THE EFTA SURVEILLANCE AUTHORITY (1),

Whereas:

I.   FACTS

1.   PROCEDURE

Pursuant to Article 1(3) of Part I of Protocol 3, the Icelandic authorities notified the sale of the State’s shares in Sementsverksmiðjan hf. by letter dated 19 August 2003 from the Icelandic Mission to the European Union, forwarding a letter from the Ministry of Finance dated 19 August 2003 (Doc No 03-5685 A).

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

After various exchanges of correspondence (8), by letter dated 21 December 2004 the Authority informed the Icelandic authorities that it had decided to initiate the procedure laid down in Article 1(2) of Part I of Protocol 3 in respect of the sale by the Icelandic State of its shares in Sementsverksmiðjan hf. (Event No 296878). The Authority raised doubts regarding the market value of Sementsverksmiðjan hf. at the time the State’s shares were sold, the market value of the assets repurchased by the State, the right of Sementsverksmiðjan hf. to use some of the assets located in Reykjavik sold to the National Treasury without any payment as well as its right to reacquire certain properties and ground rights in Reykjavik for a pre-determined price.

The Authority’s Decision No 421/04/COL to initiate the procedure was published in the Official Journal of the European Union and the EEA Supplement thereto (9). The Authority called on interested parties to submit their comments thereon. The Icelandic authorities submitted comments on this Decision by letter dated 24 February 2005 (Event No 311243). On 20 June 2005, the Authority received comments from Íslenskt sement ehf., the purchaser of Sementsverksmiðjan hf. (Event No 323552). On 2 September 2005, Aalborg Portland Íslandi ehf. submitted further comments (Event No 333018).

In a letter dated 17 February 2006 (Event No 363608), the Icelandic authorities forwarded to the Authority an English copy of an Agreement between Sementsverksmiðjan hf. and the Ministry of Industry on behalf of the Government of Iceland on the basis of which the company’s option to repurchase some assets in Reykjavik was withdrawn. Further, according to Article 2 of this Agreement, the company leased the assets it used as of 1 January 2004 for an undefined period of time for which it would pay a monthly lease established in accordance with market prices.

In light of the comments made by the complainant and in light of the further information and clarifications made by the Icelandic authorities during the formal investigation procedure, the Authority considered it necessary to extend the formal investigation procedure to cover the take-over by the Icelandic State of pension-related liabilities of Sementsverksmiðjan hf. Accordingly, it adopted Decision No 367/06/COL of 29 November 2006 on the Icelandic State’s take-over of pension-related liabilities of Sementsverksmiðjan hf. By letter dated 29 November 2006 (Event No 399095), the Authority informed the Icelandic authorities that it had decided to extend the formal investigation procedure in respect of this measure. The Icelandic authorities did not submit any comments to the Authority’s decision.

On the same date, 29 November 2006, the Authority closed the formal investigation procedure regarding the aid measures in favour of Íslenskt Sement ehf., the group of investors which acquired the State’s shares in Sementsverksmiðjan hf. The Authority concluded that no aid had been involved in this transaction.

The Authority’s Decision No 367/06/COL was published in the Official Journal of the European Union and the EEA Supplement thereto (10). The Authority called on interested parties to submit their comments thereon. The Authority received comments from Íslenskt sement ehf. on 7 May 2007 (Event No 420691). By letter dated 14 May 2007 (Event No 421504), the Authority forwarded these to the Icelandic authorities, who were given the opportunity to reply to the submitted comments. The Icelandic authorities replied on 18 April 2008 (Event No 474416).

2.   BACKGROUND

2.1.   THE SALE PROCESS OF SEMENTSVERKSMIÐJAN HF.

Until 2000, when an importer of cement from Denmark entered into the Icelandic market, Sementsverksmiðjan hf. had enjoyed a de facto monopoly in the market for cement. As a result of the new competitive situation, Sementsverksmiðjan hf. experienced economic difficulties and started cumulating losses. Therefore, in March 2003, the State decided to sell the undertaking and announced a tender to purchase 100 % of its shares in Sementsverksmiðjan hf. (11).

The tender procedure lead to the selection of a group of investors (12), which created Íslenkst Sement ehf. for the purpose of acquiring the State’s shares. The Government initiated negotiations for the sale of the State’s shares in Sementsverksmiðjan hf. with these investors. The outcome of the negotiations between the Government and Íslenkst Sement ehf. was that the company was sold mainly in accordance with the agreements described below.

On 2 October 2003, the Ministry of Industry signed, on behalf of the Government of Iceland, a Share Purchase Agreement with Íslenskt Sement ehf. On the basis of this Agreement, the State, owner of 100 % of the shares in Sementsverksmiðjan hf. for a nominal value of ISK 450 million, sold them to Íslenskt Sement ehf. for a price of ISK 68 million.

Pursuant to Article 4 of the Share Purchase Agreement, the Government of Iceland took over the pension debts and obligations of the Sementsverksmiðjan hf. It also took over all existing and future obligations regarding the annual compensation settlement of the individuals who are paying into Section B of the Pension Fund of State Employees as long as they are employees of the Sementsverksmiðjan hf.

On behalf of the State Treasury, the Ministry of Finance took over the remainder of the bonds issued to pay the accrued obligations of Sementsverksmiðjan hf. as settled in the agreement of 1997, as well as existing and future obligations of current employees of the company affiliated to Section B, by an Agreement signed on 23 October 2003 with the Pension Fund of State Employees. The Government thereby fulfilled the obligation laid down in Article 4 of the Share Purchase Agreement between the Ministry of Industry and Íslenskt sement ehf.

According to Article 5 of the Share Purchase Agreement, the Government of Iceland was to purchase some assets from Sementsverksmiðjan hf. in a separate agreement. As indicated in Section 3 of Article 5, the purchase price for these assets was ISK 450 million.

On the same date, 2 October 2003, Sementsverksmiðjan hf. and the National Treasury of Iceland signed a Purchase Contract on the basis of which the Treasury purchased the properties and assets of the company in Reykjavík, the office building of the company in Akranes with the exception of one and half floors, and the shares and bonds owned by Sementsverksmiðjan hf. in other companies, for the price of ISK 450 million. As stated in Article 5 of the Purchase Contract, Sementsverksmiðjan hf. was allowed to keep a part of the sold properties in Reykjavik (13), use them for purposes of its own industrial operations and return them to the National Treasury no later than 31 December 2011. Sementsverksmiðjan hf. would pay for all maintenance and improvements to these properties but would not pay any compensation for this right of use. According to Article 6 of the Purchase Contract, until 31 December 2009, Sementsverksmiðjan hf. had the right to re-purchase the abovementioned sold properties in Reykjavik for a total price of ISK 95 million with a fixed annual interest of 7 % as of 1 August 2003.

This purchase contract was amended on 16 February 2006 by an agreement signed between Sementsverksmiðjan hf., the Ministry of Industry on behalf of the Government of Iceland and Íslenskt sement ehf. The parties to this Agreement agreed to depart from Section 5.4 of the Share Purchase Agreement with regard to the re-purchase option of certain assets, from Section 6 of the Purchase Contract and replace it by a lease provision on certain assets (14). The monthly lease was established at ISK […] and would be adjusted according to the building cost index. Regarding the delivery time of the assets sold to the National Treasury, the parties agreed to replace the date 31 December 2011 by 1 January 2004.

2.2.   SEMENTSVERKSMIÐJAN HF.’S DEBT TOWARDS THE STATE PENSION FUND

2.2.1.    The functioning of the Pension Fund of State Employees

The Pension Fund of State Employees was originally governed by the provisions of Act No 29/1963. In the 1990, the premiums to the Pension Fund of State Employees seemed insufficient to cover its pension payments. On that basis, the State decided to reform the system and adopted Act No 1/1997 ‘The Government Employees Pension Fund Act’. The Pension Fund of State Employees was divided into two Sections: a new Section A was created and the existing pension fund changed into Section B. All new employees were to join Section A whereas existing employees could choose between membership in Section A or retaining their right to membership in Section B, closed henceforth to new members. According to the Icelandic authorities, with the splitting of the former Pension Fund of State Employees into Section A and B, the fund was made self-sustaining and would no longer cumulate a negative balance between premiums and commitments which would eventually have to be made up by the National Treasury (15).

In contrast, as a result of the provisions for Section B, there is normally a deficit which has to be covered on a regular basis. The provisions for Section B foresee the payment of premiums to Section B of the Pension Fund of State Employees only on the basis of the basic salary of the affiliated employees, not on their total pay. The affiliated employees acquire a right to receive a certain percentage of the basic pay for the post from which they retire. Thereafter, the pension is linked to the average rise in the pay of government employees. According to Article 33 Act No 1/1997, it is the employer of the members of Section B of the Pension Fund of State Employees who must cover this difference. Nevertheless, in case of payment default by the employer, by virtue of Article 32 of Act No 1/1997, the Treasury guarantees the payment of a pension to the employee according to the Act.

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

With the reform carried out in 1996, a new provision was introduced in the law governing the Pension Fund of State Employees requiring employers to refund the increase in pension payments.

Article 33 of Act No 1/1997 provides that ‘in the case where a previously determined […] pension increases due to a general increase in the salary of public employees, the Treasury and other employers who insure their employees in the Fund refund  (16) the increase which thus takes place in pension payments. […]’.

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

Article 3 of this Agreement reads as follows: ‘Using an imputed interest rate of 3,5 %, the present value of the LSR’s (17) accrued obligations with respect to employees of the Iceland State Cement Works at year-end 1996 was assessed as ISK 494 816 380. LSR’s assets for payment of obligations are considered to be 19 % of the Fund’s accrued unsettled obligations. The State’s obligations on behalf of Sementsverksmiðjan hf. Ltd is thus ISK 400 801 268.’

The new Article 33 of Act No 1/1997 foresees the possibility to pay with bonds.

According to Article 4 of the same agreement ‘The National Treasury will make payment to LSR of its obligation pursuant to Article 2 by presenting it with Iceland Cement Ltd bonds for a total amount of ISK 326 488 714 […]. The bonds are inflation-indexed to the Consumer Price Index (CPI) with the base index 178.6. Annual interest is 5,5 % (2,75 % for half-year) and shall be calculated as of 1 January 1997. Interest for the period 1 January 1997 to 30 August 1997 shall be paid separately on 1 November 1997. The present value of the bonds as of 1 September 1997, at 3,5 % imputed interest, is ISK 400 801 268. The National Treasury shall guarantee LSR of payment of instalments and interest of these bonds. With these bonds the National Treasury has fully settled its obligations towards LSR with respect to pension supplements pursuant to Article 33 of Act No 1/1997 on the Civil Servants’ Pension Fund, arising from membership of employees of the Iceland State Cement Works to LSR until the end of 1996’.

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

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

2.2.3.    The taking over by the State of Sementsverksmiðjan hf.’s pension liabilities

With an agreement dated 23 October 2003 between the Ministry of Finance and the Pension Fund of State Employees, on behalf of the State Treasury, the Ministry of Finance took over the remainder of the bonds issued by Sementsverksmiðjan hf. to pay the accrued obligations of the company as settled in the agreement of 1997. The Government also took over Sementsverksmiðjan hf.’s obligations towards the Pension Fund of State Employees to pay and settle annually the compensation settlement for the employees of the company affiliated to Section B of the Pension Fund of State Employees (as settled in an Agreement between the Pension Fund of State Employees and Sementsverksmiðjan hf. dated 30 March 1999).

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

Even if the Ministry of Finance itself decided to take over these debts and obligations of Sementsverksmiðjan hf. in the Share Purchase Agreement with the investors group Íslenskt sement ehf., it is on the basis of a distinct legal act, namely the agreement between the Ministry of Finance and the Pension Fund of State Employees of 23 October 2003, that Sementsverksmiðjan hf. was relieved of these obligations.

According to the information provided by the Icelandic authorities (18), the pension obligations for employees already retired were estimated at ISK 412 million in 2003. As far as the future obligations for the employees of Sementsverksmiðjan hf. still affiliated to Section B of the Pension Fund of State Employees were concerned, they were estimated to amount to ISK 10-15 million, depending on the time the employees remained in the company.

3.   THE MEASURES UNDER ASSESSMENT IN THE CURRENT DECISION

As already stated, the formal investigation procedure initiated with Decision No 421/04/COL was extended to cover the takeover by the State of pension-related liabilities of the company with Decision No 367/06/COL.

On the same date, 29 November 2006, the Authority adopted Decision No 368/06/COL to close the formal investigation procedure regarding the sale of the State’s shares in Sementsverksmiðjan hf. to Íslenskt sement ehf. on 29 November 2006 for a price of ISK 68 million and concluded that the sale did not contain State aid.

In the current Decision, the Authority will assess the possible existence and compatibility of State aid in favour of Sementsverksmiðjan hf. concerning the following measures where a decision has not been taken so far by the Authority:

1.

The purchase of properties, assets, shares and bonds of Sementsverksmiðjan hf. by the State. In Decision No 421/04/COL, the Authority raised the issue that State aid could be involved in the acquisition by the National Treasury of Iceland of assets belonging to Sementsverksmiðjan hf. (19) for the price of ISK 450 million if this price did not correspond to their market value.

2.

The right of Sementsverksmiðjan hf. to keep part of the assets and repurchase them at a fixed price. In Decision No 421/04/COL, the Authority also opened the formal investigation procedure regarding the possibility for Sementsverksmiðjan hf. to keep part of the sold properties in Reykjavik (20), use them for purposes of its own industrial operations and return them to the National Treasury no later than 31 December 2011. Sementsverksmiðjan hf. had to pay for all maintenance and improvements to these properties but did not pay any compensation for this right of use. Moreover, according to Article 6 of the Purchase Contract, until 31 December 2009, Sementsverksmiðjan hf. had the right to re-purchase the abovementioned sold properties in Reykjavik for a total price of ISK 95 million with a fixed annual interest of 7 % as of 1 August 2003. In Decision No 421/04/COL, the Authority preliminarily considered the lack of remuneration for the use of assets located in Reykjavik which were sold to the Treasury to constitute State aid. The Authority considered that should Sementsverksmiðjan hf. make use of the abovementioned re-purchase price, the State might lose revenue if it would sell the assets for a price below its market value.

3.

Take-over by the State Treasury of Sementsverksmiðjan hf.’s pension obligations. In Decision 367/06/COL, the Authority preliminarily concluded that the take-over by the State of Sementsverksmiðjan hf.’s pension-related liabilities constituted State aid within the meaning of Article 61(1) of the EEA Agreement. The Authority had doubts whether any of the exceptions to the general prohibition of State aid foreseen under Article 61(2) or (3) of the EEA Agreement would be applicable. In case State aid would be involved, the Authority expressed its doubts as to whether it could be declared compatible with the functioning of the EEA Agreement. More specifically, the Authority raised concerns whether the aid could be considered compatible on the basis of the provisions of the State Aid Guidelines on Rescue and Restructuring Aid.

4.   COMMENTS FROM THE ICELANDIC AUTHORITIES

In a letter dated 23 February 2005, the Icelandic authorities commented on the doubts expressed by the Authority in Decision No 421/04/COL. The Icelandic authorities explained that the repurchase of assets from Sementsverksmiðjan hf. took place as part of a restructuring: ‘The State would buy from the Company all assets that were not elemental to the production and operation, to lessen the operational costs and make the operation of the Company viable.’

Regarding the correct value of the assets repurchased, the Icelandic authorities argued that the most correct valuation was the one made by the experts of AV and VSO Ráðgjöf in September 2003. These experts valued the property at Reykjavík at ISK 276 million and the office building in Akranes at ISK 74,4 million. The Icelandic authorities considered that the valuation of the assets in Reykjavik was very favourable to the State since they had a strategic value, based on projected future value, ‘since plans were at the time of sale being made for a large bridge project closing off the Company’s harbour at Saeverhöfdi in Reykjavik and thus rendering the facilities useless for the operations of the Company. This bridge will however lead to changed city planning for the area and it is expected that the land will be reserved for a residential area, increasing its value greatly.’

As far as the repurchase right of certain assets laid down in Article 6 of the Purchase Agreement of 2 October 2003 is concerned, the Icelandic authorities indicated in this letter their will to amend the agreement and replace this option with a right of first refusal at market value.

Finally, the Icelandic authorities brought forward arguments to justify that if aid had been involved in the sales process of Sementsverksmiðjan hf., this aid could be considered compatible on the basis of the State Aid Guidelines on Rescue and Restructuring Aid. To this extent, they enclosed a restructuring plan for Sementsverksmiðjan hf.

The Icelandic authorities did not comment on the Authority’s Decision No 367/06/COL on the taking over by the Icelandic State of pension-related liabilities of Sementsverksmiðjan hf.

5.   COMMENTS FROM ÍSLENSKT SEMENT EHF.

Íslenskt sement ehf. submitted comments to the Authority’s Decision No 421/04/COL on 20 June 2005 (Event No 323552). In this letter, the company argued that the assets repurchased by the State from Sementsverksmiðjan hf. were not sold individually but in connection with the sale of the shares. That sale was therefore an integral part of the overall purchase agreement regarding the sale of shares of Sementsverksmiðjan hf. as a whole. Further, Íslenskt sement ehf. considered the rights of Sementsverksmiðjan hf. to use some of the repurchased assets as an integral part of the privatisation of the company, which was taken into account when negotiating the overall purchase price. This notwithstanding, in the opinion of Íslenskt sement ehf. the objective market value of the right to use these assets would be negligible ‘if not considered absolutely worthless’ since they could only be used by Sementsverksmiðjan hf. as the only cement producer in Iceland. Finally, Íslenskt sement ehf. contested that the company’s right to reacquire the assets it has the right to use for a total of ISK 95 million contains State aid since these specialised cement production facilities were of little market value.

In a letter dated 7 May 2007 (Event No 421504), Íslenskt sement ehf. firstly expressed its views on the approach taken by the Authority to divide the case in two parts, i.e. the sale of the shares and the other measures. In the view of this company, the different transactions had to be viewed as a whole. ‘It was a precondition, both on behalf of the seller (the Icelandic Government) and the buyer (Íslenskt sement ehf.), that the agreements concluded on the same day constituted one transaction that could not be split up. One or more of the agreements would thus not have been concluded without all the others being concluded at the same time and in relation to each other.’

Second, Íslenskt sement ehf. provided arguments to demonstrate that no State aid was involved in the take-over by the Icelandic State of Sementsverksmiðjan hf.’s pension-related liabilities. Íslenskt sement ehf. explained that the pension liabilities were not included in the balance sheet of the annual accounts for 1996 but only noted as an off balance sheet contingent liability. In 1997, the pension liabilities of the company were released against the issuing of bonds. This means that they were financed through a debt (bonds) to the Pension Fund of State Employees, which was then booked as a long-term liability in the balance sheet of the annual accounts for 1997 and the following years. Íslenskt sement ehf. further explained that in connection with the sale of its shares in Sementsverksmiðjan hf., the State took over the debt that the company had to the Pension Fund of State Employees in 2003. Thus, in the annual accounts for 2003 the amount of ISK 388 028 317 had been deducted from the liabilities in the balance sheet at the same time as the retained earnings of the company were increased by the same amount.

Third, Íslenskt sement ehf. referred to the sale of assets from Sementsverksmiðjan hf. to the State for a purchase sum of ISK 450 million, which was addressed in the Authority’s Decision No 421/04/COL. All the shares and bonds were sold to the State at market value (21). The Saevarhófdi property in Reykjavík and the part of the office building in Akranes were respectively valued at ISK 276 million and ISK 74,4 million and sold to the State for ISK 280 million and ISK 72,5 million.

Íslenskt sement ehf. also referred to the liquidation costs of Sementsverksmiðjan hf. as established by MP Investment Bank Ltd in 2003 and re-states that the liquidation cost had been calculated to be ISK 506 498 730 including the cleaning of the site in Akranes.

Íslenskt sement ehf. concluded that ‘[a]pplying the method established by the ECJ in e.g. Gröditzer Stahlwerke GmbH, the question of this case is whether the State’s total liquidation costs for the Company would exceed the cost of the State to take over the debts and sell the shares of the Company. If the answer to this question is affirmative it must be considered that the State has acted in accordance with the market economy investor principle, since a private investor would have taken over the debt and sold the shares in the Company based on sound economic reasoning.’ Therefore, Íslenskt sement ehf. was of the opinion that ‘the total liquidation costs exceeded the total cost for selling the Company by 70 376 683 ISK (22) and thus the State has acted in accordance with the market economy investor principle. Therefore, there can be no State aid involved in the State’s taking-over by the Company’s debt towards the Pension Fund in connection to the State’s sale of the shares in the Company.’

6.   COMMENTS FROM AALBORG PORTLAND ÍSLANDI EHF.

By letter dated 2 September 2005, the complainant Aalborg Portland Íslandi ehf. submitted observations to the Authority’s Decision No 421/04/COL. It expressed its agreement with the Authority’s concerns but pointed out that the taking over of Sementsverksmiðjan hf.’s pension obligations had not been addressed in the opening decision. That notwithstanding, Aalborg Portland Íslandi ehf. did not present any comments on the Authority’s Decision No 367/06/COL to extend the opening to cover the taking over by the Icelandic State of pension-related liabilities of Sementsverksmiðjan hf.

7.   FURTHER COMMENTS FROM ICELAND

In a letter dated 8 April 2008, the Icelandic authorities put forward additional information on a previously submitted restructuring plan and included a market survey which had not been yet presented to the Authority.

II.   ASSESSMENT

1.   THE PRESENCE OF STATE AID

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

1.1.   THE PURCHASE OF PROPERTIES, ASSETS, SHARES AND BONDS

On the basis of the Purchase Contract, the National Treasury of Iceland purchased the properties and assets of the company in Reykjavík, the office building of the company in Akranes with the exception of one and half floors, and the shares and bonds owned by Sementsverksmiðjan hf. in other companies, for the price of ISK 450 million.

The following table provides a comparison between the market value of Sementsverksmiðjan hf.’s properties and assets in Reykjavik and Akranes as well as of the shares and bonds as established by independent experts (23) and the price the National Treasury paid for them:

(ISK million)
	Valuation made by independent experts	Price paid by the National Treasury of Iceland
Land, real estate and equipment at Saeverhöfdi 31 in Reykjavik	276	280
Office building in Akranes (minus one and a half floors)	74,4	72,5
Shares in Geca	46,5	46,5
Shares in Spölur	40	40
Bonds in Spölur	11	11
Total	447,9	450

There is therefore a difference of 2,1 MISK (equivalent to 21 214 euros) which the National Treasury paid above the market value of the purchased assets as estimated by independent experts. The difference relates to the sale of the properties in Reykjavik which were sold for ISK 4 million more than the valuation and the office building in Akranes which was sold for ISK 1,9 million less than the valuation.

According to case law, the Authority cannot arbitrarily fix a market price in this decision on the sole basis of an expert assessment (24). Rather, when determining the market price of land and buildings, the Authority ‘must take into account the uncertainty surrounding such a determination, which is by nature retrospective, of such market prices’  (25). It can often not be concluded that one single estimate by definition represents the market value a buyer would be ready to accept. An acceptable market value, after testing the market, may rather be found within a reasonable margin. In the Authority’s view, there is no obvious answer to how wide such a margin should be. That would possibly differ from case to case.

In the opinion of the Authority, this difference in net price of ISK 2,1 million between the estimations made by the independent expert and the price finally paid by the State Treasury is so minimal that it provides no evidence that the purchase price did not reflect market terms. The price established by the independent expert may be considered as an orientation. Strong deviations from that estimate may indicate the existence of State aid. However, in the opinion of the Authority (26), such a minor difference as the one in this case is not sufficient to establish the existence of State aid in favour of Sementsverksmiðjan hf. Rather, it indicates that the payment constituted a fair market price. Hence, the Authority considers that Sementsverksmiðjan hf. did not receive State aid within the meaning of Article 61(1) of the EEA Agreement with the sale of properties, assets, shares and bonds to the National Treasury of Iceland.

1.2.   THE RIGHT TO KEEP PART OF THE ASSETS AND REPURCHASE THEM AT A FIXED PRICE

Article 5 of the Purchase Contract gave Sementsverksmiðjan hf. the possibility of keeping parts of the sold properties in Reykjavik (27), using them for purposes of its own industrial operations and returning them to the National Treasury no later than 31 December 2011. Sementsverksmiðjan hf. had to pay for all maintenance and improvements to these properties but did not pay any compensation for this right of use. Moreover, according to Article 6 of the Purchase Contract, until 31 December 2009, Sementsverksmiðjan hf. had the right to re-purchase the abovementioned sold properties in Reykjavik for a total price of ISK 95 million with accrued interests calculated on the basis of a fixed annual interest of 7 % as of 1 August 2003.

In a letter dated 17 February 2006 (Event No 363608), the Icelandic authorities forwarded to the Authority an English copy of an Agreement between Sementsverksmiðjan hf. and the Ministry of Industry on behalf of the Government of Iceland. On the basis of this Agreement, the company’s option to repurchase some assets in Reykjavik was withdrawn. The assets sold to the Treasury were delivered to it with effect as of 1 January 2004. From that date on, according to Article 2 of this Agreement, the company leased the assets it used for an undefined period of time. The monthly lease for the assets (28) is ISK […]. The lease is adjusted once a year according to the building cost index. The Icelandic authorities explained that the lease amount was calculated using the normal ratio for the Icelandic real estate market.

The Authority does not have a reason to doubt about the veracity and accuracy of the information provided by the Icelandic authorities according to which Sementsverksmiðjan hf. pays a market price for the lease of these assets (29). Thus, following the abovementioned amendments to the agreement, the Authority considers that no State aid within the meaning of Article 61(1) of the EEA Agreement is involved.

1.3.   THE TAKE-OVER OF THE PENSION OBLIGATIONS

By an agreement signed on 23 October 2003 between the Ministry of Finance and the Pension Fund of State Employees, the Ministry of Finance, on behalf of the State Treasury, took over the remainder of the bonds issued to pay the accrued obligations of Sementsverksmiðjan hf. as settled in the Agreement of 1997. Further, by virtue of the same agreement, the State Treasury took over the obligations of Sementsverksmiðjan hf. regarding employees still active in the company. These obligations were to be paid and settled annually.

1.3.1.    Presence of state resources

To constitute State aid, the aid measure must firstly be granted by the State or through state resources. On the basis of the Agreement between the Ministry of Finance and the Pension Fund of State Employees signed in October 2003, the Treasury will pay to the Pension Fund, on behalf of Sementsverksmiðjan hf., the amounts due by the company. At the time the Agreement was signed, the liabilities of Sementsverksmiðjan hf. towards the Pension Fund for the payment of pensions to already retired employees were estimated at ISK 412 million. Further, future liabilities for the remaining employees of the company affiliated to Section B of the Pension Fund still in active service, were estimated within a range between ISK 10 to 15 million. Taking over the pension-related liabilities and paying it from the Treasury involves state resources.

1.3.2.    Favouring certain undertakings or the production of certain goods

Secondly, the aid measure must confer on the recipient advantages that relieve it of charges that are normally borne from its budget.

The State took over the debt Sementsverksmiðjan hf. had towards the Pension Fund of State Employees for the payment of pensions of its own employees. Sementsverksmiðjan hf. had been established in 1955 as part of the State administration. The employees of the cement producer, called Iceland State Cement Works at the time, were affiliated to the Pension Fund of State Employees like any other employees of the State administration.

In 1997, the State reformed the Pension Fund of State Employees. The Pension Fund of State Employees made an actuarial assessment of the liabilities it had towards its affiliates in future pension payments. The result of this assessment was then compared with the assets of the Fund and the share of liabilities amongst the different employers with affiliated employees. The liabilities of the Pension Fund of State Employees for already retired employees of Sementsverksmiðjan hf. at the end of 1996 corresponded to ISK 400 million (30).

The Treasury paid this liability to the Pension Fund of State Employees with bonds of the company. This liability stayed in the accounts of Sementsverksmiðjan hf. until 23 October 2003 when the State took over a debt of Sementsverksmiðjan hf. towards the Pension Fund. This debt concerned on the one hand, the payment of pensions to employees of Sementsverksmiðjan hf. already retired at the time of establishment of the debt in 1997. On the other hand, the debt also concerned the estimated payment of pensions to 5 employees then currently active at Sementsverksmiðjan hf. which were still affiliated to Section B of the Pension Fund of State Employees (31).

In so far as the payment of pension obligations belongs to the normal costs an undertaking has to put up with in the course of business, the takeover by the State of these payments relieved Sementsverksmiðjan hf. of an operating cost. By so doing, the State granted a selective advantage to this undertaking as other undertakings have to put up with all pension related costs for their own employees.

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

Thirdly, the aid measure must distort competition and affect trade between the Contracting Parties.

Undertakings benefiting from an economic advantage granted by the State which reduces their normal burden of costs, are placed in a better competitive position than those who cannot enjoy this advantage. There is competition in the market for cement within the EEA. Currently there are two companies active in the Icelandic market of cement: Sementsverksmiðjan hf. and Aalborg Portland Íslandi ehf. Any advantage granted to Sementsverksmiðjan hf. which reduces the costs it should normally incur, places this undertaking in a better competitive position vis-à-vis the other actual or potential market players in the Icelandic cement market which does not receive this advantage. Thus, the support granted by the State to Sementsverksmiðjan hf. has the effect of distorting competition.

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

The direct competitor of Sementsverksmiðjan hf. in the Icelandic market is a subsidiary of an undertaking located in another State party to the EEA Agreement which does not produce cement in Iceland, but imports it from other EEA countries into Iceland. For this reason, the measure affects trade between the Contracting Parties to the EEA Agreement within the meaning of Article 61(1) of the EEA Agreement.

1.3.4.    Conclusion

For the abovementioned reasons the Authority considers that the State granted State aid to Sementsverksmiðjan hf. with the takeover of pension obligations with the Agreement signed in October 2003 between the Ministry of Finance and the State Pension Fund.

2.   PROCEDURAL REQUIREMENTS

Pursuant to Article 1(3) of Part I of Protocol 3 to the Surveillance 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.’

Although the Icelandic authorities submitted a notification, by letter dated 29 August 2003, on the planned sale of the State’s shares at Sementsverksmiðjan hf., the signature of the abovementioned agreements by the Icelandic authorities put any possible State aid measure granted on the basis of these agreements into effect before the Authority had taken a final decision on the notification. For this reason, the State aid granted in the framework of this transaction constitutes unlawful State aid within the meaning of Article 1(f) of Part II of Protocol 3, that is, new aid put into effect in contravention of Article 1(3) of Part I of the same Protocol.

3.   COMPATIBILITY OF THE AID

Under Article 61(3)(c) of the EEA Agreement, aid to facilitate the development of certain economic activities or of certain economic areas, may be considered compatible with the functioning of the EEA Agreement, where such aid does not adversely affect trading conditions to an extent contrary to the common interest. Restructuring aid is to be assessed under the Authority’s Rescue and Restructuring aid guidelines (hereinafter referred to as ‘the R & R guidelines’).

In Decision No 421/04/COL, the Authority emphasised that the Icelandic authorities had not provided any arguments or respective documentary evidence to assess the compatibility of the aid with the R & R guidelines. The Icelandic authorities forwarded a restructuring plan for Sementsverksmiðjan hf. with a letter dated February 2005. Further, in February 2008, the Icelandic authorities submitted additional information on the restructuring plan. In the following, the Authority will assess whether this new information makes it possible to conclude that the aid satisfies the requirements of the R & R guidelines (32).

3.1.   APPLICABLE GUIDELINES

The aid was granted in October 2003 when the State relieved Sementsverksmiðjan hf. from its pension liabilities. The assessment of the compatibility of this aid measure will be based on the R & R guidelines from 1999 (33), applicable at the time the aid was granted.

3.2.   FIRM IN DIFFICULTY

According to Section 16.2.1 of the R & R guidelines, in any event and irrespective of its size, a limited company is regarded as a firm in difficulty for the purposes of the guidelines, where more than half of its registered capital has disappeared and more than one quarter of that capital has been lost over the preceding 12 months. Whatever the type of company concerned, the R & R guidelines consider a firm to be in difficulty for the purposes of the guidelines, where it fulfils the criteria under its domestic law for being the subject of collective insolvency proceedings. The usual signs of a firm being in difficulty are increasing losses, diminishing turnover, growing inventories, excess capacity, declining cash flow, mounting debt, rising interest charges and falling or nil net asset value.

The registered capital of Sementsverksmiðjan hf. decreased from ISK 1 096 million in 2000 to ISK 458 million in 2003. The company’s turnover decreased from ISK 1,06 billion in 2000 to ISK 863 million in 2001 and ISK 598 million in 2002. The sales of the company decreased from […] in 2000 to […] in 2001 and […] in 2002. Consequently, production went down by more than […] %. Operational results were worsening rapidly during the same period. Sementsverksmiðjan hf. had a profit of ISK 70 million in 2000 but sustained a loss of ISK 230 million in 2001. The loss of the company for 2002 was ISK 220 million. Between 2000 and 2002, the total debt of Sementsverksmiðjan hf. went from ISK 733 million to ISK 1 157 million. Current assets decreased from ISK 750 million to ISK 640 million.

In the annual accounts of Sementsverksmiðjan hf. for 2002, the accountants raised serious concerns about the financial status of the company. The accumulated losses and the strong likelihood of continued operational losses in the year 2003, lead to the conclusion that the possibility of continued operation of the company was questionable.

According to the explanations and information provided by the Icelandic authorities, Sementsverksmiðjan hf. was on the brink of bankruptcy and could not recover through its own resources.

Therefore, the Authority considers that Sementsverksmiðjan hf. was a firm in difficulty within the meaning of the R & R guidelines at the time of the grant.

3.3.   DEFINITION OF RESTRUCTURING AID

Restructuring aid should be based on a feasible, coherent and far-reaching plan to restore a firm’s long-term viability. According to Section 16.2.2 of the R & R guidelines, restructuring aid usually involves one or more of the following elements: the reorganisation and rationalisation of the firm’s activities on to a more efficient basis, typically involving the withdrawal from loss-making activities, the restructuring of those existing activities that can be made competitive again and, possibly, diversification in the direction of new and viable activities. Financial restructuring (capital injections, debt reduction) usually has to accompany the physical restructuring. The provisions of the R & R guidelines however stress that restructuring operations cannot be limited to financial aid designed to make good past losses without tackling the reasons for those losses.

The restructuring plan for Sementsverksmiðjan hf. consisted of a wide range of measures. It covered the financial restructuring of the company, the restructuring of workforce and production costs and the incorporation of alternative revenue sources. Thus, in light of the R & R guidelines, this restructuring plan was not limited to the financial restructuring but tackled various other aspects of the restructuring of Sementsverksmiðjan hf. At the outset therefore, the aid was of the type that falls to be assessed under the R & R guidelines.

3.4.   CONDITIONS FOR THE AUTHORISATION OF RESTRUCTURING AID

State aid for helping firms in difficulty to restructure may be regarded as legitimate only under certain conditions. It may be justified, for instance, by social or regional policy considerations, by the need to take into account the beneficial role played by small and medium-sized enterprises (SMEs) in the economy or by the desirability of maintaining a competitive market structure when the disappearance of firms could lead to a monopoly or tight oligopoly situation.

3.4.1.    Restoration of viability

According to Section 16.3.2.2(b) of the R & R guidelines, the grant of aid should be conditional on implementation of the restructuring plan which must be endorsed by the Authority. The restructuring plan, the duration of which must be as short as possible, must restore the long-term viability of the firm within a reasonable timescale and on the basis of realistic assumptions as to future operating conditions. Restructuring aid must be linked to a viable restructuring plan to which the EFTA State concerned commits itself. The plan must be submitted in all relevant detail to the Authority and include, in particular, a market survey.

The improvement in viability must derive mainly from internal measures contained in the restructuring plan and may be based on external factors such as variations in prices and demand over which the company has no great influence only if the market assumptions made are generally acknowledged. Restructuring must involve the abandonment of activities which would remain structurally loss-making even after restructuring.

The provisions of Section 16.3.2.2(b) of the R & R guidelines require the restructuring plan to describe the circumstances that led to the company’s difficulties, thereby providing a basis for assessing whether the proposed measures are appropriate. It should take account, inter alia, of the present state of and future prospects for supply and demand on the relevant product market, with scenarios reflecting best-case, worst-case and intermediate assumptions and the firm’s specific strengths and weaknesses. It should enable the firm to progress towards a new structure that offers it prospects for long term viability and enables it to stand on its own feet.

The plan should provide for a turnaround that will enable the company, after completing its restructuring, to cover all its costs including depreciation and financial charges. According to the R & R guidelines, the expected return on capital should be enough to enable the restructured firm to compete in the marketplace on its own merits.

The restructuring plan of Sementsverksmiðjan hf. consisted of four different measures:

—	financial restructuring;

—	restructuring of workforce;

—	restructuring of production costs;

—	alternative revenue sources.

Financial restructuring

The Icelandic authorities have explained that one of the key measures of the restructuring was to reduce debts through sale of assets. During autumn 2003, Sementsverksmiðjan hf. liquidated all assets not directly related to the production and delivery of cement to the Icelandic market. With the money obtained from this sale, the company was able to reduce existing debts and was able at least to reduce the losses of operations. Total proceeds from the sale of assets were ISK 580 million and were used to reduce long and short term debt. The main aim of the company was to minimise capital expenses during the period of restructuring. All remaining long term debts were then renegotiated so that the company would not reduce the principal of the loan for two years following the sale.

According to the information provided, the most difficult part of the restructuring for the company was the re-negotiation of debt with creditors. It seems that the company had increased its short and long terms lending significantly over the three years prior to the sale, due to the losses incurred. The company had signed loans with various institutions. The credit institutions regarded these loans with Sementsverksmiðjan hf. as loans acquired by the State and were not willing to grant more credit to the company once privatised unless the outstanding loans were repaid. Therefore, the debt levels had to be reduced significantly which was achieved through the sale of assets redundant for cement production and/or distribution.

The Icelandic authorities have indicated that ‘it was a critical factor in [the financial] negotiations that the pension debt would be removed from the balance sheet of the company, so that it could provide a viable and plausible repayment schedule. It is clear, and this view was shared by the buyers and creditors, that the company could not have serviced both the pension debt and other short and long term loans, as well as maintaining a critical level of fixed asset investments to keep the company operational.’

To remove the pension debt along with a partial repayment of other debt was an essential part of gaining approval for the financial restructuring.

Restructuring of workforce

At the time of the sale, 63 employees worked for Sementsverksmiðjan hf. An analysis of the economic characteristics of the undertaking and of the market in which it was active showed that the workforce would have to be reduced by at least 20 employees. A minimum of 41 employees were needed to operate the factory. The contracts with redundant staff were terminated, whereby, due to the long employment history of some employees, the severance costs were high.

Secondly, the company operated a bonus scheme related to production for the majority of its employees. The amount to be distributed to employees was fixed so that the costs for the production bonus remained the same for the undertaking regardless of the number of employees. A negotiation was initiated with the trade union to apply this production bonus per employee so that the reduction in the overall number of staff would correspond to a reduction in the overall amount of production bonus paid.

Restructuring of production costs and alternative revenue sources

According to the Icelandic authorities, the most important measure was to re-negotiate the prices of raw materials. Moreover, the composition of cement was changed to reduce the energy costs for production.

Regarding the re-negotiation of prices for raw materials, a significant part of the variable operational costs of Sementsverksmiðjan hf. was related to international/national market prices and could not be altered. This was the case for coal, electricity, silica dust and other raw materials. However, the price for the supply of shell sand, the single most significant domestic raw material, could be reduced by […] %. The price for other domestic raw materials could also be negotiated.

Moreover, Sementsverksmiðjan hf. had started to burn waste fluids as an alternative source of revenue and as a means to reduce the overall fuel costs.

Compliance with the restructuring requirements

On the basis of the measures described above, the Authority finds that the restructuring plan for Sementsverksmiðjan hf. complies with the requirements of the R & R guidelines. The restructuring plan described the circumstances that led to Sementsverksmiðjan hf.’s difficulties. Sementsverksmiðjan hf. was not in the position to face competition and the economic weaknesses of the construction sector at the beginning of the 2000s. The plan comprised a thorough financial restructuring covering debt re-negotiation with creditors and the taking over by the Icelandic State of the pension liabilities towards the State Pension Fund. Financial restructuring was accompanied by measures of physical restructuring including the restructuring of the workforce (termination of contracts with workers, re-negotiation of advantages for workers) and in particular the re-structuring of production costs, the most costly part of the re-structuring plan. The production costs were reduced, the composition of cement was changed, the contracts with suppliers were re-negotiated, market initiatives were started to increase revenues. The re-structuring plan of Sementsverksmiðjan hf. foresaw the return to viability within a short deadline of two years, which seems a reasonable timescale. The plan has now been fully implemented and has enabled the company to compete in the marketplace on its own merits. For these reasons, on the basis of the information provided by the Icelandic authorities, the Authority considers that the restructuring plan in favour of Sementsverksmiðjan hf. complies with the requirements of Section 16.3.2.2(b) of the R & R guidelines.

3.4.2.    Avoidance of undue distortions of competition

Section 16.3.2.2(c) of the R & R guidelines requires measures to be taken to mitigate as far as possible any adverse effects of the aid on competitors. Otherwise, the aid should be regarded as contrary to the common interest and therefore incompatible with the functioning of the EEA Agreement. This condition usually takes the form of a limitation on the presence which the company can enjoy on its market after the end of the restructuring period. Where the size of the relevant market is negligible at EEA level, or the firm’s share of the relevant market is negligible, it should be considered that there is no undue distortion of competition.

According to the provisions of Section 16.3.2.2(c) of the R & R guidelines, the Authority shall determine the extent of the limitation or reduction necessary to assure that there is no undue distortion of competition on the basis of the market survey attached to the re-structuring plan and, where the procedure has been initiated, on the basis of information supplied by interested parties.

In the case at hand, the Authority opened the formal investigation procedure in December 2004 and extended it in November 2006. However, there were no comments from interested parties that could provide any information as regards the need to impose compensatory measures and the extent of the same.

The R & R guidelines have a more favourable view on those undertakings regarding which the continuation of operation is unlikely to have significant effects on the competitive situation in the EEA. The Icelandic authorities have provided a market survey on Sementsverksmiðjan hf. and the Icelandic market of cement, which is the only market in which the company is active. According to this survey, the total market for cement in Iceland is limited because of the small population of the country. There are two companies active in the cement market in Iceland: Sementsverksmiðjan hf. and Aalborg Portland Ísland hf. Whereas the former produces and sells cement and slag cement, the latter imports cement from Denmark and sells it in Iceland. In 2002, the consumption of cement in Iceland added up to 122 899 tons (34). In 2002, the consumption of cement in the EU amounted to 217,6 million. Therefore, it can be considered that the Icelandic cement market share in the EEA is negligible.

Moreover, according to the provisions of Section 16.1(3) of the R & R guidelines, restructuring aid may be considered justified not only by social or regional policy considerations but also by the desirability of maintaining a competitive market structure when the disappearance of firms could lead to a monopoly or a tight oligopoly situation. This would be the case in Iceland if Sementsverksmiðjan hf. were to disappear from the market, which would most likely become a monopoly market for cement depending on the imports from the sole other competitor in the Icelandic market for cement. The fact that the market for cement in Iceland has been characterised by either a monopoly or a tight oligopoly of two market players shows that the possibility and attractiveness of this market for other players is very limited due to the reduce scope of the market and its possibilities of development (reference is made in this respect to the findings of the market survey mentioned above).

The Authority does therefore not consider it necessary to require any further measures to limit the presence of the company in the market.

3.4.3.    Aid limited to the minimum

In line with the provisions of Section 16.3.2.2(d) of the R & R guidelines, the amount and intensity of the aid must be limited to the strict minimum needed to enable restructuring to be undertaken in the light of the existing financial resources of the company, its shareholders or the business group to which it belongs. Aid beneficiaries will be expected to make a significant contribution to the restructuring plan from their own resources, including through the sale of assets that are not essential to the firm’s survival, or from external financing at market conditions. To limit the distortive effect, the provisions of Section 16.3.2.2(d) of the R & R guidelines require the amount of the aid or the form in which the aid is granted to be such as to avoid providing the company with surplus cash which could be used for aggressive, market-distorting activities not linked to the restructuring process.

In line with the R & R guidelines, the Authority shall examine the level of the firm’s liabilities after re-structuring, including after any postponement or reduction of its debts. The Authority shall also examine whether any of the aid goes to finance new investment that is not essential for restoring the firm’s viability. In any event, it must be demonstrated that the aid will be used only for the purpose of restoring the firm’s viability and that it will not enable the recipient during the implementation of the restructuring plan to expand production capacity, except in so far as this is essential for restoring viability without thereby unduly distorting competition.

A fundamental part of Sementsverksmiðjan hf.’s re-structuring consisted on the sale of assets that were not essential to the firm’s survival, such as land and buildings as well as shares and bonds in other undertakings of which the company could dispose to obtain cash to pay its debts. Moreover, debts of the company were paid back to the extent possible and re-negotiated to facilitate its reimbursement for continuing operation of the company. Workforce and production costs and structures were accordingly restructured and financed with own means of the company. The only intervention from the State consisted in the takeover of pension related liabilities of Sementsverksmiðjan hf. for an amount corresponding to approximately ISK 425 million. This was considered as conditio sine qua non for the creditors of the company to make its restructuring feasible. Therefore, the Authority concludes that the aid granted by the Treasury was restricted to the necessary minimum as it only concerned the takeover by the Icelandic State of Sementsverksmiðjan hf.’s debt towards the Pension Fund of State Employees.

The restructuring costs can be summarised as follows:

(a) renegotiations with creditors	ISK 10 811 853 ISK 2 648 904 (fee for carrying out the financial restructuring)
(b) restructuring of workforce	ISK 19 098 479 ISK 2 702 963 (fee for carrying out the restructuring of workforce)
(c) restructuring in production costs and alternative revenue sources	ISK 1 018 200 000
(d) re-evaluation of assets	ISK 511 856 488

The Authority considers that the participation of the Icelandic State in the restructuring of Sementsverksmiðjan hf. by taking over the pension-related liabilities of the company towards the Pension Fund of State Employees constitute a fundamental element for the accomplishment of Sementsverksmiðjan hf.’s restructuring. The taking over by the State of the pension-related liabilities was considered by the creditors of the company as a preliminary condition to renegotiate any other debts and liabilities. This aid granted by the State allowed Sementsverksmiðjan hf. to obtain the necessary resources to finance the pure restructuring measures.

Although the takeover of the pension liabilities was not a cost to Sementsverksmiðjan hf. but to the State, it should be included in the whole assessment of the restructuring of Sementsverksmiðjan hf. The aid was necessary to undertake the various restructuring measures. Taking this into account and in light of the amount of expenditure necessary for the return to viability o f Sementsverksmiðjan hf., the Authority considers that the amount of aid involved in this restructuring was limited to the minimum required.

3.4.4.    Restructuring aid in assisted areas

In accordance with Section 16.3.2.5 of the R & R guidelines, the Authority will take the needs of regional development into account when assessing re-structuring aid in assisted areas. In assisted areas, the conditions for authorising aid may be less stringent as regards, in particular, the implementation of compensatory measures. This does not, however, mean that the Authority will have a permissive approach to aid for the re-structuring of ailing firms located in assisted areas to help a region prop up companies artificially. On the contrary, it is in the region’s own best interest to develop alternative activities that are viable and sustainable as soon as possible.

The factory of Sementsverksmiðjan hf. is situated in Akranes, in the mid-west region of Iceland. This area is covered by the Regional Aid Map of Iceland as approved by the Authority in Decision No 253/01/COL of 8 August 2001. The area is characterised by unemployment above the national average and de-population. The cement factory has been in Akranes since 1958 and has constituted an important element in the economic life of the area. In a town with a population of approximately 5 500 inhabitants the closure of this factory would have a very detrimental effect adding further to the ongoing depopulation and general social and economical decline.

3.4.5.    Full implementation of the restructuring plan

In accordance with the provisions of the R & R guidelines, the company must fully implement the restructuring plan that has been accepted by the Authority and must discharge any other obligations laid down in the Authority’s decision (35). The Authority will regard any failure to implement the plan or to fulfil the other obligations as misuse of the aid.

This is the timetable foreseen for the restructuring plan:

Measure	Start of restructuring	Finalisation of restructuring
Financial restructuring measures (negotiation and repayment of debts with credit institutions, takeover by the State of pension liabilities)	September 2003	October 2003
Restructuring of workforce (dismissal of employees, renegotiation with trade unions)	October 2003	April 2004
Restructuring of production costs (price renegotiation with suppliers, alternative revenues and reduction of costs)	October 2003	December 2004

The restructuring plan foresaw the generation of profit following restructuring of the company in July 2005. The Icelandic authorities have informed the Authority that Sementsverksmiðjan hf. had completed the restructuring plan and was able to reach break even in 2005. From June 2003 to May 2004, Sementsverksmiðjan hf. generated a loss of ISK 83 million, compared with the loss of ISK 250 million generated in 2002. From June 2004 to May 2005, the company generated a profit of ISK 22 million.

On the basis of this information, it seems that the restructuring plan for Sementsverksmiðjan hf. had the shortest duration possible, managed to restore the viability of the firm within a reasonable timescale and thus was based on realistic assumptions as to future operating conditions.

3.4.6.    Monitoring and annual report

The Authority must be in a position to make certain that the re-structuring plan is implemented properly. This is normally done by way of detailed regular reports communicated by the EFTA State concerned to the Authority. In the case at hand, however, the re-structuring has already finished with the establishment of the company’s viability. There are no re-structuring measures pending but all have been successfully concluded. Therefore, in this case, there is no need to report on the implementation of the re-structuring plan.

3.5.   THE ‘ONE TIME, LAST TIME’ CONDITION

In order to prevent firms from being unfairly assisted, restructuring aid should be granted only once. When planned restructuring aid is notified to the Authority, Section 16.3.2.3 of the R & R guidelines requires the EFTA State to specify whether the firm concerned has in the past already received re-structuring aid, including aid granted before entry into force of the R & R guidelines and any non-notified aid.

The Icelandic authorities have stated that the ‘one time, last time’ condition is fulfilled. They have further stated that the company has not received any aid earlier on and there are no plans to grant aid to it in the future.

4.   CONCLUSION

For the above mentioned reasons, the Authority considers that the aid granted to Sementsverksmiðjan hf. in connection with the takeover by the Icelandic State of the company’s pension related liabilities constitutes re-structuring aid is compatible with the functioning of the EEA Agreement on the basis of the provisions of the Rescue and Re-structuring Aid Guidelines applicable at the time of the grant of the aid,

HAS ADOPTED THIS DECISION: