(1)

By letter dated 6 August 1998, registered on 12 August 1998, the Italian Permanent Representation to the European Union notified the Commission, pursuant to Article 88(3) of the EC Treaty, of a draft law extending time limits in the agricultural sector. The Law was registered as aid No N 490/1998.

(2)

By letter of 30 November 1998, registered on 4 December 1998, the Italian authorities replied to the Commission's request for information of 1 October 1998.

(3)

By letter of 13 September 1999, the Commission asked the Italian authorities to provide the information requested in its letter of 28 January 1999, which it had still not received. In the same letter, the Commission invited the Italian authorities to confirm press reports that the draft law had been enacted by the Italian Parliament as Law No 290 of 17 August 1999, published in the Italian Official Gazette No 195 of 20 August 1999.

(4)

By letter dated 25 October 1999, registered on 5 November 1999, the Italian authorities confirmed that the draft law had been adopted as Law No 290/99. The letter enclosed the text of the Law as adopted and supplied some of the information requested by the Commission in its letter of 28 January 1999.

(5)

Based on this information, the aid scheme was entered in the register of non-notified aid under number NN 155/99.

(6)

By letter dated 24 February 2000 (2), the Commission informed Italy of its decision to initiate the procedure provided for in Article 88(2) of the EC Treaty in respect of Articles 4 and 5 of Law No 290/99, Article 15(16) of Law No 67/88 of 11 March 1988 (the 1988 Finance Act) and Law No 252/91 of 8 August 1991. By that letter, the Commission also informed Italy that it raised no objections to the other Articles (Articles 1, 2, 3, 6, 7 and 8) of Law No 290/99 in that they did not constitute aid within the meaning of Article 87(1) of the EC Treaty.

(7)

In the same letter, the Commission enjoined Italy to provide, in accordance with Article 10(2) and (3) of Council Regulation (EC) No 659/1999 (3) all documents, information and data needed for assessing the compatibility of the measures in question within one month of receipt of that letter.

(8)

The Commission decision to initiate the abovementioned procedure was published in the Official Journal of the European Communities (4). The Commission invited interested parties to submit their comments.

(9)

By letter dated 23 March 2000, the Italian authorities asked for a 30-day extension of the deadline set by the Commission for the submission of the information requested when the procedure was launched.

(10)

By letter of 18 May 2000, the Italian authorities submitted to the Commission their comments on the launch of the procedure.

(11)

By letter dated 13 October 2000, the Italian authorities sent the information requested by the Commission in its letter of 17 July 2000.

(12)

By letter of 31 January 2001, the Italian authorities asked for an extension of the deadline set by the Commission for the submission of the information requested in its letter of 13 December 2000.

(13)

By letter dated 12 July 2001, the Italian authorities provided the information requested.

(14)

The Commission also received comments from third parties by letter dated 30 June 2000. It forwarded them to Italy, which was given the opportunity to express its views. No specific comments with respect to this letter were sent by the Italian authorities.

(15)

On 12 March 2002, on the grounds of the varied and unrelated nature of the aid measures provided for by Article 4 of Law No 290/99 on the one hand and of those provided for by Article 5 of the same law and by Article 15(16) of Law No 67/88 and Law No 252/91 on the other, the Commission decided to split the case into two different parts, namely case C/7A/2000 and case C/7B/2000 concerning respectively Articles 4 and 5 of Law No 290/99, Article 15(16) of Law No 67/88 and Law No 252/91.

(16)

By letter dated 5 April 2002 (5), the Commission informed Italy that it had decided to take a final negative decision with respect to the aid measures provided for by Article 4 of Law No 290/99. By that letter, the Commission also informed Italy that the decision at issue did not concern, nor extended its effects to the farming, operating and improvement loans due on 31 March 1998 for which an extension was provided for by Article 4 of Law No 290/99. By the same token, the decision under examination did not concern Article 5 of Law No 290/99 nor Article 15(16) of Law No 67/88 and Law No 252/91 which constituted the legal basis for granting the aid provided for in Article 5 of Law No 290/99, which is assessed within the framework of State aid No C/7B/2000.

(17)

Additional information was sent by the Italian authorities in their letter dated 27 February 2003, registered on 28 February 2003, providing information requested by the Commission's letter of 8 May 2002.

(18)

Following the outcome of the meeting held between Commission officials and the Italian authorities on 24 March 2004 and of several informal discussions on the topic, the Italian authorities asked, by letter dated 20 May 2004 and registered on 14 June 2004, for additional time in order to provide the information still needed for the assessment of the file.

(19)

By letter of 29 October 2004, registered on 3 November 2004, the Italian authorities provided additional information. In the same letter they indicated that they would ask to keep confidential the financial data, the interventions undertaken and the account statements of the companies concerned.

(20)

By letter dated 24 November 2004, registered on 3 December 2004, the Italian authorities provided additional information. They also specified that no request for confidentiality had been made at that stage.

(21)

Additional information was transmitted by letter dated 4 April 2005, registered on 7 April 2005.

(22)

Law No 290/99, which is divided into eight articles, provides for an extension of the time limits for various operations in the agricultural sector. In its Decision of 24 February 2000, the Commission did not raise objections with respect to Articles 1, 2, 3, 6, 7 and 8 of the abovementioned Law in that they did not constitute aid within the meaning of Article 87(1) of the Treaty. However, the decision to initiate the procedure provided for by Article 88(2) concerned Articles 4 and 5 of that Law as well as Article 15(16) of Laws No 67/88 and No 252/91, which constituted the legal basis for granting the subsidies referred to in Article 5 of Law No 290/99.

(23)

A final negative decision on Article 4 of Law No 290/99 was adopted by the Commission on 5 April 2002. The present Decision concerns Article 15(16) of Law No 67/88, Law No 252/91, Article 4 (only for the farming, operating and improvement loans due on 31 March 1998) and Article 5 of Law No 290/99.

(24)

According to the information provided, in the late 1980s, the livestock sector in Italy suffered from the excessive fragmentation of production, which resulted in out-of-date structures, unsuitable to quality production. In order to modernise the whole system, Law No 87/90, subsequently amended by Law No 252/91, provided for aid for integrated projects, i.e. projects aggregating several undertakings in a cluster-like structure. The projects were included in a programme approved by the Italian inter-ministerial economic committee (CIPE), on the basis that only projects undertaken by a group of interconnected companies capable of ensuring their completion should be financed. This also meant that each company in the project was responsible for the completion of the whole project by guaranteeing (with a special clause) the joint commitment of all the aggregated companies. Furthermore, all the companies were requested to participate financially to the projects in a substantial way, with new capitalisation and, for cooperatives, also in the form of a 10-year loan. The guarantees required by the State (guarantee on the whole project and capitalisation of the companies) to be eligible for aid represented a significant financial constraint for the companies involved.

(25)

In view of the fact that the resources allocated to the completion of the integrated projects could not cover the overall financial needs of the sector, additional resources under Law No 67/88 were also used for financing these integrated projects. The interventions were carried out within the framework of an overall programme of rationalisation and restructuring of the beef sector which, in Italy, unlike most other countries in Europe, had only started in the early 1990s. Other countries in the European Union, such as France, had launched programmes for the restructuring and rationalisation of their slaughtering plants as early as the 1970s (6). The very high number of slaughtering plants in Italy and their inappropriate distribution over the national territory called for a drastic reorganisation of the sector which, according to the Italian authorities, could only be carried out with strong public support on the basis of a programme designed to modernise the entire sector. In order to survive, Italian undertakings needed to speed up technological innovation and organisational restructuring along two lines:

The task of implementing the law was delegated to a group of experts, who were required to draw up an urgent action programme, define the strategic approach and decide whether the projects submitted could be eligible for aid.

Given the serious crisis of the bovine sector, the actions of the programme were mainly targeted to this sector and, to a lesser extent, to the pigmeat and sheepmeat sectors.

(26)

Law No 67/88 establishing the credit subsidies referred to in Article 5 of Law No 290/99 lays down provisions for the annual and multiannual state budget and constitutes the Italian 1988 Finance Law. Article 15(16) of this Law allows that cooperatives and their consortia to raise loans up to a maximum of ITL 700 billion for the construction, restructuring or extension of slaughtering plants (7). According to the Law, those taking out the loans may use them, up to a limit of ITL 100 billion for 1988 and ITL 50 billion for 1989, to consolidate existing debt on the aforementioned structures and premises. A maximum interest subsidy of 10 % is granted on these loans. Article 15(16) also applies to the funding of projects to consolidate and develop agricultural cooperatives and their consortia engaged in milk or meat production. The Law was never notified to the Commission as required by Article 88(3) of the Treaty.

(27)

Article 5 of the notified Law establishes the circumstances when credit subsidies on loans contracted under Article 15(16) of Law No 67/88 can continue to apply even where some of the conditions initially laid down have not been met. In particular, Article 5(2) provides that credit subsidies on loans contracted under the abovementioned Article 15(16) in respect of joint development or debt-consolidation measures continue to apply even where the integrated project approved under Article 1 of Law No 87/90, as replaced by Article 1 of Law No 252/91, is only completed in part, provided that the integrated project of the person who took out the loan is completed. Article 5(3) provides that credit subsidies on loans contracted for the sole purpose of debt consolidation remain valid even where the integrated project fails to be carried out or is carried out only in part, provided that the person who took out the loan submits a personal investment project, to be undertaken using some of the loan. Moreover, paragraph 4 of the same Article provides that undertakings that have joined together for an integrated livestock project of national importance and eligible for funding under Article 1 of Law No 87/90, as replaced by Article 1 of Law No 252/91, should maintain their right to and eligibility for credit subsidies even where the original integrated project is not completed, provided that they complete their own part of the project.

(28)

Article 4 provides for measures to facilitate agricultural credit operations. In particular, it extended by twelve months the repayment period for operating, improvement and agricultural loans which expired on 31 March 1998. The beneficiaries were agricultural holdings primarily engaged in olive growing in Apulia, Calabria and Sicily, run by owner-occupiers or full-time farmers or olive-growing cooperatives who had been affected by the serious crisis on the market for olives and olive oil. Agricultural holdings and olive-growing cooperatives in other olive-growing regions can also qualify for these measures under the same rules and procedures if similarly affected by the crisis on the market for olives and olive oil. The Article defines an agricultural holding or an olive-growing cooperative primarily engaged in olive growing as an entity that derives at least 50 % of its gross commercial production from olives.

(29)

On 3 April 2002 (8), the Commission took a final negative decision with respect to the aid provided for by Article 4 of Law No 290/99. As clearly indicated in the decision, however, the decision did not concern, nor extended its effects to farming, operating and improvement loans which expired on 31 March 1998 for which an extension was provided for by Article 4 of Law No 290/99. These loans therefore still need to be assessed.

(30)

The other law referred to in Article 5 as a legal basis for the granting of various forms of aid is Law No 252/91 amending Law No 87/90 on urgent animal husbandry measures. It variously assists exceptional animal husbandry measures in the form of integrated projects of national importance, for which it also authorises the relevant appropriations. The Law also provides for the incorporation of a joint stock company where 51 % of the shares is owned by the Ministry for Agricultural and Forestry Policy which will be entrusted with the following tasks:

(31)

Livestock farmers operating in the production, processing and marketing of meat products.

(32)

The total updated budget to carry out the integrated projects amounts to:

(33)

Article 5 of Law No 290/99 lays down the conditions under which the credit subsidies on loans contracted under specific legislative acts can continue to apply even where some of the conditions initially laid down have not been met. At the time the Commission decided to initiate the procedure provided for by Article 88(2) of the Treaty, no background information was available on the Laws referred to by Article 5, which are strictly related to the assessment of the abovementioned Article. The Italian authorities sent the texts of these two laws (Law No 252/91 and Law No 67/88) to the Commission at its express request. However, when the Commission decided to initiate the procedure provided for by Article 88(2) of the Treaty, the Italian authorities had supplied no further information or additional data on these laws or on the aid measures they set up. The Commission was not in a position to decide whether Article 5 of Law No 290/99 related to aid within the meaning of Article 87(1) of the EC Treaty because Italian authorities had not provided clear information on the issue. However, by enabling certain agricultural undertakings to continue to benefit from specific aid measures even in cases of non-compliance with all the initial eligibility requirements, the measure seemed to favour these undertakings with respect to those which, in the same situation, were compliant. As a consequence, the measure provided for by Article 5 led to at least a presumption of aid which, in the absence of information on the part of the Italian authorities, could only be clarified by initiating the procedure provided for by Article 88(2) of the EC Treaty.

(34)

Moreover, Article 5 of Law No 290/99 could not be assessed in isolation from the instruments which constituted the legal basis for granting those particular benefits (credit subsidies and financing) it referred to, namely Article 15(16) of Law No 67/88 and Law No 252/91. The texts of these instruments were sent by the Italian authorities to the Commission at its express request. They clearly provide for State aid within the meaning of Article 87(1) of the EC Treaty. In particular, Article 15(16) of Law No 67/88 provides for the granting of soft loans to agricultural cooperatives and consortia for which a maximum interest subsidy of 10 % may be granted. It therefore relieves the agricultural undertakings concerned of the burden represented by the payment of the full interest rate in force on the market at the time the loan is granted, which would otherwise be paid by any other agricultural undertaking not entitled to that benefit. The ‘relief’ in question would, in this case, be equal to the difference between the market interest rate (9) in force at the time of the loan and the (lower) interest rate actually paid by the beneficiaries thanks to State assistance. For its part, Law No 252/91 authorises the allocations of public funds for the implementation of different types of projects in the livestock sector and in thus doing it favours the recipients of these funds with respect to other agricultural undertakings which are obliged to carry out similar projects relying solely on their own financial resources. By definition, the two measures above seemed to fall within the meaning of Article 87(1) of the EC Treaty.

(35)

When the procedure was initiated, the Commission was not in a position to establish the lawfulness of these aid measures. Despite specific and repeated requests in this respect (10), Italian authorities did not confirm to the Commission whether the instruments had been notified in accordance with Article 88(3) of the EC Treaty and, therefore, whether the measures therein contained formed part of existing aid schemes assessed by the Commission in the light of Articles 87, 88 and 89 of the EC Treaty or whether they had ever been notified to the Commission.

(36)

From a substantive point of view, the Commission had doubts as to the compatibility with the common market of some aspects of the aid schemes provided for by these legislative acts. On the basis of the information available at the time, derived from an analysis of the texts sent to the Commission, some of the measures contained in Article 15(16) of Law No 67/88 and Law No 252/91, might indeed constitute operating aid. In the absence of more accurate and detailed information refuting this preliminary approach, this could only induce the Commission to adopt a negative position with respect to such aid.

(37)

The Commission, in its decision to initiate the procedure under Article 88(2) of the Treaty, enjoined Italy to provide all the information available on the terms and conditions (interest rates, guarantees if any, etc.) at which the loans for which an extension was provided by Article 4 of Law No 290/99 were originally granted and the overall amount of the loans granted, as well as to indicate whether the aid formed part of an existing aid scheme (and if so to indicate which one). Since the final decision on Article 4 of Law No 290/99 did not concern or have any effect on the farming, operating and improvement loans which expired on 31 March 1998 for which an extension was provided by the abovementioned Article, these loans still needed to be assessed to establish whether the aid in question was granted at market conditions (and if so, the latter should have been specified) or whether they were part of existing aid schemes approved by the Commission (also to be specified).

(38)

Following initiation of procedure, in reply to the Commission's specific requests, the Italian authorities provided detailed information by letters dated 18 May 2000, 13 October 2000, 5 July 2001, 27 February 2003 and 29 October 2004, which was registered on 3 November 2004. The information provided in these letters must be read as a whole, since, following in-depth investigation, the Italian authorities revised some of the data originally provided, in particular those related to financial aggregated data. The information provided is summarised in part III.3, with references to the relevant letter.

(39)

The Commission only received one letter from third parties. This letter, dated 30 June 2000, was sent by CONAZO, writing as the leading company of a group of undertakings which had benefited from the funds granted by the Italian authorities on the basis of Laws No 252/91 and No 67/88, which were subject to the Commission's proceedings.

(40)

In its letter, CONAZO mainly expressed its surprise at the fact that, in initiating proceedings, the Commission had clearly stated that it had not been informed of the existence of Laws No 252/91 and No 67/88 and of the fact that the Italian authorities had granted aid on the basis of these laws.

(41)

According to this cooperative, the Commission could not ignore the drastic reorganisation programme for the livestock and slaughtering sectors launched by the Italian authorities as early as 1986. In the same letter, CONAZO referred to the wide-ranging restructuring programme aimed at the two sectors above as drafted by the Italian interministerial committee for economic planning (CIPE) in 1991. The company also recalled that the drastic actions undertaken in the slaughtering sector led to a dramatic reduction in the number of slaughtering plants, which fell from over 8 500 in the 1980s to the current 3 000.

(42)

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

(43)

Articles 87 and 88 of the Treaty apply to the production of and trade in products in favour of which the Italian authorities decided to grant aid. As a matter of fact, Article 40 of Council Regulation (EC) No 1254/1999 of 17 May 1999 on the common organisation of the market in beef and veal (11) provides that, save as otherwise provided in the Regulation, Articles 87, 88 and 89 of the Treaty, apply to the production of and trade in beef and veal. A similar provision is contained in Article 21 of Council Regulation (EEC) No 2759/75 of 29 October 1975 on the common organisation of the market in pigmeat (12) and in Article 23 of Council Regulation (EC) No 2529/2001 of 19 December 2001 on the common organisation of the market in sheepmeat and goatmeat (13).

(44)

Article 5 of Law No 290/99 lays down the conditions under which the credit subsidies on loans contracted under specific legislative acts can continue to apply even where some of the conditions initially laid down have not been met. By enabling certain agricultural undertakings to continue to benefit of specific aid measures even in cases of non-compliance with all the initial eligibility requirements, the measure seemed to favour these undertakings with respect to those which, in the same situation, were compliant.

(45)

Moreover, that Article cannot be assessed in isolation from the legislative acts constituting the legal basis for granting those particular benefits (credit subsidies and financing) it refers to, namely Article 15(16) of Law No 67/88 and Law No 252/91. As set out in paragraphs 37 to 39 above, these two legislative acts clearly provide for State aid within the meaning of Article 87(1) of the EC Treaty. In particular, Article 15(16) of Law No 67/88 provides for the granting of soft loans to agricultural cooperatives and consortia for which a maximum interest subsidy of 10 % may be granted. The State therefore relieves the agricultural undertakings concerned of the burden represented by the payment of the full interest rate in force on the market at the time the loan is granted, which would otherwise be paid by any other agricultural undertaking not entitled to the same benefit. In this case, the ‘relief’ in question equals the difference between the market interest rate in force at the time of the loan and the interest rate actually paid by the beneficiaries thanks to State assistance.

(46)

Law No 252/91 authorises the allocations of public funds for the implementation of different types of projects in the livestock sector and, by so doing, it favours the recipients of these funds with respect to other agricultural undertakings which are obliged to carry out similar projects by relying solely on their own financial resources. According to the case law of the Court of Justice, an improvement in the competitive position of an undertaking as a result of state financial aid leads to possible distortion of competition compared with other competing undertakings not receiving such assistance. Moreover, as there is heavy intra-Community trade in the livestock sector (14), the measure may distort competition and affect trade between the Member States.

(47)

The Commission therefore concludes that the measure is covered by the prohibition in Article 87(1) of the EC Treaty.

(48)

The prohibition in Article 87(1) is followed by the exemptions provided for in Article 87(2) and (3).

(49)

The exemptions listed in Article 87(2) are manifestly inapplicable given the nature of the aid measure in question and its objectives. Indeed, Italy did not argue that Article 87(2) was applicable.

(50)

Article 87(3) specifies the circumstances under which State aid may be considered to be compatible with the common market. Compatibility with the common market must be assessed from the Community's point of view and not from an individual Member State's.

(51)

Article 87(3)(a) is manifestly inapplicable since the aid is not intended to promote the development of areas where the standard of living is abnormally low or where there is serious underemployment.

(52)

As regards Article 87(3)(b), the aid in question is not intended to promote the execution of an important project of common European interest or to remedy a serious disturbance in Italy's economy.

(53)

This aid is not intended to achieve or suitable for achieving the objectives referred to in Article 87(3)(d).

(54)

Under Article 87(3)(c) of the Treaty, aid designed to facilitate the development of certain economic activities or of certain economic areas may be considered compatible with the common market provided that it does not adversely affect trade to an extent contrary to the common interest. The notified aid scheme must therefore be assessed within the framework of that article and of the specific provisions applicable to the case being examined.

(55)

All the integrated projects which benefited from the aid provided for by Law No 67/88 and Law No 252/91 were approved by 31 December 1992 (15). The relevant financial commitments were approved by the same date. The aid under discussion was never notified to the Commission and is therefore unlawful within the meaning of Article 1(f) of Regulation (EC) No 659/1999. According to point 23.3 of the Community Guidelines for State aid in the agriculture sector (16), unlawful aid within the meaning of Article 1(f) of Regulation (EC) No 659/1999 must be assessed in accordance with the rules and guidelines in force at the time the aid is granted.

(56)

According to the Italian authorities all the aid granted was connected to investments undertaken within the framework of the five integrated projects approved (17). The investments were undertaken both at the level of primary production (stockbreeding) and at the level of processing and marketing of agricultural products.

(57)

The investments which were considered eligible for aid substantially concerned: technological and health modernisation, the strengthening of slaughtering plants, the disposal and use of sub-products, meat processing and packaging lines, the adaptation of areas and equipment for a better presentation of the products and implementation or the logistics, the purchase of production facilities and of processing and marketing facilities to improve production technology, the purchase of facilities to favour the development of quality processes. Investments in intangible assets such as marketing and patents were also taken into account in the assessment of the overall projects but were never financed.

(58)

The following expenses were not eligible for aid:

(59)

At the time the projects and the relevant commitments were approved, the Commission considered compatible with the common market all investments where the aid rates did not exceed the maximum aid rates normally admitted by the Commission for the sector, namely 55 % (75 % in Objective 1 regions) in the case of projects complying with the sectoral programmes or the general criteria laid down in Regulation (EEC) No 866/90 (18) and 35 % (50 % in Objective 1 regions) for all the other projects, provided that these were not excluded from the selection criteria laid down in the Annex to the Commission Decision of 7 June 1990 concerning investments which could be financed within the framework of Regulations (EEC) No 866/90 and (EEC) No 867/90, used with the requisite adjustments pursuant to Article 87 of the Treaty.

(60)

It is therefore to be seen whether the investments benefiting from the aid actually met the requirements of Regulation (EEC) No 866/90 as well as the sectoral restrictions provided for by the Commission Decision of 7 June 1990. Point 2.10 of the Annex to the abovementioned Decision, which explicitly concerns meat and eggs, establishes priority investments, that is investments which are seen as particularly positive by the Commission since they are considered to favour more than others the development of a specific sector.

(61)

With respect to priority investments, the Commission looks favourably on the creation of cutting facilities linked to slaughterhouses, particularly in production areas where such facilities do not exist. On the other hand, the same point excludes all investments resulting in an increase in the slaughter capacity for pigs, cattle, sheep or poultry, unless equivalent capacity is no longer used by the same or another undertaking or, in the case of pigs, cattle, sheep and poultry other than chickens, the production level in the region indicates a shortfall in production capacity.

(62)

As indicated by the Italian authorities, only some of the investments undertaken by them concerned the creation of cutting facilities. Since the Italian authorities were unable to specify exactly the part of the investments which went into the cutting facilities, it is necessary to determine whether the investments in question belonged to the type of investments explicitly excluded under point 2.10, namely whether they resulted in an increase in the slaughter capacity unless equivalent capacity was made available by the same or another undertaking (19).

(63)

In their letter of 12 July 2001, the Italian authorities stressed that investments in the slaughtering, processing and marketing of agricultural products were carried out within the framework of seven projects. They provided data showing, for each plant taking part in the project, that the overall ex-post slaughtering capacity is on the whole lower that the ex-ante one by 30 heads/hour. The requirement of point 2.10 of the Annex to Decision 90/342/EEC is therefore observed.

(64)

The aid rates, expressed as gross grant equivalent of aid, following the method described in the Guidelines on Regional aid (20) and including all forms of public aid accorded under Laws No 252/91 and No 67/88 (Law No 290/1999 did not modify the aid rates, the volume of aid, nor the beneficiaries of aid under Law No 252/91 and No 67/88) did not exceed the 75 % aid rate (for investments located in Objective 1 regions) and the 55 % aid rate which was authorised at the time for investments connected to the processing and marketing of agricultural products for areas located outside Objective 1. Regardless of their location, all investments under examination therefore complied with the maximum aid rates authorised by Community legislation in force at the time, as shown in Table 1 below.

Table 1

Investments in the processing and marketing sector

(65)

In accordance with Article 11 of Regulation (EEC) No 866/90, the measures at issue are aimed at rationalising or developing the preparation, preservation, treatment and processing of agricultural products or recycling of by-products or manufacturing waste, at improving marketing channels, including the transparency of price formation, at applying new processing techniques, including the development of new products and by-products, or opening up new markets and innovative investments and at improving product quality.

(66)

Pursuant to Article 11(3) of Regulation (EEC) No 866/90, eligible expenses are limited to:

(67)

As explained further below in the document (see points 80 to 98), the financial balance needs should have been excluded from the eligible expenses, which have been recalculated solely on the basis of expenses directly linked to investments and eligible costs. Furthermore, the CIPE programme explicitly aimed at ensuring coherence and compliance with CMO rules.

(68)

In view of the foregoing considerations, the aid granted by the Italian authorities to carry out the investments planned within the framework of the integrated projects described above was compatible with the common market according to Article 87(3)(c) of the EC Treaty. This only applies to aid granted in connection with the actual implementation of the investments with the exclusion of any aid granted for the financial recovery of the companies considered and of the aid linked to consolidation loans which are assessed in the following sections.

(69)

As already explained, the aid scheme also provided for aid in favour of investments at the level of primary production carried out by groups of companies in line with the rationale of the overall project.

(70)

Aid was granted to the companies CONAZO, GEA and Val di Cesola (21). The eligible expenses and the total aid received are shown in Table 2.

Table 2

Investments in the production sector

(71)

Upon the date of approval of the various projects and consequent allocation of the relevant resources, aid for investments on farms was assessed on the basis of the provisions of Council Regulation (EC) No 2328/91 on improving the efficiency of agricultural structures (22). The Regulation, which established a part-financed system designed to improve the efficiency of agricultural holdings, applied to individual farms. It established a framework for common action authorising or requiring Member States to put in action a certain number of aid schemes which were partially financed at Community level. At the same time, the Regulation established a framework regulating the granting of certain types of nationally funded aid from Member States. Article 35 of Regulation (EEC) No 2328/91 defined the conditions under which Member States were authorised to provide State aid in order to achieve the same objectives as set in the Regulation. In particular, Article 35 stated that the regulation was without prejudice to the right of Member States to adopt additional aid measures in the areas covered by the Regulation with the exception of those covered by Articles 2, 6 to 9, 11, 12(2), (3) and (4), and 17 on terms differing from, or in amounts exceeding, the ceilings laid down in the Regulation, provided that Articles 92, 93 and 94 of the Treaty were not infringed. Article 35(2) provides that Articles 92, 93 and 94 of the Treaty, with the exception of Article 92(2), did not apply to the aid measures governed by Articles 2, 6 to 9, 11, 12(2), (3) and (4), and 17.

(72)

The types of aid measures which Member States were authorised to grant were therefore clearly defined by the provisions of Article 35 which limited the scope of intervention of Member States with respect to purely State-funded aid. In practice, Member States had to notify the Commission of any decision to grant aid for the initiatives covered by the Regulation either in the framework of the procedure provided for by the Regulation with a view to obtaining Community part-financing or on the basis of Articles 87 and 88 of the Treaty with respect to State aid. The Italian authorities did not notify the Commission of the aid in question in the framework of the procedure provided for by Regulation (EEC) No 2328/91 with a view to obtaining Community part-financing or pursuant to Article 12(2), (3) and (4) of that Regulation. The aid measure should therefore be assessed on the basis of Articles 87, 88 and 89 of the Treaty within the limits and on the conditions set out in the Regulation.

(73)

Article 12 of Regulation (EEC) No 2328/91 specifies the types of investments which Member States are authorised to fund exclusively out of their own resources. As stated under Article 35, Articles 87 to 89 of the Treaty do not apply to Article 12(2), (3) and (4). The aid measures therefore can only be assessed on the basis of Article 12(1) and (5) of Regulation (EEC) No 2328/91.

(74)

The measures provided for by Article 12(1) are additional aid which, under strictly defined conditions, may be granted by Member States on top of the Community part-financed system of aid granted under Regulation (EEC) No 2328/91. These additional aid measures may only be granted to holdings which satisfy all the conditions for eligibility to Community aid as laid down in the Regulation (Articles 5 to 9) and only to integrate previously approved part-financed aid measures. Since this paragraph only concerns aid intended to supplement part-financed aid measures previously approved, these aid measures do not fall within its scope.

(75)

Article 12(5) specifies the types of investment aid not subject to the prohibition and limitation provided for by the rest of the Articles and which could in principle be authorised. These are:

(76)

By letter of 13 October 2000, the Italian authorities declared that aid for investments in primary production have only been granted under Law No 252/91 to three projects. These investments were aimed at restructuring and improving breeding centres in order to reduce production costs, improve quality and improve the health and well-being of animals. On the whole, the investments allowed better ventilation of the premises, reduced animal density, improvement of the illumination, water distribution and so on. The Italian authorities assured that the aid was granted towards the completion of investments going beyond the animal health and well-being standards set in Directive 91/629/EEC (23) and in Directive 91/630/EEC (24). In their letter of 24 November 2004, registered on 3 December 2004, the Italian authorities provided the list of investments as proof that these were aimed at improving animals' health and well-being and that they went beyond the rules applicable at the time concerning animal hygiene and well-being. Each financed project has been checked by an inspection committee of the Ministry and the relevant Region to verify that the objectives of the projects were achieved.

(77)

The maximum aid rate provided for in the Regulation (35 % and 75 % in less favoured areas), including all public sources of aid channelled to the investments was not exceeded.

(78)

Furthermore, the Italian authorities assured the Commission that the total number of animals was not increased, following the completion of the investments and that all the investments were carried out in accordance with the requirements in Article 6 of Regulation (EEC) No 2328/91.

(79)

As set out in Section VI.1 (a) 3, eligible expenses do not include financial recovery needs (esigenze di equilibrio finanziario), nor the loans for debt consolidation.

(80)

In view of the foregoing, the abovementioned aid measures granted by the Italian authorities to carry out the investments in the primary production are compatible with the common market according to Article 87(3)(c) of the EC Treaty.

(81)

As stated in the section above, Article 5(2) of Law No 290/99 stipulates that credit subsidies on loans contracted under Article 15(16) of Law No 67/88 in respect of joint development or debt consolidation measures continue to apply even where the integrated project approved under Article 1 of Law No 87/90, as replaced by Article 1 of Law No 252/91, is only completed in part, provided that the integrated project of the person who took out the loan is completed. Article 5(3) provides that credit subsidies on loans contracted under the above Law for the sole purpose of debt consolidation remain valid even where the integrated project fails to be carried out or is carried out only in part, provided that the person who took out the loan submits a personal investment project to be undertaken using some of the loan.

(82)

The credit subsidies referred to in Article 5 of Law No 290/99, which were the subject of the Commission's initial assessment, are provided for in Law No 67/88. Article 15(16) of this Law, against which the Commission decided to initiate proceedings, provided that cooperatives and their consortia can raise loans up to a maximum of ITL 7 000 billion for the construction, restructuring or extension of slaughtering plants. Also, according to that Article, farmers taking out the loans may use them, up to a limit of ITL 100 billion in 1988 and of ITL 50 billion in 1989, to consolidate existing debt on the aforementioned facilities and premises.

(83)

Both Article 5 of Law No 290/99 and Article 15(16) of Law No 67/88 provide therefore for the possibility to use the allocations to consolidate debts.

(84)

Nevertheless, according to the information submitted by the Italian authorities in their reply to the initiation of proceedings by the Commission (25), within the framework of Law No 252/91, the State also took into account what are described as financial recovery needs. According to the Italian authorities, the execution of the project called for a high financial commitment in terms of both the actual implementation of the ‘development projects’ and of recovery of the financial commitment resulting therefrom (26). Financial recovery needs were considered additional to the investments since they were strictly related to the amount of money generated by said investments.

(85)

In the light of the above, it is apparent that part of the aid granted by the Italian authorities to the companies for the relevant projects was actually aimed at enabling these companies to face the financial burden ensuing from, but not strictly related to, these investments.

(86)

The Commission has always expressed doubts as to the compatibility with the common market of the aid for debt consolidation provided for by Law No 67/88 and of aid for financial recovery granted under Law No 252/91. In their reply to the initiation of proceedings, dated 18 May 2000, the Italian authorities claimed that both aid measures were granted in connection with investments carried out within the framework of the integrated projects planned. Indeed, the Italian authorities stated that Law No 67/88 had linked the acknowledgement of debt consolidation to the actual completion of the investment projects. In their opinion, the consolidation loan simply aimed at providing cooperatives with liquidity and in this respect worked as a grant. The consolidation loan was a financial operation linked, in every case, to an investment project.

(87)

Despite this statement, the Commission expressed its doubts on the abovementioned aid measures by declaring that, contrary to the Italian authorities' contention, the description provided and the wording of the Law seemed to indicate that the aid was aimed at relieving the beneficiaries from their financial difficulties with no link whatsoever with the actual completion of the investments. In the same letter expressing its reservations, the Commission also invited the Italian authorities to explain whether the aid in question complied with any of the provisions applicable at the time the aid was granted.

(88)

In their reply to the abovementioned letter (27), the Italian authorities stated that, with respect to financial recovery, the financial actions planned took account of the overall financial requirement of each integrated project. This overall global financial requirement consisted in the actual investments and in the financial equilibrium, which could not exceed 50 % of the overall financial requirement. The financial recovery therefore ensured the payment of the financial charges linked to the investments undertaken.

(89)

Following the Commission's remarks on this specific point, the Italian authorities, in their letter of 29 October 2004, registered on 3 November 2004, undertook to disaggregate the financial recovery needs from eligible expenses. Therefore, the financial recovery needs of the companies, originally included in the eligible expenses linked to the investments, were deducted. This means that only eligible expenses directly linked to the completion of the financed investments, funded under the conditions indicated above, were considered. Financial recovery never resulted in an additional transfer of financial resources from the State to the companies undertaking integrated projects, but it was originally added to the eligible expenses.

(90)

According to the new calculation (excluding the financial recovery needs from the eligible expenses), the aid intensity of the two cooperatives who benefited from it (CONAZO and Consorzio latterie sociali mantovane) was still limited to 35 % for primary production, was below 55 % for the processing and marketing sector in ordinary areas and was limited to 75 % in less favoured areas, as shown in the table below:

Table 3

Financial recovery

(91)

Concerning debt consolidation, the Italian authorities specified that the ‘debt consolidation funds’ were aimed at financing ‘development loans’, i.e. loans linked to the completion of the integrated projects for which the resources provided for by Law No 252/91 proved to be insufficient and ‘consolidation loans’, aimed at financing previous investments.

(92)

‘Development loans’ are granted within the scope of the integrated projects financed under Law No 252/91 and on the same conditions. They were granted to CONAZO, GEA and Val di Cesola. The gross grant equivalent of these loans was included in the overall aid intensity and the maximum grant equivalent deriving from the cumulation of the aid in form of cash subsidy under Law No 252/91 and in form of development loans under Law No 67/88. The total aid rates are in accordance with the aid rates authorised at the time by the Commission (as shown in Table 2 above).

(93)

The ‘consolidation loans’ that only concern CONAZO, however, were linked to previously accomplished investments and are designed to reduce the cost of financing loans contracted in respect of earlier investments. They were granted under the conditions set in Commission letter of 7 March 1989 (28), namely:

(94)

In the present case, in their letter of 12 July 2001 and in that of 29 October 2004, registered on 3 November 2004, the Italian authorities specified that the debt consolidation loans were only granted to one company, CONAZO, which was not in financial difficulty. The aid granted for debt consolidation was meant to relieve the company from debts relating to previous investments, in order to allow the cooperative to undertake new investments for the modernisation of the livestock sector. The consolidation loans were granted to finance projects undertaken between 1986 and 1993 for the setting-up of slaughtering plants, the construction of buildings, purchase of equipment and the purchase of a breeding centre for a total amount of ITL 12 396 406 733 (about EUR 6 million). The gross grant equivalent of this contribution on the overall eligible costs is around 9 % (ITL 1 198 351 597) and therefore did not exceed the Commission aid rates, as specified above.

(95)

The aid was granted to help the cooperative to face difficulties deriving from soaring interest rates, ranging from 17,80 % in 1986 to 14,75 % in 1993. Although the cooperative was viable, the high interest rates applied by the banks were seriously detrimental to its financial situation. Furthermore, the cooperative was undertaking new investments within the integrated projects financed under Law No 252/91. In order to participate in such projects, the cooperative had to meet a sine qua non condition that the part of overall financial requirement not covered by State contribution would be covered by the beneficiary companies in two ways:

(96)

According to the Italian authorities, the sum of the new financial commitments and the old ones (deriving from the high bank rates for the completion of previous investments) would have borne heavy consequences even for viable companies, such as the one concerned by this measure. Moreover, the ‘consolidation loans’ were always linked to the company's development plan, showing its financial situation, the investments undertaken and to be undertaken and compliance with the conditions indicated in point 94.

(97)

The investments for which debt consolidation loans were granted were different from and fully independent of those financed under Law No 252/91 and the public contribution towards debt consolidation (at the conditions indicated above) did not affect the aid rates of the investments financed under Law No 252/91.

(98)

Furthermore, the Italian authorities underlined that Article 5(3) of Law No 290/99 (which stipulates that credit subsidies on loans contracted under Law No 67/88 for the sole purpose of debt consolidation remain valid even where the integrated project fails to be carried out or is carried out only in part, provided that the person who took out the loan submits a personal investment project, to be undertaken using part of the loan) had never been applied. No aid (in the form of consolidation debts loans) was granted for investments which were not carried out in their totality.

(99)

On the basis of the information provided by the Italian authorities, the Commission can therefore conclude that:

(100)

In their letter dated 27 February 2003, the Italian authorities clearly stated that the measure provided for in Article 4 of Law No 290/99 had never been implemented, since it was impossible to identify the credit operations that the law intended to finance (namely the operating, improvement and agricultural loans which expired on 31 March 1998). Indeed, as these credit operations were non-existent, no State aid within the meaning of Article 87(1) of the Treaty could have been granted under Article 4 of Law No 290/99 and the measures related thereto.

(101)

As pointed out in the paragraph above, Law No 252/91 also envisages the establishment of a private-law holding company (finanziaria di partecipazioni di diritto privato) with a subscribed and paid-up capital of ITL 70,114 million. The main shareholder is the Ministry for Agriculture and Forestry Policy which owns 92,79 % of the company's shares. The remaining 7,21 % is owned by 13 different credit institutions.

(102)

The institutional tasks of the company are the following: assistance in the preparation of economic/financial programmes for restructuring and development projects, granting of guarantees for credit operations, organisations of ‘pool’ financing, preliminary contacts with banks in order to favour the financing operations planned, acquisition and sale of minority shares in companies, cooperatives, consortia, bodies and associations and granting of aid.

(103)

By Legislative Decree No 1 of 9 January 1999 (Riordino degli enti e delle società di promozione e istituzione della società Sviluppo Italia S.p.A), Finagra was merged into Sviluppo Italia S.p.A. (29).

(104)

The Italian authorities have consistently stated that Finagra operations have never involved State aid elements and that Finagra has always operated under normal market economy conditions within the meaning of the Commission's communication on the application of Articles 92 and 93 (now Articles 87 to 89) of the EC Treaty to public companies (30).

(105)

In order to prove that Finagra has always operated under normal market conditions, upon the Commission's request, the Italian authorities have provided details of all the 12 operations (in companies within the meaning of Article 5) approved by the company until 31 December 1998 (31).

(106)

An analysis of Finagra's activities showed that Finagra had operated at three levels:

(107)

In their letter dated 13 October 2000, the Italian authorities stressed that, even if rescuing and restructuring operations were contemplated by the company's articles of association, Finagra had never undertaken operations of this type.

(108)

The Commission's position on the purchase of shares by public authorities in private companies is set out in the Communication of the Commission on the application of Articles 92 and 93 of the EEC Treaty to public authorities' holdings. According to the communication, ‘public holding’ means a direct holding of central, regional or local government, or a direct holding of financial institutions or other national, regional or industrial agencies which are funded from State resources within the meaning of Article 87(1) of the EC Treaty, or over which central, regional or local government exercises a dominant influence.

(109)

Italy, through its Ministry for Agricultural and Forestry policy owns about 92 % of Finagra's shares; as such, this holding can be defined as ‘public’ within the meaning of the abovementioned communication.

(110)

The Treaty establishes both the principle of impartiality with regard to the system of property ownership (Article 222) and the principle of equality between public and private undertakings. This means that Commission action may neither penalise nor favour public authorities which provide companies with equity capital. Nor is it for the Commission to express any opinion as to the choice companies make between methods of financing — loan or equity — irrespective of whether the funds are of private or public origin. In this respect, the Commission needs to establish whether the holdings acquired by Finagra in various companies operating in the agricultural sector actually constituted State aid according to Article 87(l) of the EC Treaty and must therefore be assessed on the basis of Articles 87 to 89 of the EC Treaty or whether, as claimed by the Italian authorities, such interventions did not constitute State aid according to the provisions of the abovementioned communication.

(111)

The communication distinguishes four types of situation in which public authorities may have occasion to acquire a holding in the capital of companies:

(112)

Straightforward partial or total acquisition of a holding in the capital of an existing company, without any injection of fresh capital, does not constitute aid to the company.

(113)

According to the information provided by the Italian authorities, Finagra's interventions in existing private sector companies took the form of an increase in the share capital of the company's concerned and it cannot therefore be immediately excluded that they constituted State aid according to Article 87(1) of the EC Treaty.

(114)

The injection of fresh capital in a private company cannot however be taken as clearly constituting State aid when the capital is contributed by the public authority in circumstances that would be acceptable to a private investor operating under normal market conditions. On the other hand, there is State aid when the ‘private investor’ principle is not respected and the injection of fresh capital is contributed in circumstances which would not be acceptable to a private investor operating under normal market economy conditions (32). Point 3.2 of the communication lists six situations where this may be the case.

(115)

In their letter of 13 October 2000, the Italian authorities stated that the holdings were always taken on a temporary basis for a period not longer than five years. Upon a preliminary analysis therefore, the holdings might seem to fall within the scope of point 3.3(iii) of the communication, where it is stated that there is State aid whenever the holding is a short-term one, with duration and selling price fixed in advance, so that the return to the provider of capital is considerably less than he could have expected from a capital market investment for a similar period. The information provided by the Italian authorities, however, proved that the similarity with the possibility provided for in point 3.3(iii) on the existence of State aid is confined to this element. Indeed, the time limited acquisition was never provided for in any legal document and was decided at the discretion of the board of directors, where the other 13 members were also represented. As specified later (see point 120), Finagra acquired shares in cooperatives in its capacity as financing member (socio sovventore), which enabled it to obtain higher benefits compared to a regular investor. One obligation upon every financing member was to keep the shares for a minimum period of time, but without any obligation to sell them at the end of the minimum period. As specified further in this document, Finagra was one of the many financing members (including banks) and was subject to exactly the same rules/requirements as any other private investor. In case of other companies, the average holding time of Finagra was 3 to 3.5 years and the sale was carried out at market value. The Italian authorities reiterated on several occasions that the selling price of the shares was never pre-determined, but it was fixed at market rates. They denied the existence of any evidence (legal document, written or oral agreement or implicit understanding of any type) pointing towards an a priori definition of the front selling price of the holding, which was defined on the basis of the market value at the moment of the sale (see letter of 27 February 2003).

(116)

According to the Italian authorities, evidence of this is that in all but one cases Finagra obtained a positive return from the sales of the shares. The only exception was the acquisition of shares of one cooperative (ARA) that went into voluntary receivership, with a loss of ITL 500 million (about EUR 250 000). The loss in one acquisition of shares could not be considered per se as an indication that Finagra did not operate as any other private investor, when the decision to buy shares in the company was sound and based on viable financial and economic perspectives and all the means to recover the invested money had been used. In this specific case, when such acquisition was decided, the cooperative was undertaking a process of restructuring and modernisation in order to increase production and rationalise its industrial processes. The cooperative had a high potential for growth, since it was well-rooted in the economic reality of the geographical context in which it operated. Its revenue rose constantly from 1990 to 1994 and its economic performance improved. The cooperative, however, found itself in difficulty when facing the high costs of modernisation and the decreasing prices of meat. In 1996, therefore, the cooperative went into receivership. The cooperative, which was also part of an integrated project financed under Law No 252/92, completed the part of the project under its responsibility. After its receivership, the State recovered the entire money allocated for the financed investments. The shares owned by Finagra, however, were lost with the receivership of the company, despite all the recovery procedures being activated. In their letter of 24 November 2004, the Italian authorities clarified that the guarantee for a total of ITL 125 million had been called in and that the remaining ITL 375 million were therefore a credit in favour of Finagra. At the moment, the recovery procedure is still pending and Finagra will recover (following normal recovery procedures) at least 40 % of the outstanding credit.

(117)

In view of the above, Finagra's short-term shareholding cannot in itself be regarded as State aid within the meaning of Article 87(1).

(118)

Other elements of the shareholding should be taken into account. In particular, in their letter of 12 July 2001, the Italian authorities provided an in-depth study to prove that their interventions in the form of shareholding acquisitions were undertaken according to market principles, after a thorough assessment of the company's financial position, especially the structure and volume of its debt. No investment was made when the financial position of the company was not such that a normal return from the capital invested could be expected within a reasonable time. As clearly stated by the Italian authorities, in all the cases at issue, Finagra's interventions were based on an in-depth analysis of the company's financial situation (analysis of the financial statements at the moment of the operation) centreing on the possibility of normal returns on the investments. The financial position of the company was always sound. The criteria used to assess the viability of a company before deciding the acquisition of shares were the following:

These criteria were detailed and set down in Finagra's internal rules.

The Italian authorities have provided the details of the acquisitions of shares in five companies/cooperatives, specifying the situation of the companies against each of the previously mentioned parameters (see letters of 5 February 2001 and 26 November 2004).

(119)

Finagra's shareholding in a company generally never accounted for over 30 % of the net worth of the company acquired and never exceeded 10 % of Finagra's capital at the time when the decision to buy the shareholding was taken, as shown in the following table:

Table 4

Shares owned by Finagra on total net worth of the companies (33)

(120)

The companies always presented normal investment prospects and a sufficient margin of self-financing. In the operations undertaken, Finagra defined the criteria for the transfer of the investments undertaken and obtained guarantees from the counterparts in compliance with the principles contained in the abovementioned Communication. As shown by Finagra's articles of association, the board consisted of five members, also representing the minority shareholders (banks, credit institutes and private companies). All the decisions of the board were taken by majority and in a manner completely independent of the Government. These decisions were not subject to any ratification or control by the public administration. All its interventions were freely assessed by the administrative board, exercising its activity in compliance with the rules applicable to any merchant bank (Legislative Decree No 385/93). The board carried out Finagra's financial and credit activities fully independently from the State, basing its decisions on three elements: the risk, the expected return and the company's viability. These procedures are laid down in Finagra's internal rules.

(121)

Furthermore, when the holding concerned cooperatives, Finagra participated as financing member. This means that, according to Italian Law, it had a special position compared to normal members of the cooperatives, namely:

(122)

By buying shares in cooperatives as financing member, Finagra acted as any other private member, mostly banks and credit institutions, under the same conditions. The Italian authorities provided evidence of this by listing all the credit institutes and private individuals/companies participating as financing members in the cooperatives where Finagra also held shares (34) (see Table 5 in point 136). They also provided the documentation concerning a bank's intervention in one of those cooperatives, MCLC, to prove that Finagra acted under the same conditions as any other private financing member, the only difference being that Finagra requested greater guarantees before deciding whether to finance a cooperative as financing member. Furthermore, they provided the decisions concerning the issue of shares for Unicarni's financing members and the requests (and acceptance) of many private credit institutions seeking to become financing members.

(123)

The additional guarantee requested by Finagra consisted in a security in favour of Finagra on 50 % of the shares. As an example, in the case of MCLC, the security in national bonds was worth ITL 1 240 million (of the total shares held by Finagra and worth ITL 2 479,8 million) and in the case of Unicarni, it was worth 1 674 million (of the total shares held by Finagra and worth ITL 2 825,9 million). The Italian authorities underlined that such an additional guarantee (which is substantial compared to the company's shares held by Finagra) was not requested by other private financing members and it is, according to them, an additional proof that Finagra applied the same (and even tougher) criteria than private investors.

(124)

As an additional element, the Italian authorities also indicated that Finagra's balance sheet had always shown a positive return on capital.

(125)

In the light of the foregoing, the Commission may conclude that, in buying shares, Finagra acted as any other private operator, under market conditions. There was therefore no element of State aid, within the meaning of Article 87(1) of the Treaty, involved in such acquisition.

(126)

As stated in point 106 above, Finagra's operations also included the granting of loans to companies operating in the agriculture sector. According to the information submitted by the Italian authorities, Finagra had granted loans for a total amount of ITL 17 800 million.

(127)

In their letter dated 13 October 2000, the Italian authorities stated that the loans had always been granted at market conditions by applying an interest rate which reflected the risk connected to the loan granted and was never lower that the one in force at the time the loans were granted.

(128)

The loans were granted at an interest rate equivalent to that on government bonds (Rendistato) for operations lasting more than 18 months, minus 5 points. The minimum interest rate to be paid is however set at 3 %. In general, the interest rate on government bonds is considered as a benchmark to establish the economic viability of financial investments. An investment is considered viable if its prospective yield is deemed to be at least equal to that which can be obtained with the same amount of money if invested on government bonds. However, the 5-point decrease compared to the State bond (Rendistato) interest rate shows that Finagra could have accepted rates lower than market rates when granting the loans.

(129)

In this respect, the Italian authorities pointed out that the choice of companies to which loans were granted was made very carefully to minimise the risk of insolvency. Indeed, in granting the loans, Finagra acted like any financial institution operating in market conditions, considering whether to grant the loans to the abovementioned beneficiaries. The loans were granted on the basis of investments submitted by the applicants and the contracts always provided for loan granting and repayment conditions compatible with the undertakings of the companies applying for the loans. Under the contracts, loans had always to be reimbursed within 48 months or immediately in the event of non-performance of the contract or delays in the repayment. The loans were always granted to support economically viable projects and to favour the aggregation of several entities for managing projects based on tangible industrial plans with realistic development prospects. The repayment capacity was assessed by Finagra on the basis of the documents available (financial accounts, investment projects, three-year plans) followed by thorough analyses just like the enquiries carried out for the same purpose by credit institutions. Furthermore, all companies concerned have regularly paid back the amounts due in compliance with the deadlines set, which proves, according to the Italian authorities, that the companies had been selected on the basis of strictly economic criteria, to minimise the risk of insolvency.

(130)

The minimum interest rate levied by Finagra was 3 % until May 1999 and 2 % after that date (until June 2000, when Finagra merged into Sviluppo Italia). This is clearly below the Commission reference rates applicable for the relevant period.

(131)

However, a distinction can be made between cooperatives and private companies receiving the loans. Only two cooperatives received loans from Finagra (MCLC and Unicarni) worth in total ITL 8,3 billion.

(132)

In the case of cooperatives, loans were granted by Finagra under the conditions set for financing members, a particular kind of cooperatives' membership expressly provided for by Law No 59/92 (see description in point 120 above). The decision to grant loans was taken by Finagra on the basis of the return on the loans, based on the rates established in the articles of association of cooperatives. These decisions were accepted by Finagra's administrative board, representing all financing and other members (including, as explained before, several banks, credit institutes and private investors).

(133)

The interest rates applied were also part of the expected return on the equity investments, on which Finagra, as financing member, obtained a higher return than normal members and was therefore linked to the overall investment strategy of Finagra. Not only could Finagra directly control the management of the companies receiving the loans (35) and obtain higher profit rates, but it could also reduce the management costs, since it had large banks and credit institutions as partners. The Italian authorities declared that the other private financing members, when lending money to the cooperatives of which they were members, applied the same interest rates, since those interest rates are laid down in the rules for the collection of members' loans, approved by the cooperatives.

(134)

According to the Italian authorities, therefore, the interest rates on loans applied by Finagra should be assessed against the other conditions linked to the provision of these loans, i.e.

(135)

In order to prove that Finagra was one of the many financing members of these cooperatives, the Italian authorities provided the request (and acceptance) of many credit institutions to become financing members of MCLC and Unicarni, under the same terms and conditions as Finagra.

(136)

The number of financing members in MCLC and Unicarni is shown in the table below.

Table 5

Financing members of MCLC and Unicarni

In 2004, Unicarni had ten financing members for a total value of financing shares of EUR 5 918 000 and MCLC had 64 financing members for a total value of financing shares of EUR 1 559 286.

(137)

All the financing members, when providing loans, were bound by the rules for the collection of loans approved by the boards of the cooperatives. Those rules provided for an interest rate equivalent to that on government bonds (Rendistato) for operations lasting more than 18 months, minus five points. The minimum interest rate to be paid was set at 3 % until May 1999. Finagra therefore acted as any other (private) financing member when providing the loans to the cooperatives.

(138)

The financing members provided a substantial part of the money borrowed by the two cooperatives. As shown in the table below, in the period between 1996 and 2003, MCLC and Unicarni received loans by Finagra and other private investors, as financing members.

Table 6

Loans granted to MCLC and Unicarni by all financing members in the period 1996 to 2003

(139)

The fact that these loans were granted under the same terms and conditions as any other private investor, investing considerably in the same cooperatives where Finagra entered as financing member, proves that the principle of equality was respected.

(140)

On the basis of the foregoing considerations, the Commission can conclude that in granting the loans to cooperatives Finagra behaved as a private investor operating on the market under the same conditions. The preference given by Finagra to the specific borrowers in the agricultural sector stems from Finagra's will and statutory duty to intervene in agricultural undertakings. In this respect, the loans granted by Finagra to the cooperatives do not constitute State aid within the meaning of Article 87(1) of the Treaty.

(141)

In the case of other private companies, the difference between the aid rates at which the loans were granted and the Commission reference rates may well constitute State aid within the meaning of Article 87(1) of the Treaty, even if all the conditions referred to above in points 125 to 129 are fulfilled also in the case of private companies. The difference between the return on loans granted to private companies and loans granted to cooperatives in which Finagra was a financing member is undeniable and has been summarised in points 131 to 133 above. In the case of cooperatives, Finagra, even when applying rates that were lower than the Commission reference rates, acted as any other private investor in the same situation and expected a higher return of the equity operations to which the loans were linked. This additional return, together with the Finagra's market behaviour, which is comparable to that of any other private operator in the same situation, is clearly not applicable in case of loans to private companies.

(142)

The Italian authorities stated that Finagra had granted loans only to two private companies (Guardamiglio and Ultrocchi) and that the difference between the applied rates for these loans and the Commission reference rate applicable at the time ranged from —3,18 to —5,20 percentage points. According to the Italian authorities, this difference can be considered as aid towards the completion of investments belonging to the integrated projects provided for by Law No 252/91, but clearly distinguished from those financed by that Law. The investments, therefore, despite observing all the criteria for obtaining funding under Law No 252/91, did not benefit from any funds under this Law or any other public funds. These projects came within the integrated projects, but were functionally independent of them. The loans were part, therefore, of a strategy aiming at finalising integrated projects, by using different means of financing (though not cumulated, as in this case). The gross grant equivalent aid rate of the two loans granted for completing investments in the processing and marketing sector is 0,96 % and 4,51 %, as shown in the following table.

Table 7

Finagra's loans to private companies

(143)

Since it considers that all the subsidised investments comply with the rules applicable to the investments in the processing and marketing sector as listed in Section VI.1 (a) 1 and that the aid rate (calculated as the gross grant equivalent of the difference between the applied rate for these loans and the Commission reference rate applicable at the time) are within the maximum aid rates applicable for this kind of investments, the Commission can conclude that the loans granted by Finagra to private companies constitute State aid within the meaning of Article 87(1) of the Treaty. This aid is compatible with the common market according to Article 87(3)(c) of the EC Treaty.

(144)

In their letters of 29 October 2004, registered on 3 November 2004, and of 23 November 2004 the Italian authorities stated that Finagra only provided one guarantee with respect to bank loans, in favour of Guardamiglio.

(145)

The bank guarantee for Guardamiglio, worth ITL 2 billion, was granted on a loan of ITL 17 billion, which Guardamiglio fully repaid without calling in the guarantee.

(146)

When the guarantee was set up, the provision of State guarantees was examined according to the principles laid down in the Commission letter SG(89) D/4328 of 5 April 1989, in the Commission letter to Member States SG(89) D/12772 of 12 October 1989 and in the Commission communication to the Member States on the application of Articles 92 and 93 of the EC Treaty and of Article 5 of Commission Directive 80/723/EEC to public undertakings in the manufacturing sector (38). On the basis of these documents, the Commission accepted the guarantees only if their realisation was contractually linked to specific conditions which may go as far as the compulsory declaration of insolvency of the beneficiary or any similar procedure. An assessment of the aid element of guarantees entailed an analysis of the borrower's financial situation. The aid element of these guarantees would be the difference between the rate which the borrower would pay in a free market and that actually obtained with the benefit of the guarantee, net of any premium paid for the guarantee.

(147)

In this case, according to the Italian authorities, the guarantee does not constitute State aid within the meaning of Article 87(1) of the Treaty for the following reasons:

(148)

On the basis of the foregoing information, the Commission can conclude that the guarantee provided by Finagra does not constitute State aid under Article 87(1) of the Treaty.

(149)

The Commission finds that Italy has unlawfully implemented the aid in question contrary to Article 88(3) of the Treaty. However, from all the foregoing considerations, it is clear that:

(1)

By letter dated 15 December 2003, registered as received on 18 December 2003, Germany notified the Commission of planned investment aid for e-glass AG, Osterweddingen, (N 611/03) in accordance with the notification requirement laid down in the 1998 multisectoral framework on regional aid for large investment projects (hereinafter referred to as the ‘MSF 1998’) (3). On 23 January and 27 February 2004, the Commission requested additional information. Germany provided the requested information by letters dated 13 February 2004, registered as received on the same day, and 4 March 2004, registered as received on the same day.

(2)

On 20 April 2004 the Commission approved, under reference C(2004) 1350 final, the aid intensity for e-glass AG notified under the MSF 1998.

(3)

By letter dated 25 October 2004, registered as received on 26 October 2004, Germany informed the Commission that part of the information on the owners of e-glass AG in the initial notification was incorrect and asked the Commission for an amendment of the decision of 20 April 2004.

(4)

By letter dated 8 February 2005, registered as received on 9 February 2005, Germany submitted additional information.

(5)

By letter dated 24 February 2005, reference D/51447, the Commission gave Germany the opportunity to comment on the Commission's intention of revoking its decision of 20 April 2004 by initiating the formal investigation procedure. Germany submitted its comments by letter dated 4 March 2005, registered as received on 8 March 2005.

(6)

By letter dated 20 April 2005, reference C(2005) 1114 final, the Commission informed Germany that it had decided to initiate the procedure laid down in Article 88(2) of the EC Treaty in respect of the aid for e-glass AG. The Commission decision to initiate the procedure was published in the Official Journal of the European Union (4). The Commission called on interested parties to submit their comments.

(7)

Germany submitted its comments by letter dated 7 June 2005, registered as received on 9 June 2005.

(8)

The Commission received comments from interested parties by letters dated 3 October 2005, registered as received on 4 October 2005, 7 October 2005, registered as received on 10 October 2005, and 10 October 2005, registered as received on the same day. The Commission forwarded the comments to Germany, which was given the opportunity to react. The comments from Germany were received by letter dated 22 November 2005, registered as received on 25 November 2005.

(9)

Germany intends to provide regional investment aid to the limited company e-glass AG (e-glass) for the setting-up of a new plant for the production of raw float glass in Saxony-Anhalt, Germany.

(10)

The object of e-glass, according to its articles of association, is ‘the manufacture, processing and distribution of flat glass of all types’.

(11)

The following shareholder structure was notified on 15 December 2003:

Luxfinpart S.A., founded in 1997, is a holding company for which the notified project seemed to represent a purely financial investment at the time of notification.

Semco, founded in 1997, processes float glass. The shareholders are Sawatzki GmbH & Co. Vermögensanlage KG and Hermann Schüler GmbH & Co. KG, each with a [...] % holding.

The trustor is a [...] which processes and refines glass and float glass. The trustor's shares are [...] or held by [...].

(12)

By letter dated 25 October 2004 Germany informed the Commission of incorrect information in the notification as regards one of the owners of e-glass and its activities in the float glass market (5).

(13)

By letter dated 8 February Germany informed the Commission of a change in the ownership structure of e-glass, which took effect on 21 December 2004. The Commission was informed that Luxfinpart S.A. had sold its share in e-glass to Glas Trösch Holding GmbH, Bad Krozingen, Germany (Trösch). Trösch additionally bought [...] resulting in a [...] % share in e-glass.

(14)

Trösch is the German holding company of the Trösch group, which has its headquarters in Bern (Switzerland). Trösch is the majority owner of Euroglas S.A., Hombourg (France), and Euroglas GmbH, Haldensleben (Germany). The Trösch group produces float glass and is also active in the processing of float glass.

(15)

The lawyer Mr Heckmann who was acting as a trustee for a German firm transferred his shares to AD Augento GmbH, Stuttgart (Germany) (AD-GmbH) with effect from 21 December 2004. [...] (6).

(16)

Following the transaction on 21 December 2004, the ownership structure of e-glass is now as follows:

(17)

The project is being carried out in Sülzetal-Osterweddingen, an assisted area under Article 87(3)(a) of the EC Treaty. The regional aid ceiling is 28 % gross or, in exceptional cases, 35 % gross for large firms (7). The start of the investment project was 15 April 2003. The project was scheduled to end on 31 December 2005. The application for the granting of aid was submitted before the start of the project.

(18)

The purpose of the project was the construction of a new plant for the production of raw float glass. Float glass is by far the most common type of flat glass. Other flat glass categories include patterned glass, mirror glass and sheet glass. Float glass has a share of over 80 % of total flat glass production worldwide (8). Within the EEA, the share of float glass is probably well over 80 %. The market for float glass is generally divided into two levels, namely the production of unprocessed float glass (level 1) and the processing of float glass (level 2).

(19)

To produce unprocessed float glass, a continuous ribbon of glass is first produced, with molten glass being floated on molten tin. This produces absolutely flat glass surfaces. After cooling, the glass is cut and is then ready for sale. Float glass is usually further processed and is then used wherever flat glass is required, essentially in the building industry and the motor vehicle industry.

(20)

The new plant will be e-glass's first production site. Production was planned to start in [...], and the plant was to become fully operational in [...]. Once the start-up period has been completed in [...], annual capacity is expected to be approximately [...] tonnes (gross) of raw float glass.

(21)

Eligible costs are EUR 121 million, broken down as follows:

(22)

According to the notification, the project will help to create 186 direct jobs, including ten traineeships. It is also expected to help create 358 indirect jobs in the assisted region itself and in adjacent assisted areas (at NUTS level II).

(23)

Germany is asking for approval of aid having a gross intensity of up to 35 % of the total eligible costs of EUR 121 million.

(24)

The aid to e-glass consists of the following:

(25)

Germany has confirmed that the conditions of the approved regional aid map and of the abovementioned approved aid schemes (12) will be complied with.

(26)

By letter dated 25 October 2004, Germany reported to the Commission that part of the information in the original notification on the owners of e-glass was incorrect. Germany and the management of e-glass claim not to have been aware of this situation before the Commission adopted its decision.

(27)

The new information concerns one of the owners of e-glass (Luxfinpart S.A.) and its activities in the processing market (level 2). The initial notification specified three owners, two of them already active in the processing market (level 2), whereas the third owner was considered only a financial investor (Luxfinpart S.A.), active neither in the raw float glass production market (level 1) nor in the processing market (level 2). The correct information submitted by Germany by letter dated 25 October 2004 was that at the time of the notification the three owners of e-glass were all active in the processing market (level 2).

(28)

Since March 2003 Luxfinpart S.A. had had a commercial relationship with [...].[...] is active in the processing of float glass (level 2). [...] bore the economic risk of Luxfinpart's share in e-glass. At the same time [...] undertook the contractual obligation to buy [...] % of the output of e-glass.

(29)

In the initial decision of 20 April 2004, the relevant market was defined as being the market for raw float glass (level 1). Although two out of the three owners of e-glass were active in the processing market (level 2), Germany provided evidence that allowed the Commission to conclude that the analysis could be limited to the level 1 market.

(30)

The Commission had copies of draft contracts between e-glass and an independent customer. The contract with the independent customer demonstrated that this customer had the same terms and conditions as the owner-customers. Therefore, it was concluded that there was equal treatment between owner-customers and other customers active in the downstream market, with the result that the aid would have no impact on the processing markets and that there was no need for the Commission to include the processing market (level 2) in the definition of the relevant market. In addition, it was argued that the production (level 1) and processing (level 2) markets would follow the same development since raw float glass is the main input factor used in the processing market.

(31)

The information provided by Germany on 25 October 2004 showed, however, that the abovementioned sample contract was not from an independent customer as stated in the notification, but was actually a contract with one of the (indirect) owners of e-glass at the time of the notification, namely [...], which is active in the float glass processing market (level 2).

Therefore, the conclusion that the aid would not have any distorting impact on the processing market (level 2) and that the Commission therefore did not have to assess the development of the processing market could no longer be upheld. The new information means that the processing market (level 2) needs to be included in the Commission's assessment of the compatibility of the aid measure.

(32)

As the incorrect information had an influence on the reasons for defining the relevant market(s) and therefore influenced the competition factor and thus the maximum allowable aid intensity under the MSF 1998, the incorrect information is to be seen as a determining factor for the decision within the meaning of Article 9 of Regulation (EC) No 659/1999.

(33)

Article 9 of Regulation (EC) No 659/1999 stipulates that ‘the Commission may revoke a decision … after having given the Member State concerned the opportunity to submit its comments, where the decision was based on incorrect information provided during the procedure which was a determining factor for the decision. Before revoking a decision and taking a new decision, the Commission shall open the formal investigation procedure pursuant to Article 4(4). …’.

(34)

Before revoking the original decision, which was based on incorrect information that was a determining factor for the decision, and taking a new decision, the Commission opened the formal investigation procedure — in accordance with Article 9 of Regulation (EC) No 659/1999 — on 20 April 2005.

(35)

Following the invitation to submit comments pursuant to Article 88(2) of the Treaty, the Commission received comments from three competitors.

(36)

The first interested party, Saint-Gobain, was of the opinion that the Commission could not ignore market developments that were known by it at the time of the adoption of a decision on the compatibility of state aid under Article 87 of the EC Treaty and the MSF 1998. Consequently, in the current formal investigation proceedings, the Commission could not simply base its assessment on the average annual growth of apparent consumption in the period 1997 to 2002. Saint-Gobain stated that, in view of the incorrect information provided in the notification, the Commission should, from today's perspective, consider the time period 1999-2004 as the decisive period for the assessment of the intensity of the state aid.

(37)

According to Saint-Gobain, the average annual growth rate of apparent consumption of raw float glass over the last five years was negative (1999-2004: -0,62 %), and the market should therefore be defined as an ‘absolutely declining market’ within the meaning of point 7.8 of the MSF 1998.

(38)

Saint-Gobain was also of the opinion that, even at the time of the decision of 20 April 2004, the Commission should have taken into account forward-looking growth estimates of apparent consumption, especially if they indicated a significant change in the average annual growth of apparent consumption. It pointed out that the Commission itself requests the notifying Member State to provide estimates and forecasts on the development of the apparent consumption of the product(s) concerned in the three financial years following the notification (see point 5.4.2 in Section 5 of the Annex to the MSF 1998).

(39)

Saint-Gobain argued that the relevant market should include the market for processed glass (level 2). However, according to Saint-Gobain, only a sub-market of the overall processed glass market was relevant in this case. Saint-Gobain made an initial distinction between the markets for automotive glass and general trade glass (building glass), because it claimed that the production technology for automotive glass, the customer base and the way automotive glass was put on the market were totally different from that in the construction sector. It then further divided the building glass sector into four separate markets: (i) sealed units (double or multiple glazing); (ii) toughened glass (safety glass); (iii) laminated glass (safety glass); and (iv) silvered glass (mirrors). As glass consumption for sealed units (double glazing), in terms of volume, amounted to approximately 80 % of float glass used in general trade (non-automotive applications), Saint-Gobain claimed that the main relevant product market in this case was the market for sealed units.

(40)

As to the geographic scope of the above-mentioned markets, Saint-Gobain argued that the markets for silvered glass (mirrors) and laminated glass should be considered to be Community-wide. However, for the other product markets, in particular toughened glass and sealed units, no clear indications for a Community-wide market seemed to exist. Such markets rather appeared to involve national or even regional markets, essentially due to higher transport costs. At current prices for double glazing, the high cost would no longer allow long-distance transport, and — as far as Saint-Gobain was aware — all glass producers supplied sealed units to customers at a distance of approximately 250 to 300 km from the processing plant. Saint-Gobain therefore argued that the market for sealed units in particular should be considered to be national or even regional in scope.

(41)

Saint-Gobain also commented on the assessment of the forecasts of the number of new jobs created by the investment. It pointed out that the planned float glass plant in Osterweddingen would be situated 40 km from an already-existing float glass plant in Haldensleben operated by Euroglas. One of the three shareholders in Euroglas was Trösch. Because of the possible synergies between these two plants and due to the fact that the new e-glass plant was equipped with the most modern technology, Saint-Gobain argued that e-glass was likely to be able to operate its plant with fewer than 120 employees (including trainees).

(42)

The second interested party, […] (13), submitted updated figures for the information on the market for raw float glass (Community-wide, volume and value) used by the Commission in its decision of 20 April 2004. It also argued that the market situation in Germany should be taken into consideration by the Commission. It therefore provided figures on the volume and value of total consumption of raw float glass in Germany (2001-2004).

(43)

The second interested party was also of the opinion that, although it was extremely difficult to obtain recent figures on the volume or value of the consumption of processed glass in the Community, such figures reflected the trend in the raw float glass sector. It emphasised that, since all raw float glass was processed, the trend reflected by the data provided for the raw float glass sector should be similar to that of the processed glass market, and that the fluctuation in imports and exports of processed glass into and from the Community could be ignored.

(44)

The second interested party also commented on the Commission's assessment of the capital-labour factor. It pointed out firstly that the construction of a similar float plant by Trösch in Hombourg, France, had created 168 new jobs. Secondly, it argued that Trösch would be able to provide administrative, technical, commercial and other services, management support and training to e-glass. Therefore, the number of new jobs created by the e-glass project would be even lower than 168.

(45)

The third interested party, Pilkington, commented on the reference period to be taken into account for the calculation of the competition factor. It argued that the Commission was not continuing the original investigation, but was now carrying out a new investigation. At the same time, the Commission was obliged to take account of the latest available data. Therefore the five-year period to be taken into account was the period 1999 to 2004.

(46)

Pilkington also argued that the relevant product market was processed glass for general trade and not for automotive applications. Of this latter market, insulating glass units constituted by far the largest element. According to Pilkington, the relevant geographic market for processed glass (level 2) in this case was not Community-wide, but was confined to Germany (or at most to Germany and its immediately adjacent territories).

(47)

Germany commented by letter dated 7 June 2005, registered as received on 9 June 2005, on the decision to initiate the procedure.

(48)

As regards the relevant time period for the analysis, Germany supported the Commission's opinion as stated in the decision of 20 April 2005 that the data from 1997 to 2002 needed to be taken into account as these data represented the most recent data available at the time of the notification.

(49)

Germany suggested separating the level 2 market in safety glass (ESG and VSG), multiple-walled glass and technical glass. Safety glass (ESG and VSG) was used in the automotive industry and the construction sector, multiple-walled glass mainly in the construction sector. As all three shareholders in e-glass produced safety glass (ESG and VSG) and multiple-walled glass for the construction sector, only these sub-markets should be regarded as relevant. In addition, they provided information on the supply-side substitutability of these products.

(50)

Germany was of the opinion that the level 2 market in safety glass (ESG and VSG) and multiple-walled glass was EEA-wide. In addition, it provided information on the positive development of this market during the years 1997 to 2002.

(51)

By letter dated 22 November 2005, registered as received on 25 November 2005, Germany submitted comments on the reactions of the competitors of e-glass. It stressed that the reference period 1997 to 2002 had to remain unchanged as only information available at the time of the notification could be taken into account. In opening the formal investigation procedure, the Commission was continuing an assessment that had been started following the notification in December 2003.

(52)

Germany provided some information on the development of the raw float glass market in the years 2003 and 2004 which underlined the positive development of this market. It also showed that the main producers of float glass were planning to increase their production capacity, which supported the positive view on the market.

(53)

As regards the market for processed glass (level 2), Germany remained of the opinion that this market did not need to be included in the analysis. It argued that a very high share of the raw float glass would be directly sold into the market and the shareholders of e-glass would procure the raw float glass at market rates. As a consequence, the aid would not have any impact on the level 2 market.

(54)

Concerning the definition of the relevant market, Germany argued against the view that only multiple-walled glass would form the relevant market and stressed that the relevant market was EEA-wide and should include safety glass (ESG and VSG) as well as multiple-walled glass.

(55)

Germany also provided information on the transport costs of raw float glass and processed float glass. The percentage share of transport costs was higher for raw float glass than for processed glass due to the higher price of processed glass. This meant an EEA-wide market definition. In addition, Germany suggested that the distribution areas of the production facilities for processed glass in the EEA overlapped, which pointed to the conclusion that the market was EEA-wide.

(56)

Germany commented on the competitors’ view that the capital-labour factor needed to be adjusted since Trösch could exploit synergies between the e-glass production site and other factories of the group in the area. In particular, Germany argued that since Trösch was only one of three shareholders that were all competitors in the market for processed glass, it was not possible to generate these synergies. In addition, it provided information on the correct estimation of the number of staff and argued that comparisons between factories as carried out by competitors were not correct and led to wrong conclusions.

(57)

On 20 April 2004 the Commission approved the aid intensity for e-glass as notified by Germany on 15 December 2003. Since, after the decision was taken, Germany informed the Commission of incorrect information in the original notification and since this information was a determining factor for the decision, the Commission decided on 20 April 2005 to initiate the formal investigation procedure with a view to revoking the original decision of 20 April 2004 and issuing a new decision.

(58)

The decision of 20 April 2004 contains a complete assessment of the notification. This assessment is taken over in the present Decision except for those parts which need to be corrected because of the information sent by Germany on 25 October 2004 and formed part of the decision of 20 April 2005.

(59)

Germany notified the aid to e-glass on 15 December 2003, and this notification was registered as received on 18 December 2003. Point 40 of the 2002 Multisectoral framework on regional aid for large investment projects (14) (MSF 2002) stipulates that a project has to be assessed in the light of the criteria applicable at the time of notification: ‘…, the provisions of this framework will be applied as from 1 January 2004. The previous multisectoral framework will remain applicable until 31 December 2003. However, notifications registered by the Commission before 1 January 2004 will be examined in the light of the criteria in force at the time of notification.’ In the light of the above, for the assessment of the aid to e-glass the criteria laid down in the MSF 1998 apply.

(60)

This assessment will take into account the facts, figures and situations as they existed at the time of the notification on 15 December 2003.

(61)

The Commission has to take an ex-ante decision on the basis of estimates of future perspectives and market figures. The Member State also has no other information available to decide on the aid than the facts, figures and situations as they exist at the time of the notification. The aid intensities are not adapted afterwards if some years later — ex-post — figures show that the market has, for example, turned out differently. Although in the present case the Commission has to take a decision two and a half years after the original notification took place, it must nevertheless base its assessment on the facts and situations which existed at the time of notification.

(62)

The reference period in the decision of 20 April 2004 was the years 1997 to 2002. Competitors of e-glass suggested that the reference period for the analysis should be adjusted to take more recent data into account that is now available. Since some time has elapsed between the original notification and the current Decision, situations might have changed, markets might have developed and facts concerning the project might have turned differently than was originally planned. For the reasons stated above, this cannot be taken into account by the Commission in its assessment.

(63)

The present aid measure was granted by a Member State and through state resources within the meaning of Article 87(1) of the EC Treaty (see point 2.4 of this Decision). The aid will confer an advantage on e-glass as it would otherwise have had to bear the entire costs of the investment on its own. As a significant volume of the float glass is transported across international borders, there exists international trade in the float glass market. Therefore, financial advantages conferred on the company may distort competition in a way that may affect trade between Member States. Consequently, within this assessment, the Commission considers that the notified measure constitutes state aid to e-glass within the meaning of Article 87(1) of the EC Treaty.

(64)

Since the criteria set out in point 2.1(i) of the MSF 1998 apply, the aid project must be notified and the maximum allowable aid intensity must be determined in accordance with the MSF 1998. The Commission notes that the aid is based on three regional aid schemes already approved by the Commission. It is therefore not ad hoc aid within the meaning of the third paragraph of point 2 of the guidelines on national regional aid (15) whose basic compatibility with the common market must be examined individually. The Commission's examination requirement here is confined to the compatibility of the notified aid intensity of 35 % gross under the criteria set out in the MSF 1998.

(65)

The maximum aid intensity allowed for projects under the MSF 1998 has to be determined in accordance with the maximum aid ceiling applicable to regional aid in the assisted area concerned at the time when the aid is notified.

(66)

In the case of Sülzetal-Osterweddingen, where e-glass is located, the regional aid ceiling is 28 % gross for large companies. However, if certain conditions are met, the regional aid ceiling may be increased to 35 % gross. Upon application by a Land, and with approval of the Joint Task Sub-Committee (Unterausschuss der Gemeinschaftsaufgabe ‘Verbesserung der regionalen Wirtschaftsstruktur’ (GA)), in justified exceptional cases measures which are structurally particularly effective in relation to the location of undertakings may receive the higher aid intensity. According to the information provided by Germany, these conditions are met, since the Sub-Committee approved the application of Saxony-Anhalt on 23 July 2003 (16).

(67)

Consequently, a regional aid ceiling of 35 % gross applies in this instance. In calculating the maximum aid intensity allowed for the relevant project, this regional aid ceiling must be adjusted in accordance with the provisions of the MSF 1998 to take account of various coefficients that result from the application of three assessment factors, namely the competition factor (T), which takes account of the situation in the relevant product market, the capital-labour factor (I) and the regional impact factor (M).

(68)

The approval of aid to firms in industries with structural overcapacity poses particular risks of distorting competition. Any increase in capacity that is not offset by a capacity reduction elsewhere makes the problem of structural overcapacity more acute. Consequently, in determining the competition factor, the Commission must examine whether the planned project is being carried out in an industry or branch of industry in which there is structural overcapacity.

(69)

According to point 7.6 of the MSF 1998, the relevant product market(s) compromises the products envisaged by the investment project and, where appropriate, its substitutes considered by the consumer (by reason of the products’ characteristics, their prices and their intended use) or by the producer (through flexibility of the product installations).

(70)

Float glass is by far the most common form of flat glass. Since, because of its specific manufacturing process and its product qualities, float glass cannot be replaced either on the supply or on the demand side by other types of flat glass (e.g. sheet glass, patterned glass or mirror glass), the market for float glass must be regarded as a separate product market (17). This product market is in turn divided into two levels that must be assessed separately from one another, namely the production of unprocessed float glass (level 1) and the processing of float glass (level 2) (18).

(71)

The Commission's analysis in the decision of 20 April 2004 led to the conclusion that in this particular case solely the market for raw float glass (level 1) needs to be assessed (19). Due to the incorrect information on the ownership structure, this conclusion cannot be upheld and the processing market (level 2) needs to be included in the definition of the relevant markets since the aid could distort competition at this level also.

(72)

In the following section the market for raw float glass (level 1) is first assessed, followed by an assessment of the market for processed float glass (level 2).

(73)

The assessment of the market for raw float glass (level 1) as described in the original decision of 20 April 2004 was not called into question and not part of the decision of 20 April 2005 initiating the procedure. The following part is therefore a reproduction of the assessment that was carried out and described in the decision of 20 April 2004.

(74)

Point 7.6 of the MSF 1998 states that the relevant geographic market comprises usually the EEA or, alternatively, any significant part of it if the conditions of competition in that area can be sufficiently distinguished from other areas of the EEA. Where appropriate the relevant market may be considered to be global.

(75)

Because of the relatively high costs of transporting raw float glass (20), the sales markets of the individual production plants do not cover the whole of the EEA. Rather, they take the form of concentric circles round the relevant production site whose radius is determined by the economically viable transport distance, which as a rule is not more than 500 to 1 000 km for transport by road, this being the form of transport most frequently used. However, since there are now more than 50 production sites operated by European float glass manufacturers throughout the EEA, and since consequently their sales markets overlap, they jointly cover the whole of the EEA.

(76)

In order to determine whether, on the basis of this geographic overlapping of individual markets, similar conditions of competition also exist in the various areas of the EEA, the Commission examined whether separate markets exist on which separate prices have been able to develop independently from the other sales markets, or whether pricing in the EEA follows a uniform basic pattern. On the basis of the Eurostat statistics available, the Commission compared prices per tonne in the main float-glass-producing Member States, namely in France, Germany, Italy, the United Kingdom and Spain in the period 1997 to 2002 and in Belgium (due to missing data) in the period 1999 to 2002. The figures show that prices for raw float glass in the individual Member States show a high degree of correlation in the period 1997 to 2002. This parallel trend in prices indicates that purchasers of raw float glass have sufficient scope to switch to producers in other Member States — a clear indication of a single geographic market.

(77)

Conclusion: The Commission concludes that the geographic market for raw float glass is the EEA as a whole (21).

(78)

The lowest level of the NACE classification corresponding to the production of raw float glass is NACE class 26.11 ‘manufacture of flat glass’. Raw float glass accounts for well over 80 % of total flat glass production in the EEA and can therefore be regarded as representative of NACE class 26.11. However, capacity in the flat glass sector is measured by reference to exploitable (saleable) capacities (22). This measurement method is not comparable with the measurement of capacity in manufacturing industry as a whole.

(79)

Consequently, the Commission takes the view that the situation regarding capacity for the raw float glass market cannot be taken into consideration in assessing the competition factor (23).

(80)

Point 3.4 of the MSF 1998 provides that, in the absence of sufficient data on capacity utilisation, the Commission will use the figures on apparent consumption in order to determine whether the investment is taking place in a declining market. The market for the product in question is deemed to be declining if, over the last five years, the average annual growth rate of apparent consumption of the product in question is more than 10 % below the annual average of EEA manufacturing industry as a whole, unless there is a strong upward trend in the relative growth rate of demand for the product. An absolutely declining market is one in which the average annual growth rate of apparent consumption over the last five years is negative.

(81)

The Commission has the following data on apparent consumption of raw float glass for the period 1997–2002:

(82)

In the period 1997-2002, the average annual growth rate of EEA manufacturing industry as a whole was 4,8 %. The threshold below which, pursuant to point 7.8 of the MSF 1998, a declining market must be assumed to exist is accordingly 4,4 %. The European raw float glass market had an average annual growth rate in value terms of 5,28 % over that period and is therefore well above the EEA average (26). The Commission also examined, on the basis of the available Eurostat/Comext intra-Community trade data, whether the trend of apparent consumption of raw float glass in value terms in the individual Member States confirmed this result and found that it did so.

(83)

The positive trend of the raw float glass market is reflected in the conduct of the producers, since, on the European market, which is concentrated on a few large float glass producers (27), investment has been carried out in new production plant in recent years in France (2001 — Pilkington/Interpane), in Belgium (2001 — Glaverbel/Scheuten) and in Italy (2002 — Sangalli) (28).

(84)

Conclusion: The Commission therefore concludes that the market for raw float glass is not a declining market and that the competition factor pursuant to point 3.10.1(iv) of the MSF 1998 must be put at 1,0.

(85)

According to point 7.6 of the MSF 1998, the relevant product market(s) comprises the products envisaged by the investment project and, where appropriate, its substitutes considered by the consumer (by reason of the products’ characteristics, their prices and their intended use) or by the producer (through flexibility of the product installations).

(86)

The market for processed glass (level 2) needs to be further subdivided in order to identify the products concerned and to define the relevant market in this case. Two broad categories can be clearly distinguished which are not substitutable from the consumer or producer point of view: automotive glass and building glass (29). These two products form two separate product markets since production technology, customer base as well as marketing strongly differ. The market for building glass can then be subdivided into the following sub-markets: (i) multiple-walled glass (sealed units); (ii) toughened glass (ESG — safety glass); (iii) laminated glass (VSG — safety glass); and (iv) silvered glass (mirrors).

(87)

Safety glass (ESG and VSG) and multiple-walled glass are substitutes from the supply side as the manufacturers can adjust the production to the different products within a short time frame and without significant cost. According to Germany, around 70 to 80 % of the processed glass for the building industry is produced by manufacturers that offer the two products, safety glass and multiple-walled glass, at the same time. It is also important to note that safety glass can serve as a final product but also as an input product for the production of multiple-walled glass. In addition, sales and distribution of safety and multiple-walled glass for the building industry are often done simultaneously.

(88)

On this basis, it would be erroneous to conclude that the relevant product market should be limited to sealed units only as competitors suggested in their comments.

(89)

The Commission notes that all three shareholders in e-glass produce safety glass (VSG and ESG) and multiple-walled glass for the building industry but do not manufacture technical glass or glass for the automotive industry.

(90)

Conclusion: The Commission concludes that the relevant product market is a sub-group of the level 2 market, namely safety glass (VSG and ESG) and multiple-walled glass for the construction industry, with the following PRODCOM codes: 26121230 (toughened safety glass, n.e.c.), 26121270 (laminated safety glass, n.e.c.) and 26121330 (multiple-walled insulating units of glass).

(91)

Point 7.6 of the MSF 1998 states that the relevant geographic market comprises usually the EEA or, alternatively, any significant part of it if the conditions of competition in that area can be sufficiently distinguished from other areas of the EEA. Where appropriate the relevant market may be considered to be global.

(92)

Germany suggests that, like the market for raw float glass (level 1), the market for processed float glass (level 2) has to be considered to be EEA-wide.

(93)

Competitors of e-glass suggest in their comments that the market for processed glass (level 2) is national or even regional in scope as high transport costs would not allow for wider distribution.

(94)

According to evidence provided by Germany, the customer base of e-glass's shareholders for the relevant market as defined in paragraphs 85 to 90 is larger than national or regional and covers various areas of the EEA (30).

(95)

Sales markets form concentric circles around the different production sites and, despite relatively high transport costs, processed glass is transported over a long distance (31). These concentric circles overlap each other and cover jointly the whole EEA. Furthermore, there are no different technical standards or regulatory barriers to trade for processed glass (level 2) within the EEA territory and about 20 % of the German production is imported.

(96)

In line with previous merger and state aid decisions, the Commission considers that, like the market for raw float glass (level 1), the market for processed float glass (level 2) has to be seen as EEA-wide.

(97)

In state aid case Pilkington/Interpane (N 291/2000), SG(2000) D/106264 of 17 August 2000, the Commission concluded that the market for VSG and coated class including insulating glass is EEA-wide.

(98)

In the merger case IV/M/1230 Glaverbel/PPG, paragraph 16 states: ‘In respect of general trade in the Pilkington-Techint/SIV case the Commission left the precise definition of the geographic market open. In particular, on silvered and laminated glass the Commission noted that these products were transported over long distances by the large producers. Therefore, the parties hold that there is a strong argument for defining these markets EU-wide as well. The parties submit that the same conclusion is valid for toughened glass and sealed units as all major producers are operating at least on an EU-wide basis and market conditions in the different Member States are sufficiently homogeneous. The Commission's investigation in the present case has confirmed that the markets for silvered glass (mirrors) and laminated glass are EU-wide. For the other product markets in the general trade segment the results are not so clear’.

(99)

Therefore, defining the geographic market for level 2 as national, as suggested by Pilkington in its comments, would be contradictory to its own statement in response to the investigation of the merger case.

(100)

Conclusion: The Commission concludes that the geographic market for processed glass (level 2) in the form of safety and multiple-walled glass for the building sector is the EEA as a whole. The Commission has no reason to conclude that the market for processed glass should be differently defined in geographic terms than the market for raw float glass.

(101)

The Commission notes that data on capacity utilisation for the level 2 market are not available or do not exist. The necessary information on the (yearly) production volume and the (yearly) maximum production capacity in the EEA of the factories processing raw float glass in the form of safety glass and multiple-walled glass for the construction industry is not available — either from Eurostat or research institutes or from sector associations.

(102)

Consequently, the Commission takes the view that the situation regarding capacity for processed glass in the form of safety glass and multiple-walled glass for the construction industry cannot be taken into consideration in assessing the competition factor.

(103)

As stated in paragraph 80, point 3.4 of the MSF 1998 provides that, in the absence of sufficient data on capacity utilisation, the Commission will use the figures on apparent consumption in order to determine whether the investment is taking place in a declining market. According to point 7.8 of the MSF 1998, the market for the product in question is deemed to be declining if, over the last five years, the average annual growth rate of apparent consumption of the product in question is more than 10 % below the annual average of EEA manufacturing industry as a whole, unless there is a strong upward trend in the relative growth rate of demand for the product. An absolutely declining market is one in which the average annual growth rate of apparent consumption over the last five years is negative.

(104)

The Commission has the following data on apparent consumption in value for the reference period 1997 to 2002 (source: COMEXT/Eurostat):

(105)

Germany has submitted volume data from the industry association CPIV (33), which show that the market for safety glass (ESG and VSG) and multiple-walled glass grew by 5,54 % during the reference period 1997 to 2002. These volume data have been converted into turnover figures by using price information from the beneficiary as far as available as well as price estimates. The compound average annual growth rate in value terms calculated is 7,6 % for the reference period 1997 to 2002. This figure is in line with the COMEXT/Eurostat data shown above.

(106)

The annual average growth rate of the apparent consumption in value terms for all relevant products (safety glass in the form of VSG and ESG as well multiple-walled glass) individually but also together as reflected in the table above lies above (34) the average annual growth rate of EEA manufacturing industry for the same time period, which was 4,8 %.

(107)

Conclusion: The Commission therefore concludes that the market for processed glass as defined above is not a declining market and that the competition factor pursuant to point 3.10.1(iv) of the MSF 1998 must be put at 1,0.

(108)

The assessment of the processing market (level 2) together with the analysis of the market for raw float glass (level 1) shows that these markets have developed in the same direction during the reference period 1997 to 2002, namely with a growth rate above the average growth rate of manufacturing industry. The Commission notes that for both markets (level 1 and level 2) the competition factor is set at 1,0, which also means that the competition factor for the project as a whole is set at 1,0 (35).

(109)

The assessment of the capital-labour factor as described in the original decision of 20 April 2004 was not called into question and not part of the decision of 20 April 2005 initiating the procedure. The following part is therefore a reproduction of the assessment that was carried out and described in the decision of 20 April 2004.

(110)

The capital-labour factor of the MSF 1998 aims to adjust the admissible maximum aid intensity in favour of projects which contribute effectively and more positively to reducing unemployment through the creation of a relatively higher number of new jobs or the safeguarding of existing jobs.

(111)

According to the information provided by Germany, the project will create 186 long-term jobs, broken down as follows:

(112)

These estimates are based on a comparison with another plant in Saxony-Anhalt which has already been operating for at least six years and whose float glass division, with a production of [...] tonnes gross a day, employs 187 persons (excluding trainees) at the moment of notification. E-glass, with a production of [...] tonnes gross a day, will have a somewhat smaller number of jobs than the comparison plant, since in the case of e-glass certain areas (security) will be outsourced and since the most modern technologies will be used. The Commission considers these figures plausible.

(113)

Eligible investment costs of EUR 121 million for the creation of 186 jobs give a figure of EUR 650 538 per job. In accordance with point 3.10.2 of the MSF 1998, the capital-labour factor must therefore be put at 0,8.

(114)

The regional impact factor as described and assessed in the original decision of 20 April 2004 was not called into question and not part of the decision of 20 April 2005 initiating the procedure. The following part is therefore a reproduction of the assessment that was carried out and described in the decision of 20 April 2004.

(115)

The regional impact factor takes account of the beneficial effects of new investment on the economy of the assisted region. The Commission considers that job creation can be used as an indicator of a project's contribution to the development of a region. Investment, including capital-intensive investment, may create indirect jobs in the assisted region concerned and in any adjacent assisted region, with job creation in this context referring to jobs created directly by the project or by first-tier suppliers and customers.

(116)

The project will contribute to the creation of indirect jobs in the following areas:

(117)

As regards the areas for which the contacted firms provided letters of intent, the Commission recognises the figures specified in such letters of intent (a total of 297 jobs).

(118)

In the case of 24 other jobs, no letters of intent have been provided. However, the explanations and figures given by Germany for these jobs appear convincing. Only as regards the area ‘Suppliers of replacement and expendable parts’ are there doubts: the ten jobs claimed here seem to the Commission to be too high, since the supply of spare parts seems already largely covered by the 60 jobs specified under the heading ‘Servicing, spare parts, maintenance, repair …’. The Commission therefore includes only 14 of the total of 24 jobs not covered by letters of intent, giving a total of 311 indirect jobs which can be recognised.

(119)

The Commission therefore concludes that, compared to the 186 directly created jobs, there will be a high degree of indirect job creation (more than 100 %). Pursuant to point 3.10.3(i) of MSF 1998, the regional impact indicator is therefore 1,5.

(120)

In the light of the above and on the basis of the figures provided by Germany, the MSF 1998 formula for calculating the maximum aid intensity for this project is: 35 % gross x 1,0 x 0,8 x 1,5 = 42 % gross, limited by the regional aid ceiling of 35 % gross.

(121)

The aid intensity of up to 35 % gross of eligible investment costs which Germany proposes to grant to e-glass is consequently compatible with the maximum aid intensity calculated on the basis of the MSF 1998.

(122)

The notified aid intensity of up to 35 % gross which Germany proposes to grant to e-glass AG meets the conditions that allow it to be regarded as compatible with the multisectoral framework on regional aid for large investment projects (1998),