CELEX: E1999C0112
Language: en
Date: 1999-06-04 00:00:00
Title: EFTA Surveillance Authority Decision No 112/99/COL of 4 June 1999 introducing new guidelines on State aid to the motor vehicle industry and amending for the seventeenth time the Procedural and Substantive Rules in the Field of State Aid

Important legal notice

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E1999C0112

EFTA Surveillance Authority Decision No 112/99/COL of 4 June 1999 introducing new guidelines on State aid to the motor vehicle industry and amending for the seventeenth time the Procedural and Substantive Rules in the Field of State Aid  

Official Journal L 112 , 11/05/2000 P. 0075 - 0090

EFTA Surveillance Authority DecisionNo 112/99/COLof 4 June 1999introducing new guidelines on State aid to the motor vehicle industry and amending for the seventeenth time the Procedural and Substantive Rules in the Field of State AidTHE EFTA SURVEILLANCE AUTHORITY,Having regard to the Agreement on the European Economic Area(1), in particular to Articles 61 to 63,Having regard to the Agreement between the EFTA States on the establishment of a Surveillance Authority and a Court of Justice(2), in particular Article 1 of Protocol 3 thereof,Whereas under Article 24 of the Surveillance and Court Agreement the EFTA Surveillance Authority shall give effect to the provisions concerning State aid;Whereas under Article 5(2)b of the Surveillance and Court Agreement the EFTA Surveillance Authority shall issue notices and guidelines on matters dealt with in the EEA Agreement, if that Agreement or the Surveillance and Court Agreement expressly so provides or if the EFTA Surveillance Authority considers it necessary;Recalling the Procedural and Substantive Rules in the Field of State Aid(3) adopted on 19 January 1994 by the EFTA Surveillance Authority(4);Whereas on 15 July 1997, the European Commission decided to propose to the Member States, as an appropriate measure under Article 93(1) of the EC Treaty, the introduction of a new Community framework for State aid to the motor vehicle industry (OJ C 279, 15.9.1997);Whereas a strict discipline shall be maintained on aid to the motor vehicle industry, and a uniform application of the EEA State aid rules is to be ensured throughout the European Economic Area;Whereas according to point II under the heading "GENERAL" at the end of Annex XV to the EEA Agreement, the EFTA Surveillance Authority is to adopt, after consultation with the European Commission, acts corresponding to those adopted by the Commission, in order to maintain equal conditions of competition;Having consulted the European Commission;Whereas the EFTA Surveillance Authority has, in multilateral meetings on State aid held on 6 June and 19 November 1997, consulted the EFTA States on the introduction of the new guidelines on the basis of Article 1(1) of Protocol 3 to the Surveillance and Court Agreement;Whereas renewal of specific notification obligations for the industry constitutes an appropriate measure under Article 1(1) of Protocol 3 to the Surveillance and Court Agreement and requires the agreement of the EFTA States concerned,HAS ADOPTED THIS DECISION:1. Chapter 23 of the State Aid Guidelines shall be replaced by the text in Annex I to this Decision.2. Annex VI of the State Aid Guidelines shall be replaced by the text in Annex II to this Decision.3. The EFTA States shall be informed of this Decision by means of a letter, together with a copy of the Decision, including Annex I and II, requesting them to signify their agreement to the new guidelines within one month, insofar as they involve appropriate measures according to Article 1(1) of Protocol 3 to the Surveillance and Court Agreement.4. The Decision, including Annex I and II, shall be published in the EEA Section of and the EEA Supplement to the Official Journal of the European Communities.5. This Decision shall be authentic in the English language.Done at Brussels, 4 June 1999.For the EFTA Surveillance AuthorityKnut AlmestadPresident(1) Hereinafter referred to as the EEA Agreement.(2) Hereinafter referred to as the Surveillance and Court Agreement.(3) Hereinafter referred to as the State Aid Guidelines.(4) Initially published in OJ L 240, 15.9.1994 and in the EEA Supplement thereto No 34 on the same date, last amendment (16th) adopted by Decision No 372/98/COL of 16 December 1998 (published in OJ C 111, 22.4.1999 and in the EEA Supplement thereto on the same date).ANNEX I"23. AID TO THE MOTOR VEHICLE INDUSTRY(1)23.1. Utility and scope of the guidelines(a) Historical background1. Because of its considerable importance in the fields of employment, trade and technological development, the motor vehicle industry is generally regarded as a strategic industry. In the period 1970 to 1980, the Governments of several European States injected massive amounts of aid into the modernisation and development, or indeed the survival, of their domestic car industry(2). This action caused a subsidy race among the States concerned and led to a number of distortions of competition. As a result, the Commission introduced a Community framework for State aid to the motor vehicle industry in 1989(3) (hereinafter 'the framework') with the twofold aim of increasing the transparency of aid flows and imposing strict discipline in the granting of such aid in order to reduce distortion of competition in the Community industry to a minimum. At that time, the industry in Europe had not experienced surplus production capacity; however, intra-Community trade in vehicles and engines was extensive and alone ensured that the industry was a sensitive one. Following the entry into force of the EEA Agreement, corresponding rules were adopted by the EFTA Surveillance Authority(4).2. The Commission's framework was adopted as an appropriate measure on the basis of Article 93(1) of the EC Treaty, now, after amendment, Article 88(1), to be applied for three years(5), after which the Commission would review its scope and utility. In December 1990, the Commission decided to extend the framework subject to review within two years. In December 1992, the Commission again decided not to modify the framework and to extend it until a further review. Following an action brought by Spain, the Court of Justice of the European Communities ruled in its judgment in Case C-135/93(6) that the decision should be regarded as a limited extension, until a future review of the framework which, was to take place no later than 31 December 1994. In the light of that judgment, the Commission proposed to the Member States on 5 July 1995 that the framework be reintroduced by 1 January 1996 at the latest in the form of an appropriate measure, and that it include certain changes such as raising the notification threshold to ECU 17 million. The Commission also informed the Member States that it might re-examine, possibly revise or abolish the framework after two years, depending on the status of a possible horizontal framework (see the rules in chapter 26 of the present Guidelines)(7).3. In 1996, the European Commission carried out an in-depth study of the framework with the help of independent consultants which concluded that the framework was generally effective and recommended certain adjustments concerning, in particular, the notification thresholds, the definition of the sector and the methods of carrying out the cost-benefit analysis. On the basis of the report, the Commission decided in 1997 to introduce a new framework, again as an appropriate measure under Article 93(1) of the EC Treaty.(b) Conditions in the sector4. The motor vehicle industry is of great economic importance in the EEA. Experts reckon that as may as 10 jobs depend on each job in that industry; it employs, directly and indirectly, nearly 10 % of the active population within the EEA. Furthermore, the industry is experiencing faster globalisation of its markets. European manufacturers and their component suppliers are faced with a steady increase in competitors on their traditional markets; their response is to maintain or strengthen their commercial plant locations on the prime export markets, often setting up local production plants in central Europe, Asia or South America.5. However, production capacity utilisation rate in the European motor vehicle industry has been below 80 % since 1993 among most of the major European manufacturers(8). It is unlikely that the rate will improve significantly in the medium term(9), as the motor vehicle industry will form part of a general context of weak growth on a mature and cyclical market.6. Much progress has been made in recent years by European industries, for instance in the area of gains in productivity and quality of manufacture; they are thus approaching the best world standards. However, efforts to catch up with the United States or Japan entail a stronger emphasis on intangible investments, especially in R &  D and training, the development of industrial cooperation, modernisation of the role of public authorities, creation of a stable and favourable economic climate and a guarantee of effective competition(10). Adjusting the framework to bring it into line with the new economic situation is fully consistent with those targets.7. On the basis of Article 1(1) of Protocol 3 to the Surveillance and Court Agreement, the Authority has therefore decided to propose to the EFTA States that they give prior notification, pursuant to Article 1(3) of the same Protocol, of the most significant aid cases in the motor vehicle industry as from 1 September 1999, in accordance with the rules defined below.23.2. Rules on notification23.2.1. Definition of the industry1. The 'motor vehicle industry' means the development, manufacture and assembly of 'motor vehicles', 'engines' for motor vehicles and 'modules or sub-systems' for such vehicles or engines, either direct by a manufacturer or by a 'first-tier component supplier' and, in the latter case, only in the context of an 'overall project'.(a) Motor vehicles2. The term 'motor vehicles' means passenger cars, vans, trucks, road tractors, buses, coaches and other commercial vehicles. It does not include racing cars, vehicles intended for off-road use (for example, vehicles designed for use on snow or for carrying persons on golf courses), motorcycles, trailers, agricultural and forestry tractors, caravans, special purpose vehicles (for example, firefighting vehicles, mobile workshops), dump trucks, works' trucks (for example, fork lift trucks, straddle carrier trucks and platform trucks) and military vehicles intended for armies.(b) Engines for motor vehicles3. The term 'motor vehicle engines' means compression and spark ignition engines as well as electric motors and turbine, gas, hybrid or other engines for motor vehicles.(c) Modules and sub-systems4. A 'module' or a 'sub-system' means a set of primary components intended for a vehicle or engine which is produced, assembled or fitted by a first-tier component supplier and supplied through a computerised ordering system or on a just-in-time basis.5. Logistical supply and storage systems and subcontracted complete operations which form part of the production chain, such as the painting of sub-assemblies, should likewise be classified among these modules and sub-systems.(d) First-tier component suppliers6. A 'first-tier component supplier' means a supplier, whether independent or not, supplying a manufacturer, sharing responsibility for design and development(11), and manufacturing, assembling or supplying a vehicle manufacturer during the manufacturing or assembly stage with subassemblies or modules. As industrial partners, such suppliers are often linked to a manufacturer by a contract of approximately the same duration as the life of the model (for example, until the model is restyled). A first-tier component supplier may also supply services, especially logistical services, such as the management of a supply centre.(e) Overall project7. A manufacturer may, on the actual site of the investment or in one or several industrial parks in fairly close geographical proximity(12), integrate one or more projects of first-tier component suppliers for the supply of modules or sub-systems for the vehicles or engines being produced. An 'overall project' means one which groups together such projects.8. An overall project lasts for the life of the vehicle manufacturer's investment project.9. An investment of one first-tier component supplier is integrated within the definition of a global project if at least half the output resulting from that investment is delivered to the manufacturer concerned at the plant in question.23.2.2. Aid to be notified1. The purpose of prior notification of EFTA States' plans to grant aid is to allow the Authority to check as thoroughly as possible that aid envisaged for the motor vehicle industry is compatible with the competition rules of the EEA Agreement.(a) Aid under an approved scheme2. All aid which the public authorities plan to grant to an individual project or an overall project under authorised aid schemes for a firm or firms operating in the motor vehicle industry must, in accordance with Article 1(3) of Protocol 3 to the Surveillance and Court Agreement, be notified before being granted if either of the following thresholds is reached:- nominal amount of the investment project(13) (total cost of the project(14)): EUR 50 million,or- total gross aid for the project(15), irrespective of the source, form and objectives of the measure: EUR 5 million.3. The Authority then analyses the projects of the manufacturer and each first-tier component supplier in order to determine the compatibility of each of the aid measures envisaged.(b) Ad-hoc aid4. Any aid which the public authorities intend to grant outside an approved scheme to one (or several) undertaking(s) operating in the motor vehicle sector defined above must be notified in advance under Article 1(3) of Protocol 3 to the Surveillance and Court Agreement, unless it complies with the de minimis rule for State aid in Chapter 12 of the present Guidelines.(c) Rescue and restructuring aid for firms in difficulty5. Any rescue and restructuring aid which public authorities plan to grant to one (or several) undertakings operating in the motor vehicle industry must be notified in advance under Article 1(3) of Protocol 3 to the Surveillance and Court Agreement, unless it complies with the de minimis rule in Chapter 12 of the present Guidelines.(d) Notification6. State aid covered by the notification obligation of the present rules must be notified on a special form. Given that the working language of the EFTA Surveillance Authority is English, the form to be used is the English language version of the form in the Community framework, printed in the Official Journal of the European Communities C 279, 15.9.1997, 17-44(16), supplemented by an appropriate form to be obtained from the Competition and State Aid Directorate of the EFTA Surveillance Authority.7. EFTA States should attach any relevant supporting documents to the notification forms. As regards regional aid in particular, studies on the final plant location site should be provided wherever available.23.2.3. Ex post control and assessment1. In its decision, the Authority may require ex post monitoring and assessment of aid already granted, the amount of detail varying according to the case and the potential distortion of competition.2. In any event, a copy of the final aid contract concluded by the EFTA State and the undertaking receiving the aid must be sent to the Authority immediately after signing by the parties.3. In order to enable the Authority to check that its decision has been complied with, the EFTA States, with the assistance of the aid recipients, must submit an interim report on the aid payments or a copy of the interim report on performance of the aid contract, followed by a final report on the objectives, in terms of timetable, investments and compliance with the specific conditions imposed by the EFTA State, and the actual achievements at the end.23.2.4. Annual report1. EFTA States are requested to provide the Authority with an annual report giving data on all aid, whatever its form, granted in the past year to undertakings in the motor vehicle industry. Aid which does not have to be notified must also be mentioned in the annual report.2. Annual reports, in the form indicated in Annex VII to these Guidelines, must be sent by 1 April of the year following the reference year.23.2.5. Entry into force and duration1. These guidelines will enter into force on 1 September 1999; the preceding guidelines will serve as a basis for the assessment of aid proposals notified until that date.2. These guidelines will apply for two years. Before the end of that period, the Authority will decide whether to extend them, in particular in the light of the status of the multisectoral framework set out in Chapter 26 of the present guidelines.23.3. Guidelines for assessment of aid1. The assessment of aid must take account of general economic and industrial factors, sectoral considerations and regional, environmental and social factors. The Authority does not intend, however, to impose an industrial strategy on the sector, it is preferable for a strategy to be defined within the sector and the market. The Authority's aim continues to be to make sure that motor vehicle manufacturers in the EEA operate in a climate of fair competition. To that end, the Authority endeavours to limit distortions of competition caused by certain aid measures and to maintain a competitive environment which boosts competitiveness and productivity in the sector.2. Thus the criteria which the Authority uses to assess aid vary according to the objectives of the aid in question. It checks, however, that in every instance the aid granted is both proportional to the gravity of the problems to be resolved and is necessary for the realisation of the project. Both tests, proportionality and necessity, must be satisfied if the Authority is to authorise State aid in the motor vehicle industry. All forms of aid described above are assessed directly on that basis.3. A notification of a project may contain various types of aid; each one will be analysed on the basis of its own rules of assessment.23.3.1. Rescue and restructuring aid for firms in difficulty1. Rescue and restructuring aid is assessed under the guidelines on such aid set out in Chapter 16, without prejudice to paragraph 23.3.1.2. The Authority ensures in particular that restructuring aid, like rescue aid, is in principle a one-off operation.2. As structural overcapacity in the motor vehicle industry is set to continue in the medium term, the Authority will prohibit State aid which is aimed at a net increase in production capacity. In addition, the Authority will usually require a reduction in installed capacity. The Authority also considers it necessary for the reduction in production capacity to be proportional to the intensity of the aid, being the amount of the intensity of the aid divided by the cost of restructuring.23.3.2. Regional aid1. The motor vehicle industry may benefit from regional aid to assist new plants and the extension of existing ones in the assisted areas within the EEA, thus making a valuable contribution to regional development by creating or safeguarding often highly skilled jobs and through significant indirect effects.2. Prior notification allows the Authority to compare the advantages from the standpoint of regional development with any unfavourable consequences for the sector as a whole. The purpose of the comparison, in the form of a cost-benefit analysis, is not to deny the essential contribution made by regional aid to regional development within the EEA, but to ensure that other factors affecting the common interests of the EEA Contracting Parties, such as development and the general competitiveness of the industry in Europe, as well as respect for fair competition, are also taken into consideration.(a) Necessity3. In order to demonstrate the necessity for regional aid, the aid recipient(17) must clearly prove that it has an economically viable alternative location for its project or sub-part(s) of a project. If there were no other industrial site, whether new or in existence, capable of receiving the investment in question within the group, the undertaking would be compelled to carry out its project in the sole plant available, even in the absence of aid.4. The existence of a viable alternative defines the 'mobility' of a project; mobility may if necessary be demonstrated by investors(18) on the basis of studies they have carried out in order to identify the final location. That alternative site is not always located within the EEA. However, the Authority verifies the likelihood of the alternative, particularly when the relevant markets are considered.5. Thus, to authorise regional aid, the Authority studies the geographical mobility of the notified project, after checking that the region in question is eligible for aid under EEA law. No regional aid may be authorised for a project or parts of a project that are not geographically mobile.6. In demonstrating the mobility of a project, where the alternative location is not in the EEA or in one of the countires on central and eastern Europe (CEEC), an investor must prove, notably by means of a location study, that at least one commercially viable alternative to the location chosen has been considered in the EEA or in one of the central and east European countries (CEEC). Otherwise, the location chosen will be considered to be the best one. Consequently, only regional aid may be authorised whose intensity does not exceed the threshold (defined in section 23.3.2.c) below which it is not necessary to carry out a cost-benefit analysis.7. Regional aid intended for modernisation and rationalisation, which is generally not mobile, is not authorised in the motor vehicle industry (see section 23.3.7).8. In view of the characteristics of industrial activity in the motor vehicle industry, entire production lines that are obsolete are sometimes dismantled. Such occurrences, although rare, may involve an element of mobility inasmuch as a firm is often faced with the choice of adapting the existing plant or closing it and setting up a new plant elsewhere, either in the form of an extension or on a greenfield site. A radical change in production structures of this nature on the existing site is called a 'transformation'(19), it may be eligible for regional aid.9. Finally, transformation is not the same as 'restructuring', the latter being applicable to firms in financial difficulties.(b) Eligibility of costs10. The Authority determines whether or not costs relating to the mobile aspects of a project are eligible; eligibility is defined by the regional scheme applicable in the assisted region concerned.(c) Proportionality of aid11. When considering the mobile aspects of a project, the Authority satisfies itself that the planned aid is in proportion to the regional problems it is intended to help resolve. To that end, the cost-benefit analysis method is used. For the sake of transparency, a copy of the standard notification forms for a cost-benefit analysis is attached to the notification forms to be used for aid to the motor vehicle industry (see paragraph 23.2.2.6). The cost-benefit analysis method is described in Annex VI.12. Until the Authority has approved the regional maps in accordance with the new regional aid guidelines, which it should do by 1 January 2000, if the intensity of the planned regional aid is 10 %(20) or less of the regional ceiling, a cost-benefit analysis will not be required by the Authority. This is because a mobile project located in an assisted region always suffers from minimum disadvantages. After that date, and in so far as the new regional maps have lower ceilings, the minimum intensity triggering a cost-benefit analysis will be 20 % of the new regional ceiling.13. A cost-benefit analysis compares, with regard to the mobile elements, the costs which an investor would bear in order to carry out its project in the region in question with those it would bear for an identical project in a different location, which makes it possible to determine the specific handicaps of the assisted region concerned. The Authority authorizes regional aid within the limit of the regional handicaps resulting from the investment in the comparator plant.14. In the cost-benefit analysis, the comparator plant must be located in the EEA or in the countries of Central and Eastern Europe (CEEC) if the purpose of the investment is the manufacture of vehicles and parts of vehicles intended largely for the European markets(21).15. If the cost-benefit analysis takes as comparator a location in another assisted area within the meaning of Article 61(3) of the EEA Agreement or Article 92(3) of the EC Treaty, any difference in the regional aid rate is neither an advantage nor a handicap for the cost-benefit analysis; it is regarded as neutral by definition.16. As stated in section 23.2.2.d ('Notification') of these guidelines, studies on the choice of plant location must be submitted to the Authority whenever available in order to facilitate processing of the case and speed up the final decision.17. Operational handicaps are assessed over three years in the case of expansion projects and five years in the case of new plants on greenfield sites. The Authority believes that these periods are generally consistent with the time needed to overcome start-up difficulties and reach target operational levels in each case.18. New plant means new plant on a new site which has not yet been developed. In such cases, compared with plant expansion, undertakings are faced with the following specific problems: lack of adequate infrastructure, lack of organised logistics, lack of a workforce specifically trained for the needs of the undertaking and lack of a subcontracting structure. If, however, such services can be provided by a unit of the same group located in close proximity, the project is regarded, in accordance with Commission Decision 96/666/EC, as an expansion, even if it is actually built on a greenfield site(22).19. In the case of an overall project, the first-tier component suppliers concerned may each benefit from the same regional handicap percentage as the vehicle manufacturer, as calculated by the cost-benefit analysis, no individual cost-benefit analysis being applied to them. However, if a first-tier component supplier taking part in an overall project considers it has the specific regional handicaps that would give it a higher aid intensity, it may request a separate cost-benefit analysis the results of which will be applied irrespective of the outcome.(d) Analysis of the effects on the industry and on competition20. In view of the sensitive character of the motor vehicle industry, the Authority proposes to study the effects on competition of every investment project, looking in particular at variations in production capacity(23) on the relevant market in the group concerned(24).21. For these reasons, an adjustment (top-up) will be calculated, as follows:>TABLE>22. The top-up is expressed in terms of percentage points to be added to or subtracted from the intensity allowable according to the cost-benefit analysis.23. The impact on the industry is 'high' where the ratio between the capacity of the group after the investment (C(f)) and the capacity of the group before the investment (C(i)) is 1,01 or over.24. The impact is 'moderate' where 0,99 &lt;  C(f)/C(i) &lt;  1,01 or where a new segment is created on the relevant market.25. The impact is 'negligible' where C(f)/C(i) is 0,99 or under.26. The distinction between Article 61(3)(a) regions and Article 61(3)(c) regions is needed in order to take better account of the difficulties encountered in each region and to increase the incentive effect of regional aid on investors.(e) Determination of aid intensity27. The authorized aid, expressed as a gross grant equivalent, may not exceed the total of the amounts calculated in stages (a) to (d) (mobility, eligible investments, identification of regional handicaps, possible top-up) and usually discounted and expressed as a percentage of eligible investment so that they can be compared with the gross grant equivalent of the assisted region. The aid may not exceed the regional ceiling applicable to the type of undertaking concerned.23.3.3. Research and development aid1. Aid for R &  D will be assessed under the relevant rules on such aid in Chapter 14.2. The Authority carries out a thorough analysis of the breakdown of costs between the different categories of R &  D; investors must clearly distinguish industrial research and genuine precompetitive development from the introduction of new technology in the form of productive investment or competitive development.23.3.4. Investment aid for innovation1. Innovation means the development and industrialisation in the EEA and the countries of central and eastern Europe (CEEC) of genuinely or substantially new products or processes, that is products or processes which have not yet been used or marketed by other parties operating in the industry. A genuine innovation carries a risk of failure; the Authority will take account of the scale of this risk when it assesses the intensity of the aid envisaged.2. In general, the European motor vehicle industry needs to improve its competitiveness as compared with its United States, Japanese and Korean competitors. To that end, it should for example improve its ability to innovate in order further to reduce the technological and industrial gap(25).3. Investment aid for innovation will therefore be authorized only in duly justified cases, as an incentive to industrial or technological risk-taking.4. The maximum intensity of such aid is set at 10 % of all eligible costs, corresponding to engineering activities and investments of direct and exclusive relevance to the innovative part of the project.5. An innovative project must concern only one plant location(26) within the same group in the motor vehicle industry; no aid will be granted for parts of the project carried out in other branches of a group.23.3.5. Aid for environmental protection and energy saving1. Aid to combat pollution in general, that is aid granted under the guidelines on State aid for environmental protection (Chapter 15), may be regarded as compatible.2. It should be noted that those guidelines involve complex technical evaluations of such things as the 'ecological' costs incurred by the investor. Moreover, when it assesses the compatibility of aid, the Authority makes a thorough study of the cost savings on energy, raw materials and so on which the investor has secured as a result of the environmental protection component in the project.23.3.6. Aid to vocational training1. The Authority has a generally positive attitude towards training, retraining and reconversion programmes. State aid for such purposes will be scrutinised to ensure that it is not used solely to reduce the costs a firm would normally bear.2. The Authority will soon adopt guidelines on training aid which will also apply to the motor vehicle industry.23.3.7. Aid for modernisation and rationalisation1. Modernisation and rationalisation are essential if an undertaking is to remain competitive on a world market. However, aid for such activities presents a very high risk of distortion of competition and should normally be financed from a company's own funds.2. If an undertaking competing on an international market is unable to finance its own modernisation and restructuring, its ability to compete and its viability will eventually disappear. No aid for modernisation or rationalisation may therefore be granted to undertakings in the motor vehicle industry.23.3.8. Operating aid1. Operating aid creates lasting distortions of competition in sectors such as the motor vehicle industry. No new operating aid will therefore be authorised by the Authority, even in assisted areas. Furthermore, should an EFTA State currently be granting this type of aid under existing schemes, the Authority will suggest, on the basis of Article 1(1) of Protocol 3 to the Surveillance and Court Agreement, that such operating aid benefiting one or several undertakings in the motor vehicle industry be gradually abolished."(1) This chapter corresponds to the Community framework for State aid to the motor vehicle industry (OJ C 279, 15.9.1997).(2) In the period 1977 to 1987, State aid to the motor vehicle industry in the EC, essentially in the form of capital injections or extensive debt write-offs, is estimated at ECU 26 billion. Between 1989, when the framework entered into force, and July 1996, the EC Commission approved ECU 5,4 billion of aid to the industry.(3) OJ C 123, 18.5.1989, p. 3.(4) Chapter 23 of the State aid Guidelines adopted on 19 January 1994 (OJ L 231 and EEA Supplement to OJ 32, 3.9.94).(5) The application of the framework was delayed for the first six months of 1989 pending its approval by 10 Member States, until January 1990 for Spain and May 1990 for Germany; Spain and Germany had originally been opposed to its application.(6) Judgment of 29 June 1995 in Case C-135/93, Spain v. Commission, [1995] ECR I-1651.(7) On 25 April 1997, in Case C-292/95, Spain v. Commission, the Court of Justice annulled the Commission decision of July 1995 to extend, with retroactive effect to 1 January 1995, the framework to 31 December 1995 pending the reintroduction of the framework for a period of two years from 1 January 1996 to 31 December 1997.(8) Commission communication of 10 July 1996 on the European motor vehicle industry (COM(96) 327 final).(9) A survey conducted in the first half of 1996 among all vehicle manufacturers in the EEA revealed that the production capacity utilisation rate in 1995 was 71 %, that is an installed capacity of 18,1 million vehicles as against an annual output of 12,9 million vehicles.(10) See footnote 8.(11) Design and development often take place on the project site of the manufacturer.(12) This proximity could, inter alia, take the form of a fixed link (automated conveyor belt for example) allowing the delivery of modules directly into the car factory.(13) An investment project is usually defined as an investment by an undertaking in new assets that are necessary to set up, expand, modernise or rationalise production facilities on a specific industrial site. An investment project should not be artificially broken down into several sub-projects and/or over several financial years in order to avoid the obligation to notify.(14) The total cost of a project is defined as follows: total expenditure by an undertaking on the acquisition of new tangible and intangible fixed assets which are part of an investment project and will be depreciated (or leased) during their lifetime. Consequently, the cost is equal to the amount of capital invested in a project. The cost of the project may be different from the cost that is eligible for State aid (see paragraph 23.3.2.10).(15) The gross aid is obtained by adding the grants and grant equivalents of the aid envisaged; if aid is granted net of tax, it should be changed into gross equivalent aid by taking account of the tax effect wherever possible.(16) For this purpose the word 'Commission' shall mean 'EFTA Surveillance Authority' and the words 'Member State' shall mean 'EFTA State'.(17) A project put forward by first-tier module or sub-system suppliers that is directly linked to a mobile investment by a motor vehicle manufacturer will by definition be considered mobile itself. A supplier's project may be mobile even if the manufacturer's project is not; the supplier would have to be able to satisfy the Authority on this point.(18) Mobility alone is not always sufficient to establish the necessity for aid; for example, the site chosen may have net competitive advantages in comparison with the alternative proposed by the investor.(19) 'Transformation' means the complete dismantling of bodywork lines (motor vehicles) or power plant lines (engines) and, simultaneously, of the final assembly lines of the plant in question and the setting-up of a new bodywork lines, power plant lines and final assembly lines in an overall production structure that is clearly different from the previous one.(20) See State aid Case N 781/96, Ford Bridgend, OJ C 139, 6.5.1997, p. 4.(21) The study of the mobility of the investment and the cost-benefit analysis may be carried out using different alternative locations.(22) OJ L 308, 29.11.1996, p. 46.(23) Because of the structural overcapacity in the industry.(24) The relevant product market covers the products (and possibly the services) referred to in the investment project and their possible substitutes from the consumer's standpoint (on the basis of product characteristics, prices and intended use) and that of the producer (plant flexibility). The relevant geographic market in principle covers the EEA and the countries of central and eastern Europe (CEEC).(25) The gap can be illustrated by the average time required to build a vehicle: 25 hours in Europe, 22 hours in the United States and 16 hours in Japan (see COM(96) 327 final).(26) Or a small number of sites if different complementary sub-projects take place on a small number of sites.ANNEX II"ANNEX VICOST-BENEFIT ANALYSIS OF AID PROJECTS IN THE MOTOR VEHICLE INDUSTRY1. REGIONAL AID VERSUS DISTORTION OF COMPETITION1.1. Effects on the sectorWhen dealing with EFTA States' proposals to grant regional aid in the automotive sector, the motor vehicle framework establishes that the Authority has to assess the benefits for regional development against possible adverse effects on the sector, such as the creation of important overcapacity.Moreover, in view of the sensitive nature of the motor vehicle sector and the high risk of unwarranted distortions of competition, it is necessary to ensure that the regional aid is in proportion to the regional problems it seeks to redress.The Authority has established an aid ceiling for each of the regional areas covered under Article 61(3)(a) or (c) of the EEA Agreement. However, even when the ceiling for regional aid in the area where the project is to be developed is higher than the aid intensity proposed in favour of an automotive company, the level of regional aid exceeding the actual cost disadvantages, arising for that company in that assisted area, provides a competitive advantage to the aided company vis-à-vis the unaided competitors.The risk of undue distortion of competition is particularly high in the automotive sector because the level of globalisation and the structural overcapacity affecting most manufacturers leads to fierce price competition. This intense competition reduces the profit margins which in turn forces the industry to make permanent cost reductions. Consequently, any overcompensation of regional handicaps may have adverse effects on unaided competitors. The risk of undue distortion of competition is also high because the States and regions concerned are put into competition by multinational automotive companies for the location of large-scale investment projects. Hence, there is a tendency for disproportionate aid allocation to such projects. Such competitive bidding may involve not only regional aid but also other horizontal aid, ad hoc aid and general measures.Consequently, by submitting all cases of regional aid to a strict analysis the Authority aims to limit regional aid to what is strictly necessary to influence the locational choice of economically viable projects in the automotive industry and thereby to avoid unjustifiable distortion of competition.1.2. Balance: how to assess itIn order to assess an EFTA State's proposal for granting regional aid to a car manufacturer for a large and mobile investment project, the Authority wishes to calculate to what extent regional aid relates to the structural handicaps faced by an investor in the assisted area. For this calculation it will base itself on a method called "cost-benefit analysis". This method is based on the study "The effect of different State aid measures on intra-Community competition" by the Motor Industry Research Unit published in 1990(1).The Authority places itself deliberately in the position of the private investor when calculating costs or benefits associated with a particular location. By comparing the investment and operating costs of the chosen location in the assisted area with the best alternative location, the Authority can identify those costs and benefits. The present value of the calculated net incremental cost of the regional site can then be compared with the present value of the proposed regional aid. The balance between those values expressed as percentages of the eligible investment is the subject of a sectoral impact study of the project concerned.2. COST-BENEFIT ANALYSIS AND THE AUTHORITY'S APPROACH2.1. What is cost-benefit analysis?Cost-benefit analysis is, in general, a procedure for evaluating the desirability of a project by weighing its benefits against its cost. Results may be expressed in different ways, including the internal rate of return, the net present value and the benefit-cost ratio. Behind a number of practical approaches based upon the principle of the rationale of a private investor acting under market conditions, cost-benefit analysis has found a wide acceptance amongst private companies and government bodies in the appraisal of major investment projects.2.2. The Authority's approachThe Authority's approach is to use a variant of the cost-benefit analysis model for estimating the net incremental cost resulting for an automotive company from its decision to locate a mobile investment project in a particular regional assisted area instead of the company's best alternative location(2).In the first place, the mobility is ascertained. The automotive group in favour of which the aid is proposed must prove in a clear and convincing way that there is an economically viable alternative location site for its project. This is obviously the case for greenfield projects and expansion projects which do not involve a replacement of existing installations.It is to be noted that if the company has no viable alternative, because of industrial constraints, to carrying out the project in another site, new or already existing, then the regional aid in support of the location choice is not justified because there is no necessity at all for that aid: the automotive group would carry out its project anyway in the only possible existing location. Non-mobile investment projects focus on one of the following objectives: modernisation, rationalisation or replacement.However, on the occasion of a complete model renewal (with or without effects on the plant's capacity) that involves the dismantlement of complete older production lines and their replacement by new ones, the company can make a case for mobility. On that occasion, the company may be tempted to close the site and relocate production. Such radical refurbishment of an existing site will be called a transformation(3) and may justify regional aid. A transformation may increase or decrease the overall capacity of the plant. The alternative to transformation is normally expansion at another existing site or a greenfield project.The existence of the "viable alternative" defines the "mobile" character of the project. The "mobility" requirement is to be demonstrated by the company on the basis of the location studies carried out in order to examine different alternative locations and propose the most advantageous site from those locations. It is important to note that the most attractive location can be placed outside the EEA. In any case, the Authority verifies the rationality of the alternative location, having a special regard to the markets targeted by the company with its investment.In conclusion, in order to assess a regional aid proposal the Authority examines the actual geographical mobility of the notified project. No regional aid can be approved which would not be necessary because the project would not be mobile, in the sense that the company has no real choice of locating the project in any other place.The location study performed by or for the investor will in principle provide all the necessary input for completing the cost-benefit forms. A copy of the original study should also be transmitted to the Authority. All headings for which differences in costs(4) exist between the two sites under consideration can in principle be retained for the Authority's analysis. The sole exceptions to be eliminated are those handicaps for which a specific aid will be granted under a different objective (e.g. training). Another difference may be the number of years taken for the cost-benefit analysis for which the Authority has chosen a uniform period of three and five years (See section 3.3).The cost-benefit analysis provides for a calculation of the net incremental cost associated with the selection of the plant in an assisted area versus the best alternative location. The proportion between the present value of this net incremental cost and the present value of the eligible investment is called the "regional handicap ratio".2.3. Market-impact analysisIn order to establish the effect of regional aid on competitors, the Authority will first define the relevant product market affected by the project concerned at European level, taking into account the prevailing substitutability of demand and supply in the sector. If substitutability is strong between different market segments or niches, the Authority will add those segment or niches to arrive at the relevant market. As such, the Authority does not, for example, make a distinction between most segments of the passenger car market unless the vehicle is sufficiently distinct in its use and production mode (for example, off-road vehicles).As most vehicle producers manufacture their own engines, the Authority has considered that the relevant market for engine production by a vehicle manufacturer is the vehicle market for which the engines are built. However, as concerns component systems or modules which are now also covered by the framework, the Authority is of the view that there is a separate market for each of those component modules. In fact, a car manufacturer will only decide to (continue to) produce a module itself after verification of its cost efficiency against outsourcing that module.In the event of a notification of a global project involving vehicle or engine manufacture as well as the manufacture of the corresponding component modules, the Authority will define the relevant market as the combination of the vehicle market and the markets for the different modules.The effect of regional aid will be assessed in detail and classified according to three categories, namely low, medium or high impact for competitors in the relevant market. Such analysis will be closely related to the changes in capacity and market share generated by the project.The structural overcapacity currently affecting the motor vehicle industry at EEA level has led the Authority to adopt a stricter approach concerning State aid to projects that contribute to an aggravation of this problem, independently of its location in assisted or non-assisted areas. For that reason, the "regional handicap ratio" can be modified by adding or subtracting some percentile points (the so-called "regional top-up").The concept of overcapacity, its verification at group level, and the range of values established for the "regional top-up" are explained in detail in section 3.4.2.4. Technical expert report and confidentialityBoth the availability of a viable alternative location and the calculation of the extra costs and benefits are subject to an independent technical expert report.Because of the sensitiveness of the results of the cost-benefit analysis to the data submitted by the beneficiary company itself, the Authority makes use of an external technical expert report to verify the data submitted by that company. The Authority contracts a consultancy company with expertise in the automotive sector, which is chosen through a call for tenders procedure, subject to the Authority's public procurement procedures.Most of the information and technical data submitted by the beneficiary in the context of the cost-benefit analysis is communicated to the Authority under a strict requirement for confidentiality. The cost-benefit analysis makes use of detailed information on the operating and investment cost of the project and of other confidential information on the company's plans for sales, production and capacity, all of which may be subject to business secrets protected by law. The consultancy company employed by the Authority is subject to contractual provisions against any possible disclosure, facing heavy fines and responsibilities for such an eventuality. The Authority can guarantee also to the beneficiary company that documents marked confidential will not be circulated.3. HOW TO DO IT (AN EXPLANATION OF THE METHOD)3.1. The regional objective versus other objectives of the aided projectBefore starting the analysis, it is important to determine whether the project is only serving a regional objective or also any other objective eligible for aid under the guidelines of the motor vehicle framework. If the project is also aided under other objectives (for example, environmental, R &  D, training), it will be important to ascertain that eligible expenditure and cost-benefit analysis do not involve any of these items since they will be separately aided. The position is somewhat different for innovation when linked to investment. That expenditure can be aided from a regional and an innovation point of view.3.2. Comparison: alternative location of the projectThe identification of the comparator plant for the project, which is a key element of the analysis, is carefully examined by the Authority and can be - as any other information or technical data submitted by the company - challenged by the technical experts:- in principle, the company is requested to supply a full copy of the location study of the project which will provide evidence of the alternative site(s) considered before opting for the selected plant,- if a complete study was not made, the company(5) would have to provide sufficient circumstantial evidence to demonstrate that it has actively pusued an alternative location which would in the short run have been more cost efficient but was not pursued for specific reasons and the Authority's experts would then have to verify this evidence.In the Authority's cost-benefit analysis, the comparator site or benchmark is in principle situated within the EEA or one of the Central and Eastern European countries (CEEC), if the purpose of the investment is the production of vehicles or car components destined, to a large extent, for the European markets(6). In those rare cases where a company is only comparing one European site with a site outside Europe from which it would import the vehicles, the cost-benefit analysis may have to be performed with a hypothetical alternative site. In cases where the company can demonstrate that more than half of the production is to be sold outside Europe, the comparator plant for the cost-benefit analysis can be situated outside Europe.If the comparator site identified by the company is located in another assisted area within the EEA covered by the exemptions provided for in Article 92(3) of the EC Treaty or Article 61(3) of the EEA Agreement, the possible difference between the respective aid ceilings does not constitute an advantage or a disadvantage for the cost-benefit analysis; that difference is regarded as neutral for the final result of the analysis.3.3. Factors taken into account(7)As explained above, all information and technical data submitted by the company are checked and validated by the Authority and its technical experts. General reference data (inflation rates, average wages in the sector in the different countries, etc.) are compared with available statistics at EEA level.The cost-benefit analysis examines differences in investment cost as well as possible operating costs over a period of three years for existing plants, or five years for greenfield projects, from the first year when production of the new vehicles/engines starts, both in the plant located in the assisted area and in the comparator plant.It must be pointed out that the concept of "greenfield" project refers to a completely "new" site in an area which is also new to the manufacturer. It requires the development of basic infrastructures, the installation of logistics, the recruitment and intensive training of a new workforce and the development of a network of local suppliers, amongst other factors. In the event that those factors could be assured by another unit of the business group already located near the site, the project is regarded as an expansion of existing facilities, even when it is actually in a "greenfield" location(8).The period of three or five years has been set following the recommendation of the experts as the most appropriate period to recover from start-up costs, depending on the nature of the project: the expansion of transformation of an existing facility requires, as a rule, a shorter period before full production can be reached than greenfield plants where the learning process is slower.The Authority expects the companies to demonstrate that the net operating disadvantages decline over time in order to demonstrate the rationality of the locational choice which is normally based on the long-term comparative advantages of the site chosen by the investor as opposed to possible alternative sites.The cost-benefit analysis takes into account the following factors:- Investment cost differencesDifferences in additional investment cost(9) arising for the automotive group between the two locations must be identified in detail. The analysis considers at least five categories of cost: land, building and infrastructure, machinery and equipment, tools and dies and vendor tooling. Other categories may be identified when they correspond to assets that will be depreciated over their lifetime. These cost differences must be explained by the automotive company to the Authority and all available supporting documentation (including technical lay-outs of the plant before and after investment) must be submitted.Usually, the differences in investment between the two plants of comparison requires an on-site visit by the Authority's experts. The examination of these elements is also a crucial element to detect the capacity bottlenecks of the aided plant in cases where production capacity increases are at stake.The analysis of investment handicaps shows whether or not the location in the assisted area results in an advantage or disadvantage for the company due to the fact that the investment that would have been required in the comparator plant is more or less expensive than the one actually installed in the assisted area.- Operating cost differencesDifferences in operating costs corresponding to the first full three or five years of production also have to be examined in detail. In the supportive material a distinction should be made between normal or permanent cost differences and start-up cost differences for each category. Data are to be given in the currency of the EFTA State providing the aid (exchange rate assumptions to be provided) and in current prices for historic years or constant prices for future years. The factors usually taken into account are:Labour costs: differences in the wage bill of production at optimal productivity which can be broken down in differences in wage rates, in working hours and manpower;Components/materials: differences in the cost of components and supplies, taking into account local-suppliers policies, central-purchases policies, etc;Inventories: differences in the financing cost of stocks for incoming material and finished products that appear as a consequence of the location choice (i.e. differences in number of days in stock on the plant and on the road);Transport: differences in cost arising for the automotive company because of the peripheral location of the regional plant (both as regards incoming materials and finished products), resulting from differences in distances and unit transport costs;Other operating handicaps: differences in cost of, for example, various utilities and guarantees.3.4. End result of the cost-benefit analysis: "regional handicap ratio" versus "aid intensity"The cost-benefit analysis model obtains the net incremental cost between the two locations. The nominal value is to be discounted using the reference rate of the EFTA State concerned valid at the start of the project. When operating handicaps are expressed in constant prices, the nominal value of those handicaps will be discounted by the real interest rate, which is equal to the reference rate minus the inflation rate for the country in question.The Authority also examines the correct application of the regional aid scheme in arriving at the eligible expenditure. The relevant "aid intensity" for the Authority's decision on the aid project is the ratio between the discounted aid flow and the discounted flow of eligible investment using the reference rate. This aid intensity is then expressed in gross grant equivalent.Division of the net incremental cost in present values by the present value of the eligible investment produces the "regional handicap ratio".This "regional handicap ratio" is compared with the "aid intensity" expressed in gross grant equivalent resulting from the EFTA State's proposal. Comparing both ratios; the following initial propositions can be drawn up:- if the aid intensity is well below the regional handicap ratio, it is assumed that the automotive company will not receive an unjustified amount of aid; the aid will serve to compensate to a certain extent the financial disadvantages of the geographical choice,- if the aid intensity is substantially higher than the regional handicap ratio, it may be assumed, at this point of the analysis, that the automotive company may receive an unjustified amount of aid; the aid may serve to overcompensate the financial disadvantages of the geographical choice,- if the aid intensity is close to the regional handicap ratio, the market-impact analysis will define whether the proposal is acceptable.3.5. Market-impact analysis: the "regional top-up"Taking into account the present surplus capacity in the European automotive industry, the Authority's assessment of regional aid cases in the motor vehicle industry puts a special emphasis on the production capacity of the vehicle maker(10) receiving the aid "before" and "after" investment and the situation of the vehicle's market segment that will be affected as a consequence of the aided project.Aid proposals in support of investments that potentially aggravate the overcapacity problem of the industry can be modulated by reducing the "regional handicap ratio" by up to two points; this could imply that the Authority has to start proceedings under Article 1(2) of Protocol 3 to the Surveillance and Court Agreement even when the proposed aid does not overcompensate the regional handicap.On the contrary, a project contributing to an overall improvement to the overcapacity situation affecting the industry can benefit from increases of up to four points (in assisted areas) to the regional handicap estimated by the cost-benefit analysis.The "regional top-up" range of values is the following:>TABLE>Note:the "regional top-up" is expressed in percentile points that are added to (or subtracted from) the "regional handicap ratio" estimated by the cost-benefit analysis.A distinction between Article 61(3)(a) and Article 61(3)(c) areas is necessary in order to take into account the different situation of the regions and increase the incentive effect of regional aid for potential investors.4. PROCEDURE4.1. Pre-notificationEFTA States may wish to contact the Authority in advance of a notification to obtain advice to ensure that the subsequent notification is as complete as possible. This is particularly relevant when the aid nature of certain measures is uncertain, when an aid measure serves more than one objective, when it is doubtful whether a cost-benefit analysis is required or when a company has not carried out a location study.4.2. NotificationThe EFTA State should, with the help of the aided company, complete the standard notification form (paragraph 23.2.2.6 of the Guidelines) and cost-benefit analysis forms adding the necessary supporting material.4.3. AppraisalUpon registration of the notification, the Authority will inform the EFTA State as soon as possible and usually within 15 working days about any information(11) which may be lacking in order to make the notification complete for an assessment of all aspects of the case. At the same time, it will propose to the EFTA State a meeting in its offices or on the site of the investment to discuss the information already received and to be received.On that occasion, the EFTA State and the Authority can be assisted by appropriate experts so that all technical and financial information can be discussed in detail. During the meeting, missing information for a full assessment of the case will be identified by the Authority and agreement reached by all parties on supportive material to be provided and on the prospective timetable for decision-making. Following that meeting(12), the Authority will confirm its final request for further information in writing.Once the additional information which corresponds to the requests of the Authority is received, the decision will normally be adopted within 30 working days for notified aid under an approved aid scheme(s) or two months for notified ad hoc aid.However, within this deadline the Authority will invite the EFTA State, which can if appropriate be assisted by experts, to review the cost-benefit analysis in a meeting in Brussels. Any errors and misinterpretations can then still be corrected before a final version is arrived at.5. COST-BENEFIT ANALYSIS FORMS AND GLOSSARY OF TERMSThe forms to be used are the English language version of the forms in Annex II of the Community framework for State aid to the motor vehicle industry, printed in the Official Journal of the European Communities C 279, 15.9.1997, p. 17 to 44(13).(1) Published by the Office for Official Publications of the European Communities under the number ISBN 92-826-0381-4.(2) Prior to the review of the Community framework, the alternative location always had to be the best possible location for the same project in a non-assisted area. If that option was not examined by the company, it was invited by the Commission to select that location.(3) This notion of transformation is different from restructuring, which is reserved for companies in difficulty or sites that would be closed if the investment project did not go ahead.(4) Differences in corporate taxes are not considered as a cost element.(5) Producers of component systems to be located in the vicinity of a vehicle plant would normally not have made such a study. The alternative site is thus the same as for the vehicle producer. A car assembler who has been in competition with other sites will on the other hand not have access to the location study performed by the car company.(6) The study on the mobility of the investment and the cost-benefit analysis could be carried out on the basis of different comparison sites.(7) This section would be better understood if read in parallel with the cost-benefit analysis sheets found in the notification form referred to in section 5 below.(8) Commission Decision 96/666/EC (OJ L 308, 29.11.1996, p. 46).(9) The investment cost may be larger than the eligible investment, which is defined by the regional aid scheme actually applied.(10) In the case of component modules, the Authority will not take account of overcapacity considerations given that first-tier component suppliers are not considered to invest in new capacities unless they have firm purchase orders.(11) Given the fact that every case has its own pecularities, it is normal to expect that the notification does not provide comprehensive information on all technical and financial aspects of a project. In cases where the EFTA State has consulted the Authority before notification, the need for additional information will of course be limited.(12) If the company argues for considerable investment cost differences between two existing sites, it may also be necessary for the Authority's experts to visit the alternative site.(13) For this purpose the word "Commission" will mean "EFTA Surveillance Authority" and the words "Member State" shall mean "EFTA State"."