of 1 January 2003 shows how the value
of NOK 331 million (identified in the December 2002 report) is adjusted downwards to a final value of
NOK 281 million. The final opening balance also reflects a substantial
liquidity instalment of
NOK 1 600 million to cover expected negative cash flows.

investments and some minor adjustments brought

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C. Transitional contracts

(i) Transfer price

All construction contracts and operation and maintenance contracts for carrying out work on behalf of the
Public Road Administration which expired after 1 January 2003 were ‘formalised’ into ‘transitional contracts’
and transferred to Mesta AS (1). At the time of the transfer it appears that the construction contracts and
operation and maintenance contracts had a value of about NOK 2 960 million and NOK 5 750 million,
respectively, in total approximately NOK 8710 million (2).

The authorities have explained that the original prices of construction contracts resulted from ‘negotiated’
prices and have been fixed on the basis of the price level resulting from submitting other construction
contracts to public tenders. The authorities have also stated that the price of construction contracts was
subject to an ex-post adjustment mechanism in order to take account of fiscal requirements. It seems that
this mechanism involved adjusting prices so as to ensure a deficit if a profit had been made in previous
years (and vice versa). Finally, the contracts have been adjusted to take into account new fiscal and regulatory
requirements of Mesta AS.

The Norwegian authorities have explained that the value of all operation and maintenance contracts have
been based on the costs and prices fixed in the agreements with the Production Department. The Public
Road Administration put the contracts up for public tenders per 1 September each year up until 2006. Out
of a total of 108 contracts Mesta AS won 68 contracts which equals about 62,7 %. A comparative overview
submitted by the company, Veidekke ASA, shows that in respect of contracts tendered out in 2003 to 2006
the resulting winning prices were generally lower than the prices at which the contracts were previously
transferred to Mesta AS. The overview also shows that the prices submitted in offers submitted by Mesta AS
(itself) in subsequent tenders are lower than the prices at which the contracts have been transferred to
Mesta AS. A report commissioned and published by, amongst others, ViaNova Plan concludes that in
respect of a number of operation and maintenance contracts, transferred to Mesta, and subsequently subject
to public tenders in January 2003, the cost level appear to be about 32 % below the original cost level of
comparable transitional contracts transferred to Mesta AS.

Prior to the establishment of Mesta AS the Norwegian Parliament supported five test/pilot contracts which
the Public Road Administration had planned to put up for public tender. The resulting prices have not been
used as a basis for fixing the prices of the transitional contracts. In December 2000 the Public Road Admin-
istration issued a report showing that for contracts of the Production Department the costs represented
94 % of the price while for contracts of private entrepreneurs the costs represented 71 % of the price. Some
of the test/pilot cases formed the basis for coming to this conclusion. Moreover, questions posed in the
Parliament in 1999-2000 revealed that a previous analysis showed that the price level of the operation and
maintenance contracts was 20-25 % above those of the private contracts (3). Finally, a press release of
17 April 2001 explained that a comparative review revealed that the lowest price offer amongst the private
providers was about 15-20 % lower than that of the Production Department.

(ii) Transitional contracts in opening balance

The Norwegian authorities have stated that ‘[t]he transitional contracts have been reflected in the opening balance
of Mesta AS through their contribution to future cash flow as an element in the valuation of the business as a going
concern.’ but that the transitional contracts constituted only a small part of this value. In this context refer-
ence has been made to a previous statement that ‘[t]he ongoing operations of Mesta have been evaluated based on
discounted future cash flows and an interest rate of 6,7 %. The real value of operations has been established to
NOK 600 million. The estimated real value has been allocated to the assets and the valuation of the assets stated in
the proposal to the opening balance reflects their real value’ (4).

(1) No transitional contracts have been entered into with respect to asphalt and road marking.
(2) The figures represent the values remaining at the point in time the contracts were transferred from the Production Depart-

ment to Mesta AS.

(3) ‘Spørsmål fra Samferdselskomiteen om St. meld. nr. 46 (1999-2000) Nasjonal transportplan 2002-2011’.
(4) Letter dated 1 November 2004 from the Norwegian authorities to the Authority.

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D. Document duty and registration fee

According to Section 3(2) of the Mesta Act real estate transferred to Mesta AS was processed as a name
change and was therefore exempted from the payment of document duty and registration fee normally
falling due in cases of transfer of ownership to real estate. Exemption from document duty and registration
fee may be granted by reference to the continuity principle which is a term that covers situations where the
acquiring company takes over the legal rights and obligations of the transferring company. Two circulars lay
down principles on the application of the continuity principle of which the first dated 25 May 1990
replaced the second dated 21 June 2005. Under the first circular an exemption from document duty and
registration fee could be granted by reference to the continuity principle only if ownership would be trans-
ferred in the context of mergers between limited liability companies. However, the second circular broadened
the scope to cover both mergers, de-mergers and conversions undertaken on the basis of corporate legisla-
tion based on the continuity principle.

The Authority has doubts as to whether the measures identified above involve State aid.

II. ASSESSMENT

A. Restructuring measures

The Authority has not taken a final position on the involvement of State aid. In particular the Authority has
doubts as to whether the criterion of an economic advantage would be fulfilled with respect to the restruc-
turing measures

If financial obligations arising from the application of labour legislation or collective agreements to provide
unemployment benefits or pension schemes are considered to constitute the normal costs of a company the
pension obligations in the case of Mesta (1) could be considered to constitute the ‘normal costs’ and any
relief from such costs would be equivalent to an economic advantage. However, this approach does not take
into account the terms on which the previous employer i.e. the State, employed the relevant workers and
the State liability arising from such arrangements. Since the State financing is limited to the difference
between the costs of an ordinary pension scheme and the costs of a civil servant scheme, the State pays
only for its own liability and hence the provision of State funding to cover such costs would not constitute
an economic advantage. A similar argument could be made with respect to the State's funding of special
retirement age packages since the entitlement to retire at a specific (early) age was offered as a result of the
State employment and is hence therefore also a liability incurred by the State. Moreover, these considerations
also apply to the State financing of compensation for salary since the latter is one of the rights derived from
the civil servant status previously held by the relevant employees.

The Authority has taken the preliminary view that the reimbursement by the State to Mesta AS of the costs
incurred under the items entitled ‘moving’ and ‘commuting’ constitutes an economic advantage which
Mesta AS would not have received in the normal course of its business. Moreover, the costs related to
moving offices (including support and maintenance offices) as well as the transfer of archives are costs
which should be partly borne by the State and partly by the new company itself. As to the cost item of
renovation of machines, it is the owner, in this case the State, which is responsible for covering the costs of
discarding machinery which can no longer be used. However, if the inclusion of unusable machinery in the
assets transferred to Mesta AS has had a negative impact on the value assessment of all assets this manner of
handling the disposal of unusable machinery may result in the grant of State aid via the rate of return
required by the State.

B. Contribution of assets

The Authority found that it is uncertain as to whether the value of fixed assets set out in the final opening
balance of Mesta AS involves an economic advantage. While there is considerable uncertainty with respect
to the value of fixed assets to be recorded in the opening balance the Authority found that the value of fixed
assets,
transferred by the Norwegian authorities to Mesta AS, was adjusted considerably downwards
compared to previous estimates and that a downward reduction of machinery was made on the basis of
NOK 747 million which was merely an estimated preliminary value.

(1) See for example paragraph 62 of Section 3.2.6 of the State Aid Guidelines on aid for rescuing and restructuring firms in

difficulty and Case C-251/97, France v Commission, [1999] ECR I-6639, paragraph 40.

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As regards real estate, it is not clear to the Authority how the value has been fixed considering that the
most recent expert report of October 2002 identified a value of NOK 395 million which was subsequently
reduced to NOK 331 million in December 2002 and to NOK 281 million in the final opening balance.
Moreover, the logic behind reducing the value of machinery with NOK 200 million to NOK 547 million
while the cash flow analysis estimated the value of employed capital at NOK 600 million is not clear.

C. Transfer of transitional contracts

The Authority questions whether the prices in the construction contracts transferred to Mesta AS reflected
the market price.

Moreover, apart from the fact that the price at which the maintenance and operation contracts have been
transferred is not clear, the Authority considers that the results of the ViaNova report and the comparison
submitted by Veidekke ASA could indicate that the operation and maintenance contracts may not have been
fixed at market prices.

In view of the results obtained in the pilot projects, the comparative reports showing that the contract price
of the Production Department was more than 20 % points higher than in private contracts the Authority
also questions the argument of the Norwegian authorities that the market was not developed or the prices
of similar contracts were not identified by the market. The fact that Mesta AS has subsequently won the
majority of the public tenders seems to show that the company applies a different price structure than the
one applied for purposes of fixing the prices at which the contracts were transferred.

D. Document duty and registration fee

In line with the conclusion of the Authority in its decision of 14 December 2005 the preliminary view of
the Authority is that the exemption granted to Mesta AS from paying document duty and registration fee in
respect of the transfer of ownership of real estate involves State aid (1).

E. Distortion of competition and effect on trade between Contracting Parties

Due to the international character of the construction market the Authority considers that any State aid by
means of financial support to Mesta AS (either in the form of grants or in the form of an exemption from a
duty) will distort competition and affect trade.

F. Compatibility of the aid

Considering that the pension related restructuring measures all stem either directly or indirectly from the
fact that the previous employees of the Public Road Administration held a civil servant status, it seems that
the specific status of employees of the Public Road Administration was granted in a framework which was
not exposed to competition. The restructuring costs imposed on Mesta AS could therefore be considered to
affect the latter's competitive position in a market open for competition which, in turn, could be a reason to
consider potential State aid to cover the relevant costs as compatible.

As regards the State funding of the remaining restructuring costs, or potential aid involved in the valuation
of assets and the transitional contracts as well as in the exemption granted from document duty and registra-
tion fee, the Authority has not been able to identify elements showing that such funding would be compa-
tible on the basis of Article 61(3) of the EEA Agreement.

(1) Decision No 318/05/COL.

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‘EFTA SURVEILLANCE AUTHORITY DECISION

of 18 July 2007

to initiate the procedure provided for in Article 1(2) in Part I of Protocol 3 to the Surveillance and
Court Agreement with regard to the reorganisation of the Norwegian Public Road Administration
and the establishment of Mesta AS

(Norway)

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 Agree-
ment,

Having regard to the Authority's Guidelines (4) on the applica-
tion and interpretation of Articles 61 and 62 of the EEA Agree-
ment,

Whereas:

I.

FACTS

1.

PROCEDURE

By letter dated 30 August 2004,
the Authority received a
complaint against the Norwegian authorities in relation to the
establishment of Mesta AS which was created to take over the
production activities carried out within the Public Road Admin-
istration in Norway (5). The letter was received and registered by
the Authority on 2 September 2004 (Event No: 291537).

By letter dated 15 September 2004 (Event No: 291631), the
Authority requested information from the Norwegian authori-
ties. By letter dated 24 September 2004 from the Norwegian
authorities, both received and registered by the Authority on
24 September 2004 (Event No: 293749) the Norwegian autho-
rities requested an extension of the deadline within which it had
to reply (6). The Authority granted the request by letter dated
28 September 2004 (Event No: 294074).

(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) Procedural and Substantive Rules in the Field of State Aid — 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 Supple-
ment No 32, 3.9.94, p. 1, last amended by the Authority's Decision
No 388/06/COL of 13 December 2006 for purposes of prolonging
Chapter 14 on Aid for research and development, hereinafter referred
to as the “State Aid Guidelines”).
(5) Translation from “Statens vegvesen”
(6) The request for an extension of the time limit was officially confirmed
by letter dated 28 September 2004 from the Norwegian Mission to the
European Union, forwarding the letter dated 24 September 2004 from
the Norwegian authorities, both received and registered by the
Authority on 29 September 2004 (Event No 294279).

By letter dated 4 November 2004 from the Norwegian Mission
to the European Union, forwarding a letter from the Norwegian
authorities dated 1 November 2004, both received and regis-
tered by
the Authority on 4 November 2004 (Event
No: 298076), the Norwegian authorities replied to the informa-
tion request.

The Authority considered that further information was neces-
sary and sent another request for information dated 8 September
2005 (Event No: 306025). By letter dated 17 October 2005 the
Norwegian authorities requested an extension of the deadline
within which it had to respond, both received and registered by
the Authority on 19 October 2005 (Event No: 346953) (7). The
Authority granted the request by letter dated 20 October 2005
(Event No: 347051).

By letter dated 15 November 2005 from the Norwegian
Mission to the European Union,
forwarding a letter dated
10 November 2005 from the Norwegian authorities, including
appendixes, both received and registered by the Authority on
17 November 2005 (Event No: 350245) the Norwegian autho-
rities replied to the information request.

The Authority requested yet further information by letter dated
14 August 2006 (Event No: 383867). By letter dated
28 September 2006 from the Norwegian Mission to the
European Union, forwarding a letter from the Norwegian autho-
the Norwegian authorities
rities dated 26 September 2006,
requested an extension of the deadline within which it had to
reply, both received and registered by the Authority on
28 September 2006 (Event No: 390099). By letter dated
2 October 2006 the Authority granted the request
(Event
No: 390486).

By letter dated 11 October 2006 from the Norwegian Mission
to the European Union, enclosing a letter from the Norwegian
authorities dated 6 October 2006, both received and registered
by the Authority on 11 October 2006 (Event No: 392699) the
Norwegian authorities replied to the information request.

In addition hereto, during the autumn of 2006 and the begin-
ning of 2007 the Authority and the Norwegian authorities have
had informal contact both via telephone and electronic mail.
Information received by the Authority in this context has been
consolidated by the Norwegian authorities in a letter dated
18 June 2007 received and registered by the Authority on
21 June 2007 (Event No: 426240).

(7) The request for an extension of the time limit was officially confirmed
by letter dated 21 October 2005 from the Norwegian Mission to the
European Union, forwarding the letter dated 17 October 2005 from
the Norwegian authorities, both received and registered by the
Authority on 21 October 2005 (Event No 347285).

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2. BACKGROUND FOR THE EXISTENCE OF THE ALLEGED AID

2.1. The complaint alleging the involvement of State aid

The Public Road Administration in Norway is in charge of the
construction and maintenance of national and county munici-
pality roads, bridges and tunnels. Prior to 1 January 2003 the
Norwegian Road Administration operated in-house production
departments (hereinafter collectively referred to as the “Produc-
tion Department”) via district offices which carried out
the
construction work on behalf of the Public Road Administration.
However, in 2001-2002 the Norwegian authorities decided to
carry out an overall restructuring of the in-house production
activities.
the
Parliament should separate the production activities from the
Public Road Administration and transfer them to a limited liabi-
lity company owned by the State (1). The administrative func-
tions consisting of planning future construction activities,
including the organisation of public tenders, remained within
the State administration.

In this regard the Government proposed that

As a result, on 1 January 2003, the production activities of the
Production Department within the Public Road Administration
was separated from the State and transferred to a newly estab-
lished company, Mesta AS. All assets, rights and obligations
pertaining to the Production Department were transferred to
Mesta AS as contributions in kind (2). The assets included
machinery and equipment as well as service contracts entered
into between the Production Department and the Public Road
Administration. In return the State received shares in the new
company. Currently, Mesta AS carries out construction and
maintenance activities in competition with other operators
active on this market.

The complainant has argued that Mesta AS has received State
the EEA Agreement on
aid contrary to Article 61(1) of
four accounts: (i) the State has financed the restructuring costs;
(ii) the fixed assets transferred to Mesta AS have been assessed
at below market value in the opening balance; (iii) Mesta AS has
been cross-subsidized as a result of
the takeover by the
the Production Department's previous contract
company of
portfolio; and (iv) Mesta AS has not paid document and registra-
tion duties normally falling due in the case of transfer of owner-
ship of real estate.

The following describes the facts relevant for assessing whether
each of these alleged measures involve State aid.

2.2. Restructuring and other reorganisation measures

It appears from preparatory legislative work that all employees
(about 5 000) previously employed in the Production Depart-
ment were to be transferred to the newly established company.
However, in order to ensure the establishment of an efficient
company it was considered necessary to take measures for
purposes of reducing the workforce (to about 3 600) (3). The

(1) The first proposal in this regard was included in St. prp. nr. 1 Tillegg
nr. 4 (2001-2002). The proposal was further detailed in St. prp. nr. 1
Tillegg nr. 1 (2002-2003) entitled “om omdannning av Statens vegvesens
produksjonsvirksomhet
the
production activities within the Public Road Administration into a
State owned company.

til statlig aksjeselskap” on the transfer of

(2) Section 2 of Ot. prp. nr. 6 (2002-2003) entitled “Om lov om omdanning
av Statens vegvesens produksjonsvirksomhet til statlig aksjeselskap” on the
transfer of production activities within the Public Road Administration
into a State owned limited liability company.

(3) Section 4.2 of St. prp. nr. 1 Tillegg nr. 1 (2002-2003).

various restructuring measures undertaken to achieve this goal
consisted of (i) early pension packages; (ii) temporary mainte-
nance of civil servant pension (4); (iii) maintenance of the right
to a special retirement age (5); and (iv) various measures invol-
ving moving, commuting, the maintenance of wage and the
renovation of machines (6).

The total costs for carrying out the restructuring measures were
initially estimated to an amount of NOK 1 468 million
(discounted to present values) and foreseen to be reimbursed by
the State to Mesta AS in instalments over a three-year period of
2003-2005. Initially the restructuring measures also included a
item (v) related to compensation for salary (7).
further cost
However,
immediately prior to fixing the opening balance of
Mesta AS the Norwegian authorities decided that the relevant
costs should rather be covered by a capital contribution to
Mesta AS in the form of equity.

The restructuring costs were not
included in the opening
balance of Mesta AS since the restructuring costs were to be
funded by the State via the State budget for the three years of
2003, 2004 and 2005 (8).

It appears from the State budget for 2006 that Mesta AS has
received a total of NOK 993,5 million from the State to cover
restructuring costs already accrued as well as future restruc-
turing costs. In this regard Mesta AS received NOK 357 million
for 2003; NOK 356,5 million for 2004; and NOK 280 million
for 2005 (9). It appears furthermore from the State budget for
2007 that at the end of 2006 total restructuring costs were esti-
mated by Mesta AS to amount to NOK 1 212 million until the
year of 2013 (10). However,
the Norwegian authorities have
explained that although it was initially foreseen that the State
should cover all restructuring costs (implying that if the original
estimate of the restructuring costs of NOK 1 468 million would
be insufficient the State would grant additional funds) the State
budget for 2007 provides that Mesta AS will not be granted
further
than NOK 993,5 million
(albeit subsequently amended by the Norwegian authorities to
NOK 993,6 million).

restructuring

funds

The Norwegian authorities have explained that if at the end of
the period the restructuring costs should turn out to be less
than originally estimated the surplus amount must be repaid to
the State or injected into the company as a capital contribution
— which in the form of equity would be subject to the required
rate of return. However, the authorities maintain that it is unli-
kely that Mesta AS will have a surplus of funds at the end of
the period due to the fact that the total amount which Mesta AS
ultimately will receive is considerably lower than the initial esti-
mate for restructuring costs.

In terms of regulation, the Norwegian authorities adopted an
Act on the transformation of the production activities of the
Public Road Administration to a State owned limited liability
company which regulates the rights of employees who were
transferred from the Public Road Administration for employ-
ment in Mesta AS (11).

(4) Civil servant pension is translated from “tjenestepensjonsordning”.
(5) Translated from “Opprettholdelse av særaldersgrense”.
(6) Section 5 of St. prp. nr. 1 Tillegg nr. 1 (2002-2003).
(7) Translated from “Ventelønn”.
(8) Section 5 of St. prp. nr. 1 Tillegg nr. 1 (2002-2003).
(9) St. prp. nr. 1 (2005-2006).
(10) St. prp. nr. 1 (2006-2007).
(11) Act of 13 December 2002 (“lov om omdanning av Statens vegvesens

produksjonsvirksomhet til statlig aksjeselskap”).

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A. Restructuring measures

(i) Early pension

It appears from preparatory legislative work that during a
three year period as of 1 January 2003 until the end of 2005
Mesta AS could offer employees transferred from the Production
Department within the Public Road Administration an arrange-
ment according to which they would be able to retire with
pension at the age of 60 rather than the normal retirement age
of 67 years. Both state owned and private companies have the
right to make use of this instrument.

to NOK 911 million (1). However,

In legislative preparatory works the State funded costs of
offering early pension arrangements (including administration
costs representing about 5 % of total costs) were estimated to
amount
the Norwegian
authorities have subsequently explained that in August 2005
accrued costs were merely NOK 113 million and that
the
amount of total estimated costs would be NOK 637 million
(rather than NOK 911 million). The reason for this reduction is,
according to the Norwegian authorities, that it was subsequently
the workforce could be reduced by means of
realised that
normal
retirement which reduced the need to offer early
pension arrangements (in fact, only 470 individuals have bene-
fited from early pension) (2).

(ii) Maintenance of civil servant pension rights

The employees of the Public Road Administration had the status
of a civil servant but lost this status upon their transfer to Mesta
AS (although certain specific rights were maintained for a
limited period, see further subsection (v) below). The authorities
decided, however, that the employees should benefit from a five
year transitional regime (i.e. from 1 January 2003 to the end of
2007). The transitional regime implies that the State pays Mesta
AS the relevant costs for purposes of ensuring that employees
to that of civil
are guaranteed pension contributions equal
servants during the relevant period (3).

In Norway the costs relating to the pension rights of civil
servants are paid into the State pension fund (“Statens penjons-
kasse” or “SPK”) (4). Membership of
the SPK provides rights
corresponding to those of civil servants. Therefore, in order to
ensure the transitional regime the membership of
the State
pension fund was maintained.

The State funding to Mesta AS is intended to cover the differ-
ence between the average costs of an ordinary private pension
scheme and the (higher) costs of maintenance of membership in
the SPK. Originally the relevant costs were estimated to amount
to NOK 395 million (5). The Norwegian authorities have,

(1) Section 5 of St. prp. nr. 1 Tillegg nr. 1 (2002-2003).
(2) The authorities have nonetheless pointed out that although early
pension packages will not be offered after the end of 2005, payments
in respect of the early pensions arrangements accepted prior to this
date may still be made until the end of 2012.

(3) The Norwegian authorities have explained that if Mesta AS decides to
maintain the civil servant pension rights beyond 2007 the company
must cover the costs itself and the State will not reimburse the
company for such costs.

(4) The rights of civil servants are set out in the Act on civil servants “Lov

4.3.1983 om statens tjenestemenn”.

(5) Section 5 of St. prp. nr. 1 Tillegg nr. 1 (2002-2003).

however, subsequently explained that per August 2005 the costs
accrued in this respect amounted merely to NOK 209 million.
In this regard the authorities have also explained that
the
original amount of NOK 395 million was in any event not
intended to be a fixed amount as the parameters for the annual
pension premium to be paid (which are assessed by the SPK as a
percentage of the pension-qualifying income) vary (6).

Individuals employed after the establishment of Mesta AS are
offered a pension scheme of which the costs are paid for in full
by the company.

(iii) Maintenance of special retirement age

Certain of the civil servants who were transferred to Mesta AS
were entitled to retire at an earlier age (i.e. at 65 years) than the
normal retirement age of 67 years.
In connection with the
transfer of employees of
the Public Road Administration to
Mesta AS, the employees, who at the time of the establishment
of Mesta AS (i.e. on 1 January 2003) had 10 years or less left
before retirement (that is, those who were 55 years or older),
were granted the right to maintain their special retirement age
of 65 years (7). The additional costs of maintaining the special
retirement age arrangement were originally estimated to amount
to NOK 85 million (including administration costs representing
about 5 % of the total amount) to be funded by the State (8).

The Norwegian authorities have explained that per August 2005
NOK 24,5 million costs had been incurred for purposes of
maintaining the special retirement age but further costs may
incur until the expiry of the arrangement in 2012.

(iv) Costs related to moving, commuting, maintenance of salary and

renovation of machines as well as other related costs

According to preparatory legislative works, this cost item covers
costs for purposes of moving (“flyttekostnader”); commuting
(“pendlergodtgjørelse”); maintenance of salary (“bibehold av lønn”);
and renovation of machines (“maskiner — sanering”) (9). The
Norwegian authorities have explained that it also involves costs
related to moving offices (“kontor-flyttekostnader”); moving main-
tenance and support offices (“støttepunkter-flyttekostnader”); and
transfer of archives (“arkivoverføring”).

With the exception of the measure relating to maintenance of
salary (which has not been put into effect and hence did not
incur any costs) all measures were carried out at the time of the
establishment of Mesta AS and lasted until the end of 2005.
While the total costs pertaining to all measures were originally
estimated to amount to NOK 77 million (10), the Norwegian
authorities have explained that, per January 2006, total costs
accrued amounted to approximately NOK 82,4 million. The
Norwegian authorities have also explained that although not
being liable, the State nonetheless paid for the costs.

(6) The pension-qualifying income varies from year to year, amongst
others, due to adjustment of salaries. Elements influencing the level of
the premium are the premium rate and the contribution of employers
to the National Insurance.

(7) The special retirement age arrangement would therefore be applicable

until the end of 2012.

(8) Section 5 of St. prp. nr.1 Tillegg nr. 1 (2002-2003).
(9) St. prp. nr. 1 Tillegg nr. 1 (2002-2003).
(10) Section 5 of St. prp. nr. 1 Tillegg nr. 1 (2002-2003).

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M ov i n g :
C o s t s
N O K 0 , 5 m i l l i o n

a c c r u e d

p e r

J a n u a r y

2 0 0 6 :

This item includes costs incurred in relation to relocating
leading or administrative personnel in order to take up employ-
ment at Mesta AS. As the personnel
took up positions in
different
locations within Mesta AS than those where such
personnel previously worked within the Public Road Adminis-
tration, certain employees had to move domiciles to take up
their new employment. Examples of costs include actual, docu-
mented costs related to the purchase of domiciles (“faktiske, legit-
imerte kostnader ved boligkjøp”) (1), paid absence for purposes of
moving (“flyttepermisjon”) and travel costs in relation to inspec-
tions of new property (“visningsreise”).

C o m m u t i n g : C o s t s
N O K 6 , 8 m i l l i o n

a c c r u e d

p e r

J a n u a r y

2 0 0 6 :

This item also covers costs considered necessary to ensure that
leading or administrative personnel took up employment within
Mesta AS at premises far away from their domicile. Examples of
costs include commuting costs between the domicile and work
(“Dekning av husleie”) (2)
(“hjemreise”), costs
driving allowance between domicile and work (“kjøregodtgjørelse”)
and board allowance (“kostgodtgjørelse”).

for double rent

M ov i n g o f f i c e s : C o s t s a c c u r e d p e r
N O K 7 , 8 m i l l i o n

J a n u a r y 2 0 0 6 :

This item involves costs for moving from the offices of the
Public Road Administration to the central headquarters and
regional offices of Mesta AS. Examples of costs are cleaning out
of old offices (“Rydding og rengjøring av gamle kontorer”); packing
office material up (3) and transporting it to the new offices
(“Pakking og transport”); preparation, furnishing and upgrading of
new offices at Mesta AS (“Klargjøring, innredning og oppgradering
av nye kontorer”); as well as costs for the administration of
moving activities (“administrasjon av flyttning”).

M ov i n g o f s u p p o r t a n d m a i n t en a n c e o f f i c e s : C o s t s
a c c r u e d p e r J a n u a r y 2 0 0 6 : N O K 4 0 , 1 m i l l i o n

This item includes costs for purposes of moving from old
offices to new local maintenance and support offices as well as
reorganising former operation and support offices into new
operation and support offices for Mesta AS. Examples of costs
are cleaning up of old operation and maintenance support
offices (“rydding og rengjøring av gamle driftsstøttepunkt”), packing
office material up and transporting it
to the new offices
(“pakking og transport”), preparation, furnishing and upgrading of
new operation and maintenance support offices (“Klargjøring,
innredning og oppgradering av driftsstøttepunkt”) and administration
of moving activities (“administrasjon av flytting”).

Tr a n s f e r o f
2 0 0 6 : N O K 7 , 1 m i l l i o n

a r ch i v e s : C o s t s

a c c r u e d p e r

J a n u a r y

This item includes costs for purposes of installing electronic and
physical archives in Mesta AS. It covers the costs involved in

from other

separating relevant archives
irrelevant archives
within the Public Road Administration as well as the costs
related to the establishment of new archives in Mesta AS. Exam-
ples of costs included are the costs for assessing the extent of
necessary resources for each archive (“Ressursbehov pr. arkiv”),
photocopying
preparation
(“klargjøring”) and quality assurance work (“kvalitetssikring og
sikkerhetsarbeid”).

(“kopiering”),

transport

(“frakt”),

R e n ov a t i o n o f m a c h in e s : C o s t s a c c r u e d p e r J a n u a r y
2 0 0 6 : N O K 2 0 , 1 m i l l i o n

that

Although this cost
it covers costs
item would suggest
related to repairing or renovating machines this is not the case.
The Norwegian authorities have explained that the contribution
in kind to Mesta AS contained discarded machines, surplus
machines and scrapped sites which could not be used for its
business. The machines were old, wrecked, or in other ways not
of any use for purposes of modern road construction. For prac-
tical reasons all machinery was transferred to the new company
the machines and clean up the
which should dispose of
unusable sites. Hence this cost
item covers costs related to
cleaning up of sites (“opprydding”) and removing, scrapping and
transporting unnecessary machinery (“fjerning, skroting, og frakt-
kostnader”).

The evaluation of machines and the identification of surplus
and unusable machines and material were carried out by the
machinery department in Mesta AS under the supervision of
the Director for logistics and purchases. Mesta's auditor verified
that the use of the funds was in line with internal
instruc-
tions (4).

(v) Compensation for salary and other measures for reducing the

work force

Although the cost item of compensation for salary does not
form part of what the Norwegian authorities would refer to as
“restructuring costs” it represents nonetheless one of the instru-
ments used for reducing the previous work force of the Public
Road Administration.

As mentioned above, while the employees transferred from the
Production Department lost their civil servant status, certain
specific rights derived from this status were nonetheless main-
tained for a limited period. These rights are regulated in the Act
of 13 December 2002 No 84 on the conversion of the produc-
tion activities to a State owned limited liability company (herein-
after the “Mesta Act”) (5). Section 4 of the Mesta Act provides
that during a period of three years after commencing employ-
ment in Mesta AS on 1 January 2003 employees who are subse-
quently dismissed and meet certain conditions (for example
minimum employment of one year) have the right to be offered
an appropriate position within the State
administration
(“fortrinnsrett til annen statlig stilling”) or, if a position cannot be
offered, the right to receive compensation for salary (“ventelønn”).

(1) Such as actual moving costs.
(2) Such as where a room is rented during the week.
(3) With the exception of archives which is covered by a separate cost item

below.

(4) The internal instructions are based on legislative preparatory works

such as St. prp. nr. 1 Tillegg nr. 1 (2002-2003).

(5) Act of 13 December 2002 (“lov av 13.12.2002 om omdanning av Statens

vegvesens produksjonsvirksomhet til statlig aksjeselskap”).

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Compensation for salary is regulated by the Act on civil
servants (1). It is an arrangement whereby civil servants who
have been given notice for reasons of redundancy and who have
not been offered a different suitable job will be entitled to 2/3
of the salary as of the date on which notice was given and up to
a maximum of 16 years (depending on the age and duration of
State employment).

for paying them 66 % of the salary up to the point in time at
which they would have acquired the right to early pension.

In the context of implementing the above arrangements various
administration costs were incurred,
including the costs of
external consultants to operate a career centre.

Although the costs relating to compensation for salary initially
formed part of the restructuring costs the Ministry of Labour
later decided that the estimated costs should rather be taken
into account when identifying the size of the equity of Mesta
AS. Or in other words, the means to finance the relevant costs
would be injected by the State in Mesta AS as equity (2). The
rationale for this approach was that funding through equity
should result in a more careful use of dismissals as a reorganisa-
tion tool in the public sector. Instead, more use should be made
of other (cheaper) reorganisation instruments, such as leave of
absence with reduced pay and pension packages, etc. (3).

At the time of the establishment of Mesta AS it was originally
foreseen that 450 employees would be covered by the compen-
sation for salary scheme with total costs of approximately
NOK 512 million. This amount was therefore taken into
account when determining the equity of Mesta AS (4). However,
as Mesta AS made use of the following (cheaper) alternative
workforce reducing instruments Mesta AS spent considerably
less of its equity funding than initially anticipated (5):

Termination packages which is an arrangement according to
which employees terminate employment without benefiting
from compensation for salary in return for receiving up to a
years salary as well as financial assistance to find other employ-
ment.

Pension packages is an arrangement whereby employees at the
age of 62 will terminate employment in return for being guar-
anteed 66 % of the salary until the retirement age at 67 years
and the right to continue to earn normal pension rights during
this period (6).

Leave of absence with reduced salary is an arrangement to induce
employees who would acquire the right to receive early pension
(at the age of 60) between 2003 and 2005 to terminate before
by offering such employees to terminate immediately in return

(1) The Act on civil servants (“lov av 4.3.1983 om statens tjenestemenn”).
(2) The Norwegian authorities have explained that while the State is
responsible for paying compensation for salary directly to the entitled
individuals, the State requires the costs reimbursed from Mesta AS —
who in turn — has received NOK 512 million from the State in the
form of equity to cover such costs.

(3) A letter dated 3 June 2002 from the Ministry of Labour and Adminis-
tration reveals that this approach was the result of a general review
during which it was found that in all cases of transforming a state inte-
grated entity into a separate state owned company the company needs
to be given an incentive to reduce potential claims for compensation
for salary. This was considered achieved by making the company pay
for the costs of compensation for salary itself — while the State would
finance the relevant costs via equity (which would be subject to a fixed
rate of return).

(4) Section 4.4 of St. prp. nr. 1 Tillegg nr. 1 (2002-2003).
(5) By letter dated 6 October 2006 to the Authority, the Norwegian autho-
rities have submitted a table providing an overview of the costs accrued
in respect of the various instruments for reducing the work force.

(6) The description of the arrangement by the Norwegian authorities was
as follows: “Der ordinær AFP ytelse var lavere enn garantert ytelse på 66 %
(tidlig pensjon) ble det ytt et mellomlegg (gavepensjon)”.

in 2004.

The Norwegian authorities have explained that NOK 17 million
was spent for the abovementioned measures in 2003 while
NOK 70 million was spent
In 2005 a further
NOK 56 million was spent and a provision of NOK 158 million
made for future liabilities. Costs for purposes of compensation
of salary or alternative instruments are therefore currently
expected to total
approximately NOK 301 million. The
“remaining” amount of NOK 211 million forms part of the
company's equity. The Norwegian authorities have explained
that there is no decision dictating that an eventual surplus
equity should be returned to the State and that
the final
accounts have to be assessed before a final decision can be
taken on how to deal with surplus equity (7).

2.3. Value

of machinery

(hereinafter
and
“machinery”) and real estate and buildings (hereinafter
“real estate”) in the opening balance

equipment

The following provides an overview of the process for purposes
of establishing the value of the fixed assets in the final opening
balance of Mesta AS. For purposes of this process two auditors
were engaged: Ernst & Young, was engaged by the Public
Road Administration in order to establish the new company
while the Ministry of Transport and Communication engaged
Deloitte & Touche in order to undertake a quality check of the
value assessment of the assets and the proposal for an opening
balance (including the documentation submitted) as well as eval-
uating the process, methods and principles applied in this
context. Subsequently, Ernst & Young became the auditor of
Mesta AS.

A. Value assessment of assets separately

(i) Machinery

the assessment was

For purposes of assessing the value of the assets, the Public
Road Administration, Arthur Andersen & Co AS, the attorney
and Skagerak
to the Norwegian Government, ViaNova
Forsikringsmegling AS prepared a report dated 10 May 2002
entitled the Opening balance (8). In this report, the starting point
for
the book value of machinery of
NOK 1 111 million on 1 January 2002. By deducting equip-
ment (not planned for a transfer to Mesta AS) estimating invest-
ments and depreciation for the year 2002 and taking account of
other correction factors, the estimated value of machinery was
NOK 866 million, preliminary adjusted to NOK 747 million on
1 January 2003. While the report states that engineers of the
Public Road Administration have assessed the real value on the
basis of market price observations, Ernst & Young has in a
subsequent letter stated that the value of NOK 747 million
represented the retroactive creation of book values (9).

(7) The final accounts referred to were those for the year of 2005 but the

authorities have not provided an update of the situation yet.

(8) The original title of the report is “Åpningsbalanse”.
(9) Letter of 20 February 2007 from Ernst & Young to the Authority.

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The evaluation process was continued by the preparation of a
report dated August 2002 entitled the Opening balance (1)
prepared by the Public Road Administration, Ernst & Young, Via
Nova and Skagerak Forsikringsmegling AS. The report reveals
that in July 2002 it was decided that the assets of the Produc-
tion Department
to be transferred to Mesta AS should be
assessed on the basis of their real value. The report also reveals
that since the process for obtaining real values of machinery
had not been completed the value of machinery (2) was based
on the principle of “simulated continuity”, that is, the values
would be re-construed to what they would have been had the
Production Department been subject
to general accounting
law (3).

A further report dated December 2002 entitled Opening balance
Supplement: Value assessment of assets, prepared by the Public
Road Administration, Ernst & Young, Via Nova, OPAK and
Skagerak Forsikringsmegling AS presents a new estimate in the
value of machinery (4). To arrive at real value two principles
were followed (i) for certain groups of machinery, the starting
point was recorded book value corrected for a value added tax
and amended depreciation periods plus other discretionary
assessments; for other groups (ii) values were based on external
valuations and prices. The new estimate for
the value of
machinery to be
included in the opening balance was
NOK 572 million. This value was calculated by using two
points of reference namely the estimated value of machinery of
NOK 747 million and a book value of NOK 1 035 million.

(ii) Real estate

In the May 2002 report entitled the “Opening balance” the value
of real estate was estimated to be NOK 277 million. The esti-
mate was fixed starting with the book value of NOK 596 million
per 1 January 2002 which was adjusted downwards to take into
account increased depreciations and non-transferred real estate.

In the August 2002 report entitled the “Opening balance” the
value of NOK 277 million was stated to represent the value of
real estate had the Production Department been subject to the
regular law on accounting.

The December 2002 report entitled “Opening balance Supplement:
Value assessment of assets” shows how a book value of real estate
of NOK 596 million was
reduced to a real value of
NOK 331 million on the basis of (i) sales; and (ii) an evaluation
carried out by the independent expert OPAK of about 1/3 of
the properties and a description of the remaining properties.

In terms of expert assessments the Norwegian authorities have
submitted a report dated 28 February 2002 in which OPAK
assessed the
to approximately
NOK 336 million (taking account of planned sales) (5). A

value of 375 properties

(1) The original title of the report is “Åpningsbalanse”.
(2) The value between NOK 866 million and NOK 747 million.
(3) The State administration is not subject to the general accounting law

(“regnskapsloven”).

(4) The original title of the report is “Åpningsbalanse Supplering: Verdivur-

dering av eiendeler”. Page 11 of the report.

(5) Prior to sales the value would be NOK 420 486 240 million. Only 100
out of 375 properties were inspected and OPAK observed that certain
information to be submitted by the Public Road Administration in
respect of the remaining properties was lacking.

follow-up report dated 21 October 2002 prepared by OPAK
explains that following, amongst others, the addition of 16
properties, a new evaluation resulted in the value of approxi-
mately NOK 395 million.

B. Value assessment based on discounted cash flow and

quality check

capital

capital”)

amounts

employed

A separate value assessment was carried out and summarised in
a report dated October 2002 entitled:
“Value assessment”
prepared by Ernst & Young for purposes of verifying the results
of the work undertaken in respect of the value assessment of
the assets (6). The auditors conclude the report by stating that
the application of the discounted cash flow method means that
to
(“sysselsatt
the
NOK 600 million (within an interval of +/- 25 %). The analysis
was based on a cash flow assessment for 2003-2012 for which
period Ernst & Young estimated a negative present value of
NOK 300 million while the terminal value was fixed at plus
NOK 900 million. In this regard Ernst & Young has in a subse-
quent letter explained that “the fair market value at a minimum
must equal the company's equity”. The results of the discounted
cash flow method meant therefore that a downward adjustment
of the value of the assets had to be made (7). Ernst & Young has
further explained that “Had the value [of NOK 747 million] been
fully applied in the Parliament Proposition, the company would have
had equity of NOK 2 100 million. This equity exceeds the value
resulting from the verification of the value of the company against
future cash flows by NOK 200 million. On this background it was
downward with
and
decided
NOK 200 million in relation to estimated value of the machinery at
the time. The total adjustment was at the time … done as an adjust-
ment of machines, as it was expected that a valuation based on esti-
mated fair market values would reduce the values of machines”.

adjust machines

equipment

to

total

A quality control of
the value assessments undertaken by
Deloitte & Touche resulted in a report dated 12 December 2002
and entitled Evaluation of proposal for a value assessment and the
opening balance (8). The report shows that the auditors endorse
the application of the principle of real value for purposes of
assessing assets (9). The auditors also found that the previous
estimated value of
fixed assets of NOK 1 137 in the
opening balance (10) should be reduced with NOK 200 million
to NOK 937 million. According to the auditors this adjustment
should be made as a result of the value assessment (resulting
from the abovementioned discounted cashflow method) (11)
which showed that the value would be lower by assessing the
employed capital (“sysselsatt capital”) than if the assets would be
evaluated separately or in groups. Although Deloitte & Touche
expressed concerns about
the (discounted cashflow) value
assessment they concluded that it was the best possible estimate
of the values of the assets and that it could be used for a down-
ward adjustment of the operational assets.

(6) Translation from the Norwegian title “Verdivudering”.
(7) Letter of 20 February 2007.
(8) Translation from the Norwegian title: “Vurdering av forslag til verdsettelse

og åpningsbalanse Vegproduksjon AS for Samferdselsdepartementet”.

(9) See page 3 of the report. It appears that Deloitte & Touche assumed that
the value assessment (on which the opening balance is based) has been
based on acknowledged principles for the value assessment of compa-
nies.

(10) The value of NOK 1 137 million was made up of machinery
NOK 747 million, real estate of NOK 331 million and other assets of
NOK 59 million.

(11) I.e. the report entitled Value Assessment dated October 2002 by

Ernst & Young.

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It appears from the Deloitte & Touche report that the report of
December 2002 entitled Opening balance Supplement: Value assess-
ment of assets
for a value assessment of
machinery of NOK 572 million) did not form part of the docu-
ments submitted to Deloitte & Touche for purposes of checking
the value assessments undertaken.

(which provides

The Norwegian authorities have explained that the discount
factor used for the cash flow analysis was based on principles
similar to those underlying the rate of return by a private
investor. It was therefore based on the average market rate of
return and the company's commercial risk. The rate of return
on equity was calculated based on the “capital asset pricing
model”
(CAPM) by using the following formula: Expected
return of the assets (R) = risk free interest rate (r) plus Beta of
the asset (b) X {expected return on the market portfolio — risk
free interest rate (r)}. According to the authorities the rate was
fixed at 6,7 % nominal return on total assets after tax. It was
based on risk free interest rate of 6 % before tax, or 4,2 % after
tax (of 28 %), a risk premium after tax of 2,1 % (0,35 % of 6 %)
and a correction for loss premium factor for debt of 0,4 %.

C. Value assessment in final opening balance

(i) Machinery

The final opening balance of 1 January 2003 prepared by Mesta
AS with assistance of Ernst & Young, ViaNova Plan and Trafikk
AS (attached as Annex A) shows a total value of fixed assets of
(i) machinery is
NOK 977 million of which value of
NOK 594 million; and (ii) real estate is NOK 281 million.

In line with previous recommendations to reduce the value of
fixed assets by NOK 200 million, and to allocate this reduction
to machinery,
reduced from
NOK 747 million to NOK 547 million (1). The addition of
further investments and some minor adjustments brought the
final value of machinery to NOK 594 million.

the value of

item was

this

(ii) Real estate

In the final opening balance of 1 January 2003 the value of
NOK 331 million (identified in the December 2002 report) is
adjusted downwards to a final value of NOK 281 million.

(iii) Contribution of liquidity

The opening balance also recorded a substantial liquidity instal-
ment of NOK 1 600 million to cover expected negative cash
flows during the first years of operation in respect of, inter alia,
pension obligations and restructuring measures. Based on a
balance
equity made up
NOK 1 900 million and liabilities constituted NOK 786 million.

sheet of NOK 2 686 million,

(1) The report continues by referring to the value of machinery of
NOK 572 million identified in the December 2002 report (entitled
Opening balance Supplement: Value assessment of assets). It is stated that
since the value assessment of Mesta AS shows that the company can
only justify an equity of NOK 1 900 million, the NOK 572 million had
to be adjusted downwards by NOK 25 million. In a subsequent letter
dated 20 February 2007 Ernst & Young has explained that this meant
that the actual downward adjustment of the value of machinery was
not NOK 200 million but rather NOK 25 million.

2.4. Transfer of transitional contracts and their value in the

opening balance

the contracts (2).

remaining obligations under

It appears from the legislative preparatory works that as of
1 January 2003 all new contracts of the Public Road Adminis-
tration should be subject to public tender procedures in order
to increase competition. At the same time, it was decided that
already existing contracts under which the Production Depart-
ment carried out work on behalf of the Public Road Administra-
tion would be transferred to Mesta AS to allow the latter to
fulfil
In this
regard the Norwegian authorities have explained that all
construction contracts (“utbyggingsprosjekter”) and operation and
maintenance contracts (“funksjonsavtaler”) for carrying out works
which expired after 1 January 2003 were “formalised” into
“transitional contracts” and transferred to Mesta AS (3). The
Norwegian authorities have stated that the method and schedule
for handling transitional contracts have been subject to a review
by “several external consultants” prior to the establishment of
Mesta AS and the results of this have been laid down in a
report prepared by the Public Road Administration, Arthur
Andersen & Co, the attorney general, ViaNova and Skagerak
Forsikrings-megling AS. However, so far, the Norwegian authori-
ties have not submitted this report.

The Norwegian Authorities have explained that the manner of
handling transitional contracts is intended to introduce competi-
tion in a fast and efficient manner while at the same time
ensuring safety for the road users. The authorities considered
that prices would gradually be reduced following the introduc-
tion of competition. The authorities have further explained that
it was essential that all contract work was carried out uninter-
rupted as of 1 January 2003 and that “Neither the NPRA nor the
private sector was able to tender all the approximately 100 contracts
before that date.
It was not possible for Mesta to cut staff and
machines from that date.”.

In terms of fixing the value of the transitional contracts the
Norwegian authorities have explained that
the transitional
contracts are commercially based in the sense that they have
terms similar to those
been redrafted and contain contract
included in contracts between the Public Road Administration
and private operators, such as provisions ensuring the use of the
Norwegian Standard (“NS”), the obligation to pay value-added
tax,
insurance provisions, guarantee liabilities, etc. which also
reflect the (new) regulatory framework applicable to Mesta AS.

A. The construction contracts

The Norwegian authorities have explained that the construction
contracts had to be transferred to Mesta AS in order to continue
the completion of ongoing construction projects. The contracts
vary in terms of complexity and duration but all expired in the
course of one or two years after the establishment of Mesta AS.

The Authority has asked the Norwegian authorities whether the
value of the construction contracts transferred to Mesta AS was
fixed on the basis of the prices resulting from previous public
tenders (4). The Norwegian authorities responded that “prices
were set as a continuation of the prices the productions division had

(2) St. prp. nr. 1 Tillegg nr. 1 (2002-2003), Ot. prp. nr. 6 (2002-2003).
(3) No transitional contracts have been entered into with respect to asphalt

and road marking.

(4) Letter dated 8 September 2005 from the Authority to the Norwegian

authorities.

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set for the negotiated agreements”, that new contractual obligations
were not to affect prices and that prices had been negotiated on
a model which is, as far as possible, based on market terms.
According to the authorities this model includes the following
feature: “The model was that the prices set would ensure that the
production division in each county would reach the demands estimated
from the requirements specified in the fiscal budget. Prices were then to
be adjusted in relation to the profit or deficit made in the preceding
years. This implied that a deficit could be guaranteed already from the
onset of an agreement,
if the productions division of the county in
question had made a large profit in the preceding years” (1). In subse-
quent correspondence the Norwegian authorities have explained
that prior to the establishment of Mesta AS about 50 % of the
construction work (required by the Norwegian Public Road
Administration to be carried out) had been put up for public
tenders while the rest was awarded to the Production Depart-
ment. Due to the fact that the Public Road Administration could
identify a price level for construction contracts on the basis of
such public tenders, it was practice that the price levels in the
internal contracts should correspond to the price level in the
contracts awarded through public tenders. On this basis the
price level reflected in public tenders have been taken into
for the
account
internal construction contracts which were later transferred to
Mesta AS (2).

identifying the price level

for purposes of

B. The operation and maintenance contracts

102 existing operation and maintenance contracts (“funksjonsav-
taler”) were taken over by Mesta AS. These contracts would all
expire within a period of maximum four years,
i.e. the third
quarter of 2006. In terms of duration they fall in four categories
set out below. Upon expiry of the operation and maintenance
them up for
contracts the Public Road Administration put
public tenders per 1 September each year.

— Category A: 24 contracts, which expired during the autumn

of 2003;

— Category B: 25 contracts, which expired during the autumn

of 2004;

— Category C: 27 contracts, which expired during the autumn

of 2005;

— Category D: 26 contracts, which expired during the autumn

of 2006.

The Norwegian authorities have explained that the value of all
operation and maintenance contracts have been based on the
costs and prices fixed in the agreements with the Production
Department and that the real market value will appear upon the
completion of the contracts when the Public Road Administra-
tion can give an outline of the costs for these contracts. Upon
querying the authorities whether they could provide such an
outline at the current stage the authorities have responded that
an indication of the cost price is the price resulting from a
report referred to as a report
issued by ViaNova Plan (see
below).

(1) Letter dated 10 November 2005 from the Norwegian authorities to the

Authority.

(2) Letter dated 6 October 2006 from the Norwegian authorities to the

Authority.

C. The value at which the contracts were transferred

It appears

The values at which the contracts have been transferred appear
from an overview over contracts assigned to the Production
Department (3).
that construction contracts and
operation and maintenance contracts had a value of about
NOK 2 960 million and NOK 5 750 million, respectively,
in
total approximately NOK 8 710 million (4). The overview of
operation and maintenance contracts provides annual values per
region but does not indicate the price of individual contracts.

The values in the abovementioned overview of the contracts
correspond to the values forwarded in a letter from the Ministry
of Transport dated 19 December 2002 to the association of
construction businesses (“Byggenæringens Landsforening”). In this
context
the values for operation and maintenance contracts
were referred to as being “estimates” only (5).

Aside from this, the company, Veidekke ASA, has submitted an
Excel spreadsheet showing the prices at which the operation and
maintenance contracts were transferred to Mesta AS. According
to Veidekke ASA the spreadsheet was forwarded from the
Ministry of Transport to the association for asphalt entrepre-
neurs (“Asfaltentreprenørenes Forening”) who distributed it to its
(including Veidekke ASA) (6). The
members
spreadsheet
the total price at which the operation and
shows
maintenance contracts have been transferred to Mesta AS is
NOK 5 885,2 million.

that

D. Price level resulting from subsequent tenders

A report commissioned and published by the Directorate of
Public Roads, ViaNova Plan and Trafikk AS covers an analysis of
the price level of contracts in December 2003 (the “ViaNova
Report”). The ViaNova Report shows that a number of transi-
tional operation and maintenance contracts
transferred to
Mesta AS were subject to public tenders in January 2003. One
of the conclusions in the report was that the cost level of the
transitional contracts which have been subject to public tenders
during 2003 appear to be about 32 % below the original cost
level of
transferred to
Mesta AS.

comparable

transitional

contracts

In relation to questions regarding this report the Norwegian
authorities have answered that reduced prices were expected in
the future and that the Public Road Administration did not
enter into re-negotiations for purposes of obtaining a price
reduction in respect of the (remaining) transitional contracts.
According to the authorities, it was in any event not an option
to review the transitional contracts following the results of this
report as this would infringe public procurement regulations. In
this context the authorities have also explained that “there is a
wide gap between the bids as the market needs to be established and it
is the first time that this type of contract is used in Norway. Hence all
parties have to learn and identify the correct price level partly by

(3) Enclosure 26 to the letter dated 1 November 2004 from the Norwegian
authorities to the Authority. The overview is enclosed in a letter dated
13 November 2002 entitled: “Kontrakter som tildeles Produksjonsavde-
lingen uten konkurranse i 2002”.

(4) The figures represent the values remaining at the point in time the
to
contracts were transferred from the Production Department
Mesta AS.

(5) Referred to as “Regionsvise anslag for funksjonskontrakter”.
(6) Veidekke ASA has submitted comments in the form of observations.

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20.12.2007

calculating uncertainties involved in four to five years contracts carried
out in difficult weather situations. The difference between some of the
bids and later bids are up to a 100 % taking into account the lowest
and highest bids which is an indication of an immature market” (1).

The Norwegian authorities have submitted an overview of the
prices resulting from tendering out operation and maintenance
contracts between 2003 and 2006. The amounts represented in
the overview submitted by the Norwegian authorities are (with
some discrepancies) similar to those stated in an Excel spread-
sheet submitted by Veidekke ASA which also includes a table
comparing the winning (i.e. lowest) offer in each tender proce-
dure with the prices at which the contracts were transferred.
The comparison submitted by Veidekke ASA shows that in
respect of contracts tendered out in 2003 to 2006 the resulting
winning prices were generally lower
than the prices at
which the contracts were previously transferred to Mesta
AS. Moreover, the overview also shows that the prices submitted
in offers by Mesta AS (itself) in subsequent tenders are lower
than the prices at which the contracts have been transferred to
Mesta AS (2):

Tender
year

Winning price
(million NOK)

2003

1 226,6

2004

1 605,2

2005

1 857,1

2006

7 455,5

Amount by which
contract transfer
price exceeds
winning price
(million NOK)

Amount by which
contract transfer
price exceeds
Mesta AS' tender
offers
(million NOK)

94

328

760

948

67

282

563

900

The overview of operation and maintenance contracts put up
for public tender between 2003 and 2006 submitted by the
authorities shows that Mesta AS won 14 out of 24 contracts
tendered out
In 2004 Mesta AS won 13 out of
25 contracts while in 2005 Mesta AS won 20 out of
29 contracts. In 2006 Mesta AS won 21 out of 30 contracts (3).
This means that out of a total of 108 contracts Mesta AS won
68 contracts which equals about 62,7 %.

in 2003.

E. Previous price examinations and experience of

the

Public Road Administration

The Norwegian authorities have explained that prior to the
establishment of Mesta AS the Norwegian Parliament supported
five test/pilot contracts which the Public Road Administration
had planned to put up for public tender. The authorities have
explained that the resulting prices were used to evaluate this
type of contract internally (both in the period before and after
the decision to establish Mesta AS in 2001). The prices have,
however, not been used as a basis for fixing the prices of the
transitional contracts. Upon queries by the Authority of the
reason for this, the Norwegian authorities have explained that

(1) Answer provided in Section 2.2.3(b) (question 6) of the letter dated
10 November 2005 from the Norwegian authorities to the Authority.
(2) The prices set out in the Excel sheet have been calculated into annual
prices by Veidekke ASA in order to allow for a comparison between
them and the price submitted in tender offers.

(3) The figures deviate slightly from those submitted by Veidekke ASA.

it had been decided that the value of the transitional contracts
should be determined on the basis of the cost base for the
contracts.

According to the authorities the winning prices of the five test/
pilot contracts were as follows:

Bærum (1998) five years: NOK 74 940 000

Nedre Romerike (1999) five years: NOK 56 000 000

Ibestad Dyrøy (1999) four years: NOK 30 418 400

Lågendalen (2000) four years: NOK 45 706 323

Våler og Åsnes (2001) five years: NOK 39 018 023.

the price while with respect

In December 2000 the Public Road Administration issued a
report in which it examined the competitiveness of the opera-
tion and maintenance services of the Production Department (4).
The report contains preliminary results of August 2000 and the
ability to compete has been calculated by identifying the relation
between the calculated costs of a contract and the agreed price.
In the case of the contracts of the Production Department the
costs represented 94 % of
to
contracts entered into by private entrepreneurs the costs repre-
sented 71 % of the price. It appears that the test/pilot cases
formed the basis for coming to this conclusion. On page 7 of
the report the Bærum contract is listed as having an average
annual value of NOK 15 million as a result of the public tender.
This figure is a result of price per km of 125 000 × 120 km
road which equals NOK 15 million (or NOK 75 million during
five years) (5). The Nedre Romerike contract is listed in the
report with an annual value of NOK 11,2 million. The price per
km is 50 000 × 198 km road which equals NOK 9,9 million
(or NOK 49,5 million during five years) (6).

that an analysis had been carried out

Aside from this, it appears, from questions posed by the trans-
port committee in the Parliament to the Ministry of Transport
in 1999-2000 concerning the situation of
the Public Road
in
Administration,
Akershus which showed that the price level of the operation
and maintenance contracts was 20-25 % above those of the
private contracts (7). Moreover, in a press release dated 17 April
2001 the Public Road Administration refers to the fact that a
comparison between, on the one hand, four contracts under
which maintenance and operation services were provided by
private operators, and on the other hand, contracts under which
the Production Department carried out corresponding services,
showed that the lowest price offer amongst the private providers
was about 15-20 % lower than that of the Production Depart-
ment.

(4) “Rapport nr. 110 “Produksjonsavdelingens konkurranseevne Drift og vedlike-

hold” Statens vegvesen Akershus”.

(5) The details regarding the road length and price per km is derived from a
report on a meeting between the Transport Committee of
the
Parliament and the association for asphalt entrepreneurs dated
19 October 2000.

(6) There is, however, some discrepancy in the price of the Nedre Romerike
contract reflected in the report and the price submitted by the
Norwegian authorities.

(7) “Spørsmål

fra Samferdselskomiteen om St. meld. nr. 46 (1999-2000)
Nasjonal transportplan 2002-2011”; “Spørsmål 28: Konkurransesituasjonen
mellom Statens vegvesens produksjonsvirksomhet og den private asfalt-
bransjen”. The question (No 28) and answer appear in Innst. S. No 119
(2000-2001) of 9 February 2001, p. 183. The question formed part of
the background for the recommendation of the Transport Committee
concerning St. meld. nr. 46 (1999-2000) which was approved on
29 September 2000.

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F. The transitional contracts and the opening balance

not involve registering a title document and there is therefore
no obligation to pay document duty or registration fee.

Upon queries by the Authority as to whether the value of the
transitional contracts have been reflected in the opening balance
of Mesta AS, the Norwegian authorities have stated that the
transitional contracts and all future contracts have been reflected
in the opening balance. In this regard the authorities have stated
that: “[t]he transitional contracts have been reflected in the opening
balance of Mesta AS through their contribution to future cash flow as
an element in the valuation of the business as a going concern.” but
that the transitional contracts constituted only a small part of
this value. In this context reference has been made to a previous
statement that “[t]he ongoing operations of Mesta have been evalu-
ated based on discounted future cash flows and an interest rate of
6,7 %. The
real value of operations has been established to
NOK 600 million. The estimated real value has been allocated to the
assets and the valuation of the assets stated in the proposal to the
opening balance reflects their real value” (1).

Furthermore,
the Norwegian authorities have stated that as
revenues from the “contracts must be entered as income in the
account gradually as they produce revenues for the company.” the
contracts “are included in the cash flow which form the basis for the
valuation of the assets and as such reflected in the opening balance.”.

2.5. Exemption from document duty and registration fee

According to Section 3(2) of the Mesta Act, real estate trans-
ferred to Mesta AS have been exempted from the payment of
document duty and registration fee.

In terms of legislation on document duty and registration fee
the main rule is that when ownership of real estate is transferred
a title document must be issued (“formell overskjøtning” or “hjem-
melsoverføring”). The transfer of ownership in a title document
may be registered in the real estate registry in Norway (“Eien-
domsregisteret”) (2), but there is no obligation to do so. However,
registration of ownership to property in the real estate registry
ensures that any third party can verify who is the owner of the
property and in this manner protects the real owner from
allowing, third parties to transfer title to his property to others
in good faith. The registration of the issuance of a title docu-
ment
transfer of ownership triggers the
payment of (i) document duty of 2,5 % of the value of the prop-
erty; and (ii) registration fee of fixed rate of NOK 982 per docu-
ment (3). The new title holder must pay the duty (4).

in the context of

If the registration does not involve registering the issuance of a
title document there is no obligation to pay either document
duty or registration fee. For example, if only the name of the
owner of the real estate has been changed, the registration does

the legal

the so-called continuity principle: One circular

Exemption from document duty and registration fee may be
granted by reference to the continuity principle which is a
term that covers situations where the acquiring company takes
over
the transferring
rights and obligations of
company. Two circulars lay down principles on the application
of
(“First
Circular”) issued by the Ministry of Justice on 25 May 1990
(G-37/90) was replaced by another circular (“Second Circular”)
issued by the Ministry of Justice on 21 June 2005 (G 06/2005).
Under the First Circular it was only where ownership would be
transferred in the context of mergers between limited liability
companies that an exemption from document duty and registra-
tion fee would be granted by reference to the continuity prin-
ciple. However, the Second Circular broadened the scope to
cover both mergers, de-mergers and conversions undertaken on
the basis of corporate legislation which is based on the conti-
nuity principle.

According to the Norwegian authorities and Section 3(2) of the
Mesta Act (5) any real estate pertaining to the Production
Department which was transferred to Mesta AS was processed
in the real estate registry (and in other public registers) as a
name change. Hence no document duties or registration fees
have been paid by Mesta AS.

2.6. Trade in maintenance and construction activities

for construction includes a
While the Norwegian market
number of Norwegian operators (6)
it appears from offers
submitted in open public tenders in Norway that market opera-
tors also include international participants in the EEA such as
Lemminkäinen Norge AS, Skanska Norge AS and NCC
Construction AS (7). Moreover, operators on the Norwegian
construction market are active in other EEA countries, such as
the construction company, Veidekke ASA, which is active both
in Denmark (via Hoffmann A/S) and in Sweden (via Veidekke
Sverige AB).

3. COMMENTS BY THE NORWEGIAN AUTHORITIES

3.1. Restructuring costs

The Norwegian authorities have argued that the grant of an
amount of up to NOK 395 million for purposes of maintaining
membership in the State Pension Fund (“SPK”) was necessary
because continued membership of the SPK scheme is a burden
imposed upon the company by the State. In order to protect the
State's investment the costs should be covered by the State.

(1) Letter dated 1 November 2004 from the Norwegian authorities to the
Authority. Another similar statement appears in a letter dated
6 October 2006 from the authorities to the Authority: “The transitional
contracts and all future contracts were reflected in the opening balance through
the present value per 1 January 2003 of their estimated contribution to the
estimated future cash flow in Mesta.”.

(2) The Real Estate Registry contains information from “Tinglysningsregis-
teret” or “Grunnboken” and “GAB-registeret (Grunneiendommer, Adresser og
Bygninger)”.

(3) Section 7(1) of Law No 59 of 1975 on document duty and Law No 86

of 1982 on court fees.

(4) Section 2-6 of the Regulation on Document Duty, Ministry of Finance,

16 September 1975 as amended.

(5) Section 3(2) of the Mesta Act (cf. footnote 33) concerns the transfer of
ownership to real estate from the Public Road Administration to
Mesta AS.

(6) Section 3.3 of St. prp. nr. 1 Tillegg nr. 1 (2002-2003). It appears that
the total market for construction and building in Norway accounts for
approximately NOK 130 billion per year. The construction market and
those parts of the building market which are relevant for the newly
established company accounts for approximately NOK 42 billion (of
which operating and maintenance work accounts for NOK 12 billion
while investment work accounts for NOK 30 billion).

(7) According to Section 2.1 of St. prp. nr. 1 Tillegg nr. 1 (2002-2003) the
total turnover of the Production Department was NOK 6,55 billion for
the year of 2001.

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With respect to the costs related to moving, commuting and
renovation of machines, the Norwegian authorities have argued
that the State, as an owner, should logically cover such costs in
investor principle. The
accordance with the private market
authorities have further argued that when an owner spins off a
part of its business and transfers it into a separate entity, it is
normal that the owner covers the costs related to measures such
as the transfer of archives to the new entity. It would be a
burden on Mesta AS to cover such costs itself and it is therefore
not an advantage for Mesta AS to receive compensation for this
purpose. Hence in the present case the State paid for the costs
while it was both practical and efficient to let Mesta AS handle
the implementation of the relevant measures.

The Norwegian authorities have further argued that the State
funded the renovation of machines because discarded machines
and machines not compatible to the company's business (which
constituted part of
the contribution in kind) constituted a
burden on the company. The Norwegian authorities have
argued that if one compares the situation to a situation in which
a private company was to take over the Production Department,
the surplus machines and other production facilities would have
led to a discount for the buyer or a demand for compensation
for taking on such a liability.
It was therefore necessary to
protect the State's investment and logical that the costs inflicted
on Mesta AS for taking over machines and other production
facilities not compatible to its business should be covered by the
State. The State could have chosen another model, namely to
sell surplus machines and taken responsibility for cleaning up
discarded sites itself.

More in general the authorities have pointed out that in order
to ensure that the State only covered costs that were necessary
to achieve an effective restructuring process, Mesta AS estab-
lished written internal instructions on how to account for the
relevant restructuring costs. When each business unit had identi-
fied items considered as “restructuring costs” it was assessed
whether they could qualify as such on the basis of the internal
criteria. The Chief Financial Officer in Mesta AS has been
instructions have
responsible for controlling that the internal
been complied with. The company's auditor controlled whether
the company's accounting practice in respect of the restruc-
turing costs was in compliance with the State's objective of only
covering necessary costs.

3.2. Transitional contracts

In general the Norwegian authorities maintain that the transi-
tional contracts were necessary because the State “has a
responsibility for keeping the public roads open and in good
repair” and that at the time no private operator was able to
carry out the type of work. The authorities have moreover
argued that had the contracts been made subject to open public
tenders (i.e. exposed to competition) Mesta AS would have been
the only supplier which possessed the resources, geographical
presence and other qualifications required to be able to submit
bids on many of the contracts. Mesta AS could therefore have
won them all and thereby obtained a monopoly. A monopoly
situation would not meet the objective of the reorganisation as
outlined by the Norwegian Authorities. The Norwegian authori-
ties have further argued that from the point of view of the
Public Road Administration the act of putting a significant
amount of existing and future projects out for public tenders
requires new competence and resources for purposes of drafting
contract terms. In this context the authorities have also argued

that since Mesta AS could not cut down on staff and machinery
as of 1 January 2003 it was not possible to tender all contracts
prior to that date.

Specifically with respect
to the operation and maintenance
contracts the Norwegian authorities have pointed out that it did
not seem prudent to reduce the four years period during which
Mesta AS took over the operation and maintenance contracts.

rates,

In the context of answering questions from the Authority of
whether the transitional contracts were transferred to Mesta AS
at market
the Norwegian authorities explained that
although prices in the relevant market are volatile the trend,
that prices are reduced below that of the transitional contracts,
was difficult
the time, considering that many
elements influence the price (just like it is difficult to foresee
whether the current prices will remain stable over the next
years). The price reduction is argued by the authorities to
demonstrate that the authorities are about to achieve the objec-
tives of the reorganisation of the Production Department of the
Public Road Administration.

to foresee at

3.3. Exemption from document duty and registration fee

The Norwegian authorities have argued that the manner of
proceeding in the present case (which escapes the obligation to
pay document duty or registration fee) constitutes a general
practice based on the application of the “continuity principle”
which is in line with the treatment accorded to all other State
restructurings that have previously taken place. The Norwegian
authorities have further argued that
should the Authority
consider that this way of proceeding constitutes an exemption
from the general rules, the exemption — based on the conti-
nuity principle — is justified by the nature or general scheme of
the tax system.

II. APPRECIATION

1.

PROCEDURAL REQUIREMENTS

Pursuant to Article 1(3) of Part I of Protocol 3 to the Surveil-
lance and Court Agreement, “the EFTA Surveillance 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 Norwegian authorities have not notified the Authority of
any of the measures taken in relation to the transfer of the
activities of the Production Department to Mesta AS. Therefore,
in the event that the Authority comes to the conclusion that
Mesta AS has
received State aid within the meaning of
Article 61(1) of the EEA Agreement the Norwegian authorities
will be considered not to have respected their notification obli-
gation pursuant to Article 1(3) of Part I of Protocol 3 to the
Surveillance and Court Agreement.

The grant of State aid within the meaning of Article 61(1) of
the EEA Agreement which has not been notified constitutes
unlawful State aid within the meaning of Article 1(f) in Part II
of Protocol 3 to the Surveillance and Court Agreement.
It
follows from Article 14 in Part II of Protocol 3 to the Surveil-
lance and Court Agreement that the Authority shall decide that
unlawful aid which is incompatible with the State aid rules
under the EEA Agreement must be recovered from the benefici-
aries unless it would be contrary to a general principle of law.

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2. THE PRESENCE OF STATE AID

2.1. State aid within the meaning of Article 61(1) of the

EEA Agreement

Article 61(1) of the EEA Agreement reads as follows:

“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”.

To be termed State aid, within the meaning of Article 61(1) of
the EEA Agreement a measure must meet the following four
cumulative criteria: The measure must (i) confer on recipients an
economic advantage which is not received in the normal course
of business; (ii) the advantage must be granted by the State or
through State resources and must (iii) be selective by favouring
certain undertakings or the production of certain goods; and
(iv) distort competition and affect trade between Contracting
Parties.
is examined whether these four
cumulative criteria are met in the present case.

In the following it

2.2. Economic Advantage

Restructuring and other reorganisation measures

(i) Restructuring measures

Mesta AS has received funding from the State for purposes of
the costs related to three types of pension packages offered to
employees transferred from their previous State employment to
Mesta AS. The funds cover (i) the costs related to early pension
packages offered between 1 January 2003 and the end of 2005;
(ii) the additional costs of paying pension contributions corre-
sponding to that of a civil servant (beyond those paid for an
ordinary pension scheme) between 1 January 2003 and the end
of 2007; and (iii) the costs involved in maintaining employees'
entitlement to a special (early) retirement age.

In order to determine whether the three above mentioned
measures involve an economic advantage the Authority must
examine whether the costs of such measures may be considered
as normally included in the budget of an undertaking.

From a general point of view financial obligations arising from
the application of labour legislation or collective agreements to
provide unemployment benefits or pension schemes constitute
the normal costs of a company and hence any relief from such
obligations are normally considered as State aid (1). If this were
not the case, a company could receive the benefit of the work
carried out by its employees without, however, paying the full
costs of the terms on which the company has employed them.

(1) See for example paragraph 62 of Section 3.2.6 of the State Aid Guide-
lines on aid for rescuing and restructuring firms in difficulty and Case
C-251/97, France v Commission, [1999] ECR I-6639, paragraph 40.

If this approach is followed in the present case the financial
obligations arising out of the three pension regimes established
by the Norwegian authorities in 2003 in respect of Mesta AS
could be considered to constitute the “normal costs” that Mesta
AS has to bear and any relief from such costs would be equiva-
lent to an economic advantage.

this

that

observes

the Authority

approach
However,
does not take into account the terms on which the previous
employer i.e. the State, employed the relevant workers and the
State liability arising from such arrangements. For example, the
costs of paying additional pension contributions at a civil
servant level (measure ii), may be considered to be a liability of
the State because it is a direct consequence of the employees'
previous State employment as civil servants (2). Since the State
financing is limited to the difference between the costs of an
ordinary pension scheme and the costs of a civil servant
scheme, the State pays only for its own liability in the form of
the additional costs resulting from the previous working rela-
tionship. If the relevant costs are considered to be a liability of
the State the provision of State funding to cover such costs
would not constitute an economic advantage.

costs

the public

funding of

conditions as

status and associated employment

In the context of a privatisation the European Commission has
considered that
relating to
employees' previous civil servant status did not constitute aid as
“[t]he State (as an employer) had the obligation to compensate its
employees for the changing working conditions as the employees would
loose their
civil
servant” (3). Moreover, in a case concerning the transfer of public
transport activities to an independent State-owned undertaking
(Combus A/S) for purposes of providing transport operations
on a commercial basis, the Court of First Instance has ruled that
the aim of a replacement of the privileged and costly status of
officials with the status of employees (comparable to that of
other similar undertakings) is to free the company from a struc-
tural disadvantage it would have in relation to its private sector
competitors (4). Based on this judgment it could be maintained
that if the State or a State entity has employed individuals by
giving them a civil servant status (or a status similar to that) a
State intervention in favour of such employees, which will allow
the company to take on workers on conditions comparable to
that of private company workers, does not constitute an advan-
tage for the company.

A similar argument could be made with respect to the State's
funding of special retirement age packages since the entitlement
to retire at a specific (early) age was offered in the context of the
State employment and is hence therefore also a liability incurred
by the State. At first sight this argument seems, however, not to
be valid with respect to early retirement packages as this offer
was made available by Mesta AS as part of the new employment
terms of 1 January 2003. However, to the extent that employees
accepting early retirement offers would have been part of a tran-
sitional regime for purposes of maintaining the civil servant
status, early retirement packages constitute simply a (cheaper)
alternative for the State to get rid of its civil servant liability.
Under those circumstances the above argument could also be
made with respect to early pension packages as the relevant
costs substitute the State's civil servant liability.

(2) This may be considered in line with the approach adopted in the
European Commission's decision Poste Italiane (OJ L 282, 19.10.2002,
p. 29).
(3) Decision of

the European Commission No N 483/2000 — The

Netherlands; Sale of engineering group South Holland.

(4) Case T-157/01, Danske Busvognmænd v Commission, [2004] ECR II-917.

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to whether

Due to the abovementioned considerations, the Authority has
doubts as
the abovementioned three pension
regimes offered by the State to Mesta AS in the context of
restructuring involves an economic advantage. The Authority
invites the Norwegian authorities to provide any additional
information it may consider
this
matter.

for purposes of

relevant

the Authority observes that

With respect to the funding provided by the State to Mesta AS
in order to cover costs incurred for purposes of “moving” and
“commuting”
the obligation to
cover such costs have not arisen from the previous working
relationship between the State and the employees. On the
contrary, based on the description of the measures which are
covered, the costs result from a range of incentives offered to
previous leading or administrative personnel in the Public Road
Administration (such as, reimbursement for costs in relation to
the purchase of domiciles, commuting, double rent of domiciles,
inspection trips, etc.)
in order to induce them to take up
employment at Mesta AS.

As referred to above, the normal financial obligations of an
undertaking include as a starting point, any labour costs a
company incurs
for purposes of employing or attracting
employees. While the most common incentive to attract
employees is salary, other incentives, such as compensation for
disadvantages related to the geographic location of employees'
domiciles (such as the financing of moving and commuting) are
no more or no less a tool used by a company to obtain and pay
desired employees. The Authority has therefore taken the preli-
minary view that the reimbursement by the State to Mesta AS
of the costs incurred under the items entitled “moving” and
“commuting”
advantage which
Mesta AS would not have received in the normal course of its
business.

an economic

constitutes

With respect to the State funding received by Mesta AS to cover
costs for purposes of moving offices and support and mainte-
nance offices from the Public Road Administration to the new
offices of Mesta AS as well as reorganising former offices and
sorting out old archives for purposes of establishing new
archives (covering a total amount of NOK 50,2 million), such
costs include not only costs for purposes of cleaning out old
offices at the Public Road Administration but also the prepara-
tion and upgrading of new offices for Mesta AS as well as instal-
ling electronic and physical archives in Mesta AS.

The Authority considers that while it may be argued that costs
related to cleaning out old offices of the Public Road Adminis-
tration relate to the work previously carried out by the latter,
the nature of the costs for purposes of preparing and upgrading
offices for the use of Mesta AS are similar to costs incurred for
purposes of establishing a new company. These costs should
thus be borne by the new company. The preliminary conclusion
of the Authority is therefore that the costs related to moving
offices (including support and maintenance offices) as well as
the transfer of archives are costs which should be partly borne
by the State and partly by the new company itself. The
Norwegian authorities are therefore invited to provide the
Authority with information allowing the Authority to allocate
costs to the specific measures undertaken under each cost item.

As to the cost item of renovation of machines, it is the owner,
in this case the State, which is responsible for covering the costs
of discarding machinery which can no longer be used. The fact

that the authorities did not itself discard such machinery but
chose to transfer the machinery to Mesta AS and reimburse the
costs incurred for the disposal does not change this assessment.
Nonetheless, if the inclusion of unusable machinery in the assets
transferred to Mesta AS has had a negative impact on the value
assessment of all assets, this manner of handling the disposal of
unusable machinery may result in the grant of State aid via the
rate of return required by the State. This is further explained
below in the Section entitled “Contribution of assets”. In the light
this the Norwegian authorities are invited to inform the
of
Authority of whether
the unusable or obsolete machinery
formed part of the machinery subject to the value assessment
carried out by the auditors.

(ii) Other reorganisation measures — compensation for salary

With respect
to the compensation for salary the State has
financed the relevant costs by means of a capital contribution to
Mesta AS in the form of equity.

As a preliminary point, the Authority observes that the manner
in which costs may be funded are irrelevant from the point of
view of the application of the State aid rules. Hence, the fact
that the Norwegian authorities have chosen to finance the costs
for compensation of salary in the form of equity does not influ-
ence the assessment as to whether the State's financing of the
relevant costs may constitute State aid. As may be recalled, the
reason that the Norwegian authorities chose to fund via equity
(rather than by grants) was simply to induce the company to
spend the funds for alternative instruments for reducing the
work force than the compensation for salary arrangement.

Secondly, with respect
to whether State financing of costs
incurred for purposes of offering compensation for salary
constitutes an economic advantage, it could be argued that in
line with the approach set out above, the financial obligations
arising out of pension arrangements established by the State
constitutes the “normal costs” that the company has to bear. If
this approach is followed Mesta AS has received an economic
advantage in the form of funds to cover the costs related to
compensation for salary since this regime was established and
imposed on Mesta AS as of the date of its establishment.

However, the entitlement to compensation for salary is one of
the rights derived from the civil servant status previously held
by the relevant employees of the Public Road Administration
and could therefore be argued to be the liability of the State as a
direct consequence of its previous working relationship with the
employees. If this approach is taken the State funding of such
costs would not constitute an economic advantage.

The Authority has not taken a final position on how to proceed
in this matter. In the meantime the Norwegian authorities are
invited to submit any further information of relevance for the
issue.

With respect to the fact that the funds intended for compensa-
tion for salary were spent on alternative measures to reduce the
work force, namely the termination and pension packages as
well as packages for leave of absence, such measures merely
represent acknowledged alternatives to compensation for salary.
Indeed,
if the State funding earmarked for compensation for
salary is used to cover costs of alternative work force reducing
measures, intending to achieve the same aim as compensation

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for salary,
it does not alter the assessment of whether the
company has received an economic advantage via funding for
compensation for salary. In this regard it is recalled that the
State's intention of funding compensation for salary by means
of equity was simply to bring down overall costs by inducing
the company to use cheaper alternative work force reducing
instruments.

Finally, with respect to eventual surplus funding, the Authority
understands that out of the total amount of NOK 512 million
the “remaining” amount of NOK 211 million remains to form
part of the company's equity. However, out of the amount of
NOK 301 million expected to be spent for compensation of
salary and alternative measures, NOK 143 million has already
been spent, while NOK 158 million represents only the esti-
mated amount for future liabilities. Should this amount not be
spent in full, or at all, any remainders will also form part of the
equity.

In view of the fact that the Norwegian authorities have not yet
decided on how to deal with eventual surplus funding in rela-
tion to the above mentioned measures, at the current stage it is
difficult
to address the question of whether any remaining
equity may constitute a capital injection which could have been
made by a private investor (under the rules governing the
private market investor principle) (1).

In the light of the above considerations the Norwegian authori-
ties are invited to inform the Authority on how the authorities
will proceed in this matter.

(iii) Surplus funding

The Norwegian authorities have not requested Mesta AS to
repay any funding in excess of the amounts spent for purposes
of the restructuring costs. If it turns out that the State funding
is in excess of the restructuring costs the Norwegian authorities
must inform the Authority of the extent of the excess funding
and how the authorities intend to proceed in this respect.

Contribution of assets

(i) The application of the private market investor principle

the Transparency Directive (2).

Mesta AS qualifies as a public undertaking within the meaning
of
In determining whether a
financial
transaction by the owner of a public undertaking
involves an economic advantage the Authority applies the
“market economy investor principle” which has been confirmed
several times by the European Court of Justice. According to
capital or
this principle,

authorities

contribute

if public

(1) According to this principle, if public authorities contribute capital or
contribution in kind to one of its undertakings on conditions which
would be acceptable to a private market investor no economic advan-
tage is involved. The principle is explained in more detail below in the
following Section.

(2) Commission Directive 80/723/EEC of 25 June 1980 on the transpar-
ency or financial relations between Member States and public undertak-
ings (the “Transparency Directive”) (OJ L 195, 29.7.1980, p. 35) as last
amended by Directive 2005/81/EC (OJ L 312, 29.11.2005, p. 47). The
Directive is incorporated into the EEA Agreement by means of Article 1
of Annex XV.

contribution in kind (e.g. assets) to one of their undertakings on
conditions which would be acceptable to a private market
investor no economic advantage is involved (3). Conversely,
if
money or other assets are contributed to public undertakings
on conditions which are unacceptable to a private market
investor an economic advantage is involved (4). This is normally
considered to be the case where the structure and future
prospects of the company is such that a normal return (by way
of dividend payments or capital appreciation) by reference to a
comparable private enterprise cannot be expected within a
reasonable time (5). For example, if the rate of return is fixed on
the basis of the value of assets, which have been assessed at
below market value, the return may not be equivalent to what a
private investor would consider acceptable in similar circum-
stances.

The Authority observes that in a case like Mesta AS, there is
considerable uncertainty with respect to the value of fixed assets
to be recorded in the opening balance. The Authority observes
also that valuations have been carried out by independent audi-
tors/experts and on the basis of different methods and combina-
tions of methods.

The Authority observes furthermore that the value of
fixed
assets, transferred by the Norwegian authorities to Mesta AS,
was adjusted considerably downwards compared to previous
estimates. This is the case both with respect to value assessments
of the assets on an individual basis and as a result of
the
discounted cash flow analysis which assumed substantial nega-
In this
tive cash flows during the first years of operation.
context the Authority observes that the downward reduction of
machinery was made on the basis of NOK 747 million which
was merely an estimated preliminary value.

this value was

As regards real estate, the value identified in the most recent
OPAK report (of October 2002) was NOK 395 million. Later, in
the December 2002 report (6)
reduced to
NOK 331 million and the final opening balance fixes a value of
NOK 281 million. It is not clear on what basis the final value of
real estate was fixed. Aside from this, the Authority observes
that
the value of real estate determines the actual amount
payable in document duty and registration fee and that any such
charges should be calculated on the basis of the relevant valua-
tion principles laid down in the relevant rules.

The Authority recalls that the cash flow analysis estimated the
value of employed capital at NOK 600 million. On the basis of
this analysis it was decided to reduce the value of assets with

(3) See the State Aid Guidelines on the application of State aid provisions
to public enterprises in the manufacturing sector. The guidelines apply,
however, also to other sectors. The principle is explained in Section 3
which provides that “[t]o ensure respect for the principle of neutrality the aid
must be assessed as the difference between the terms on which the funds were
made available by the State to the public enterprise, and the terms which a
private investor would find acceptable in providing funds to a comparable
private undertaking when the private investor is operating under normal
market economy conditions (hereinafter “market economy investor principle”)”.
(4) See first indent paragraph 6(c) of the State Aid Guidelines on rules on

State ownership of enterprises and on aid to public enterprises.

(5) Section 7.1 of the State Aid Guidelines on the application of State aid
provisions to public enterprises in the manufacturing sector. This
manner of applying the market economy investor principle has been
confirmed by the Court of Justice; see joined Cases T-228/99 and
T-233/99, Westdeutsche Landesbank Girozentrale, Land Nordrehein-West-
falen v Commission, [2003] ECR II-435, at paragraphs 254 and 258.

(6) Entitled “Opening balance Supplement: Value assessment of assets”.

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NOK 200 million of which the entire amount was allocated to
machinery. Still, in the final opening balance the overall value of
fixed assets was fixed at NOK 977 million of which machinery
alone was fixed at a value of approximately NOK 600 million
(NOK 594 million). The logic behind this manner of proceeding
is not entirely clear to the Authority.

Moreover, as discussed in the Section below, there is a question
as to whether the transitional contracts were transferred to
Mesta AS at above market values. To the extent that this took
place, the additional value could, from an accounting point of
view, have been included as an asset in the opening balance.
The consequence of this would have been that the value of
other assets would be reduced correspondingly which could
potentially lead to very low calculated values of all machinery
and real estate.

Finally, the Authority observes that the December 2002 report
(by Deloitte & Touche) comments that the equity ratio is very
high — which was partly a result of the substantial liquidity
injection of NOK 1 600 million.

On the basis of these considerations, the Authority is uncertain
as to whether the value of fixed assets set out in the final
opening balance of Mesta AS involves an economic advantage
within the meaning of Article 61(1). The Authority therefore
invites the Norwegian authorities to further clarify the uncer-
tainties outlined above.

Transfer of transitional contracts

One example of the application of the private market investor
principle is that if the State sells land and buildings at market
price, State aid is presumed not to be involved since the State
has behaved like a private market investor (1). However, the
private market investor principle applies equally when the State
is purchasing goods and services. Thus, if the State enters into a
contract for purposes of having services provided by a market
operator, no State aid will be presumed to be involved if the
State behaves as a private market investor by paying the market
price. Conversely, if the price is higher than the market price
the contract may involve an economic advantage for the service
provider, corresponding to the difference between the market
price for providing similar services and the price at which such
services are provided under the contract. One way for the State
to obtain an indication of the market price is to subject work
contracts to a non-discriminatory public tender. However, this is
not the only manner in which the market price may be estab-
lished and the Authority will take into account all circumstances
of
the transaction for purposes of determining whether a
market price has been applied.

In the present case a number of the service contracts, entered
into between the Public Road Administration and the Produc-
tion Department for purposes of the provision of services by
the latter to the former, were transferred from the Production
Department to Mesta AS in the sense that Mesta AS replaced
the Production Department in its capacity as service provider.
The Authority must therefore examine whether the prices at
which the contracts have been “entered into” between the Public
Road Administration and Mesta AS reflect market prices.

(1) The State Aid Guidelines on State aid elements in sales of land and

buildings by public authorities.

(i) Construction contracts

At the current stage it is not clear to the Authority how the
prices of the construction contracts transferred to Mesta AS
have been fixed. The Authority observes that the Norwegian
authorities have explained that the original prices of construc-
tion contracts resulted from “negotiated” prices and have been
fixed on the basis of the price level resulting from submitting
other construction contracts to public tenders. The authorities
have also stated that the price of construction contracts was
subject to an ex-post adjustment mechanism in order to take
account of fiscal requirements. It seems that this mechanism
involved adjusting prices so as to ensure a deficit if a profit had
been made in previous years (and vice versa). According to the
authorities this price was based on market terms. Finally, the
authorities have stated that at the point in time of the transfer
of contracts to Mesta AS the contracts were adjusted to take
into account new fiscal and regulatory requirements. However,
it is not clear whether those adjustments changed the actual
price of the contracts.

The Authority finds reason to question whether the prices in
the construction contracts transferred to Mesta AS reflected
market price. Hence,
the Authority requests the Norwegian
authorities to clarify the manner in which the prices of the
construction contracts transferred to Mesta AS have actually
been fixed. In this regard it would be helpful if the authorities
could clarify,
the price level
resulting from parallel public tenders have played in fixing the
prices. The Authority would also appreciate it if the Norwegian
authorities could confirm that the price at which the construc-
tion contracts were
about
NOK 2 960 million, and, in the negative, provide the correct
amount.

transferred to Mesta AS is

to which extent

in particular,

(ii) Operation and maintenance contracts

The price at which the maintenance and operation contracts
have been transferred is not clear to the Authority. According to
the overview submitted by the Norwegian authorities it should
be NOK 5 750 million. However, the Authority is uncertain
whether this is the correct amount in view of the fact that a
corresponding figure has been referred to as being an estimate
only. Moreover, according to the spreadsheet submitted by
Veidekke ASA, the total value of operation and maintenance is
NOK 5 885,2 million.

to whether

With respect
the operation and maintenance
contracts were transferred to Mesta AS at market price, the
Authority has taken note of the fact that the ViaNova report
revealed that the cost level of the transitional contracts which
have been subject to subsequent public tenders during 2003,
appeared to be about 32 % below the original cost level of
comparable transitional contracts transferred to Mesta AS. This
could indicate that the operation and maintenance contracts
may not have been fixed at market prices. Moreover,
the
comparison submitted by Veidekke ASA showing that the price
at which the contracts were transferred to Mesta AS was gener-
ally higher than the price at which similar contracts were subse-
quently won is another indication that the contracts transferred
to Mesta AS may not have been fixed at market value.

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The Norwegian authorities have argued that the market was not
developed or the prices of similar contracts were not identified
by the market. In the opinion of the Authority, this argument
could be questioned in view of the fact that the Norwegian
authorities — prior to the establishment of Mesta AS — had
obtained prices resulting from five test/pilot projects. Some of
these formed the basis for establishing that the cost share of the
contract price was about 23 % points higher in the case of the
Production Department than in the case of contracts entered
into by other market operators. One example of this was the
price identified for the Bærum contract (with a value of approxi-
mately NOK 75 million) (1). Moreover,
it seems that a price
analysis was carried out in Akershus prior to 2000 showing
that the price level of the operation and maintenance contracts
was about 20-25 % above that of the contracts entered into by
market operators.

In such circumstances it seems as if a price level had been iden-
tified by the market for comparable contracts prior to 1 January
2003 and that the Norwegian authorities were not unaware that
the price level identified by the market was considerably lower
than the prices at which the contracts were transferred. More-
over, even after the issuance of the first public tenders — upon
which the authorities must have become aware of the price
difference — the authorities did not take steps to renegotiate
the contracts. Finally, the fact that Mesta AS has subsequently
won the majority of the public tenders seems to show that the
company applies a different price structure than the one applied
for purposes of fixing the prices at which the contracts were
transferred.

The Norwegian authorities have stated that they have a responsi-
bility to ensure that the public roads are open and in a good
State and that a private operator would not be able to carry out
the contract work under the transitional contracts. According to
the authorities this means that if the contracts were tendered
out at that time, Mesta AS would have won them all. However,
the Authority considers that the fact that the tenders in respect
of the pilot/test projects appeared to be carried out without
problems seems to indicate the opposite.

The above could indicate that the operation and maintenance
contracts have not been transferred at market price to Mesta
AS. Hence,
in the light of the comments set out above the
Authority invites the Norwegian authorities to explain further
why the prices of
transitional operation and maintenance
contracts were not fixed on the basis of the prices resulting
from the test cases. The Norwegian authorities are also invited
to explain their argument that the public procurement rules
would be infringed if the contracts transferred to Mesta AS were
to be renegotiated for purposes of fixing the price. Finally, the
authorities are invited to confirm whether the price at which
the operation and maintenance contracts were transferred to
Mesta AS is NOK 5 750 million, and, in the negative, provide
the correct price.

Document duty and registration fee

An economic advantage may be provided through a reduction
including
in the undertaking's tax burden in various ways,

(1) The price level listed in the report for the Nedre Romerike contract
does not correspond entirely to the price which the Norwegian authori-
ties have submitted and the Authority invites the Norwegian authorities
to provide clarifying information in this respect.

a reduction in the tax base or total or partial reduction in the
amount of tax, or a deferment, cancellation or even special
rescheduling of tax debt (2). The real estate transferred from the
Production department to Mesta AS was registered as a name
change implying that Mesta AS benefits from the protection
offered by registration in the real estate registry while being
exempted from paying document duty and registration fees,
normally falling due in the case of transfer of title to property.
Mesta AS received therefore an economic advantage which it
would not have received during the normal course of business.
This is in line with the Authority's conclusion in the Entra case
adopted on 14 December 2005 (3).

On 14 December 2005 the Authority adopted a negative deci-
sion in which it considered that the exemption granted in July
2000 to the company Entra AS (in the context of a transfer of
real estate to Entra from the State) from paying document duty
and registration fee involved State aid which was not compatible
with the functioning of the EEA Agreement (4). In this decision
the Authority considered that the exemption did not form part
of an administrative practice qualifying as a general measure as
the application of the continuity principle to the reorganisation
of companies was not an administrative practice at the time:
Until late June 2005 the application of the continuity principle
was limited to cases of the transfer of ownership in the context
of mergers between limited liability companies. Only as of
21 June 2005 was its scope of application broadened to other
transactions. Therefore the Authority found that the exemption
was not justified by the nature or general scheme of the tax
system in Norway.

2.3. Presence of State resources

(i) Restructuring and other reorganization measures

the presence of State resources if

The condition of
fulfilled
because the total amount of estimated restructuring costs of
NOK 1 468 million is intended to be covered by grants
awarded by the Norwegian State between 2003 and 2005 (of
which Mesta AS has received an amount of NOK 993,6 million).
Moreover, the capital injected by the Norwegian authorities as
equity into Mesta AS for purposes of covering the costs of the
temporary salary also represents funds provided by the State.

(ii) The contribution of capital and assets (i.e. machinery, real estate

and contracts)

It appears from the Transparency Directive (5) and the State Aid
Guidelines on Public authorities' holdings' that the provision of
capital to public undertakings involves State resources. In line
with the Commission's decision practice the Authority considers
likewise the investment by the State in the form of contribution
in kind (such as machinery, real estate and contracts) involves
the transfer of State resources (6).

(2) See point 2 of Section 3 of the State Aid Guidelines regarding State aid

measures on direct business taxation.

(3) Decision No 318/05/COL.
(4) Decision No 318/05//COL.
(5) Commission Directive 80/723/EEC. The Directive is incorporated into

the EEA Agreement by means of Article 1 of Annex XV.

(6) See for example Commission Decision 2006/741/EC of 20 October
2004 on State aid implemented by Germany for Landesbank
Schleswig-Holstein — Girozentrale, now HSH Nordbank AG (OJ L 307,
7.11.2006, p. 134).

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(iii) Transfer of transitional contracts

The transfer by the public authorities of a contract for purposes
of the provision of services by a State integrated entity in return
for revenues by the State, to an undertaking, which takes over
the role as a service provider,
involves State resources in the
form of payments by the State for the provision of services.

(iv) Document duty and registration fee

A loss of tax revenue is equivalent to consumption of State
resources in the form of fiscal expenditure. Such State support
may be provided just as much through tax provisions of a legis-
lative nature as through the practices of the tax authorities. By
virtue of its exemption from paying document duty and regis-
tration fee Mesta AS has kept the sums corresponding to the
payment of the relevant duty and fee otherwise payable to the
Norwegian authorities. As the State is therefore foregoing
revenue the exemption involves the transfer of State resources.
This is in line with the Authority's conclusion in the Entra case
adopted on 14 December 2005 (1).

2.4. Favouring certain undertakings or the production of

certain goods

The provision by the State of funds to finance the restructuring
costs as well as any contribution by the State of assets, including
contracts, at a value which is below market value favour one
company only, namely Mesta AS. The measures are therefore
selective in nature.

the time of

to document duty and registration fee,

With respect
the
Authority considers that the circulars issued by the Ministry of
the establishment of
Justice confirm that, at
Mesta AS on 1 January 2003, only mergers could benefit from
the continuity principle which provided for an exemption from
payment of document duty and registration fee. The Second
Circular extended this practice to de-mergers and conversions in
late June 2005; implicitly meaning that such transactions were
not subject to any exemption prior to this point in time. Since
the establishment of Mesta AS took place on 1 January 2003,
and cannot be considered as a merger, the exemption estab-
lished by means of the First Circular for mergers is not applic-
able in the case of Mesta AS.

Hence, the exemption of the latter from payment of the docu-
ment duty and registration fee is selective which is not justified
by the nature or the logic of the system. This is also in line with
the conclusion reached in the case of Entra of 14 December
2005 (2).

2.5. Distortion of competition and effect on trade between

Contracting Parties

The international character within the EEA of the construction
market is evidenced both by the fact that Norwegian construc-
tion operators are active in other EEA countries (such as
Veidekke ASA), while international companies originating in
other EEA countries than Norway are active on the Norwegian
construction market (such as Lemminkäinen Norge AS, Skanska
Norge AS, NCC Construction AS). In such circumstances, the

(1) Decision No 318/05/COL.
(2) Section 1.2.1 in Part II of Decision No 318/05/COL.

contribution of
funds to one operator on the construction
market, Mesta AS, will strengthen and reinforce its position
compared to other undertakings which are located in Norway
or in other EEA countries and competing in the construction
(and related) businesses (3). The funding will amongst others
enable Mesta AS to offer lower priced bids for purposes of
wining construction contracts in competition with its competi-
tors.

On this basis, the Authority considers that the contribution of
financial support to Mesta AS (either in the form of grants or in
the form of an exemption from a duty) will distort competition
and affect trade.

2.6. Conclusion

As appears from the above, the Authority has doubts as to
whether the measures identified above involve State aid.

3. COMPATIBILITY OF THE AID

With respect to Article 61(2) of the EEA Agreement, it appears
that none of the exceptions under this Article apply in the
present case as none of the measures possibly involving State
aid in favour of Mesta AS has been aimed at the objectives listed
in those provisions.

With respect to Article 61(3)(a) of the EEA Agreement, a State
aid measure is considered compatible with the functioning of
the EEA Agreement under this provision when it is designed to
promote the economic development of areas where the standard
of living is abnormally low or where there is serious underem-
ployment. However, the measures which may involve State aid
to Mesta AS are neither destined for such areas nor are they
designed for this purpose. This provision is therefore not rele-
vant.

The exception in Article 61(3)(b) of the EEA Agreement does
not apply to the present case either since any State aid granted
to Mesta AS is not intended to promote the execution of an
important project of common European interest nor to remedy
a serious disturbance in the economy of Norway.

The exception laid down in Article 61(3)(c) of the EEA Agree-
ment which provides that State aid may be considered compa-
tible with the common market where it facilitates the develop-
ment of certain economic activities or of certain economic areas
may be relevant.

For purposes of assessing the compatibility of the restructuring
and reorganisation measures — except
for those related to
moving, commuting, moving offices and the transfer of archives
— the Commission's decision practice is relevant. In the context
of assessing compatibility of pension schemes, the Commission
has considered that a partial relief of the financial burden on a
company resulting from pension rights, acquired by employees
in the past, and exceeding those provided under generally
applicable pension regimes, could be declared compatible. The
Commission's conclusion in this regard was motivated by the

(3) See in this respect Case 730/79, Philip Morris v Commission, [1989]
ECR 2671, at paragraph 11 where it is stated that “[t]hen State financial
aid strengthens the position of an undertaking compared with other undertak-
ings competing in intra-Community trade the latter must be regarded as
affected by that aid”.

20.12.2007

EN

Official Journal of the European Union

C 310/27

fact that the pension regime in question removed previously
existing barriers to entry to the respective market and that the
financing of additional pension rights (acquired at a point in
time when the market was still closed) affected the companies'
competitiveness once the market was open to competition.

In the present case the relevant restructuring and reorganisation
costs all stem either directly or indirectly from the fact that the
previous employees of the Public Road Administration held a
civil servant status. Although the market for road construction
has been open for competition for a long time, the Production
Department was not on the market as it merely served the State
in-house. Since the specific status of employees of the Public
Road Administration was therefore granted in a framework
which was not exposed to competition, the related costs (of the
restructuring and reorganisation costs) imposed on Mesta AS
could be considered to affect the latter's competitive position in
a market open for competition. This could therefore be a reason
to consider potential State aid to cover the extra costs of such
pension obligations as compatible.

As regards the State funding of the remaining restructuring and
organisation costs, the Authority has not been able to identify
elements showing that such funding would facilitate the devel-
opment of certain economic activities or of certain economic
areas.

With respect
to the compatibility under Article 61(3)(c)
of potential State aid as a result of the contribution of assets
(i.e. under evaluation of machinery, real estate and transitional
contracts), any aid involved would be operating aid. The
Authority has not identified elements showing how such poten-
tial aid would facilitate the development of certain economic
activities or of certain economic areas. Likewise have the autho-
rities not shown this with respect to any potential aid involved
in the prices of
transferred to
Mesta AS.

the transitional contracts

As to aid involved as a result of an exemption from the
payment of document duty and registration fee in favour of
Mesta AS, the Authority considers that it constitutes operating
aid and, in line with its position taken in its decision adopted
on 14 December 2005, that such aid cannot be found compa-
tible on the basis of Article 61(3)(c) of the EEA Agreement.

Finally, at the current stage the Authority does not possess suffi-
ciently detailed information to identify the existence of any
public service costs. The Norwegian authorities have stated that
they have a responsibility to ensure that the public roads are
open and in a good State without claiming, however, that the
conditions of Article 59(2) of the EEA Agreement are fulfilled.
The Authority has therefore doubts that any State aid in favour
of Mesta AS may be declared compatible under Article 59(2) of
the EEA Agreement and invites the Norwegian authorities to
submit further information in this regard should this argument
be of relevance.

Article 61(1) of the EEA Agreement and whether the measures
may be considered as compatible with Article 61(2) or (3) of
the EEA Agreement.

II of
Consequently, and in accordance Article 4(4) of Part
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 of the Surveillance and Court
Agreement. The decision to open proceedings is without preju-
dice to the final decision of the Authority, which may conclude
that the measures in question are compatible with the func-
tioning of the EEA Agreement or do not involve State aid at all.

In 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
the Norwegian authorities to submit their comments within one
month of the date of receipt of this Decision.

receipt of

In light of the foregoing consideration, the Authority requires
the
that, within one month of
Norwegian authorities provide all documents, information and
data needed for assessment of
the measures in favour of
Mesta AS and requests the Norwegian authorities to forward a
copy of this letter to the potential aid recipient of the aid imme-
diately,

this decision,

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 Norway regarding the restructuring and reorganisation
measures in favour of Mesta AS, the contribution of assets and
the transfer of transitional contracts to Mesta AS as well as the
exemption of Mesta AS from paying document duty and regis-
tration fee.

Article 2

are

authorities

The Norwegian
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.

requested,

pursuant

Article 3

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

4. CONCLUSION

Article 4

Based on the information submitted by the Norwegian authori-
ties, the Authority has doubts as to whether the measures in
favour of Mesta AS involve State aid within the meaning of

The EC Commission shall be informed,
in accordance with
Protocol 27 (d) of the EEA Agreement, by means of a copy of
this Decision.

C 310/28

EN

Official Journal of the European Union

20.12.2007

Article 5

Other EFTA States, EC Member States, and interested parties
this Decision in its
shall be informed by the publishing of
authentic language version, accompanied by a meaningful
summary in languages other
than the authentic language
version, in the EEA Section of the Official Journal of the European
Communities and the EEA Supplement thereto, inviting them to
submit comments within one month from the date of publica-
tion.

This Decision is addressed to the Kingdom of Norway.

Article 6

Only the English version is authentic.

Article 7

Done at Brussels, 18 July 2007.

For the EFTA Surveillance Authority

Kristján Andri Stefánsson

College Member

Kurt Jaeger

College Member

20.12.2007

EN

Official Journal of the European Union

C 310/29

ANNEX A

Final opening balance of Mesta AS on 1 January 2003

Fixed assets

977

Intellectual property

Self-developed systems

Permanent operational assets

Computer — hardware, etc.

Real estate and buildings

Other fixed assets (*)

Machinery and equipment

Stock/inventory

Claims

Customer claims

Other claims

Bank contribution and cash

Liquidity

Injected equity

Share Capital

Premium fund (**)

Set aside for future obligations

Guarantees

Current assets

1 709

Equity

Total assets

2 686

1 900

Liabilities

786

Cleaning obligations relating to the environment

Pension liabilities

Other liabilities

Short-term debts

Supplier debt

Public charges due

Accrued wage payments

Other short-term debt

“Materialforekomster”

(*)
(**) “Overkursfond”’

Total equity and liabilities

2 686

23

47

281

32

594

103

6

1 600

1 000

900

60

37

319

24

6

85

242

13