Incompatible aid from Hellenic Shipyards - guide

02 July 2008
by eub2 -- last modified 02 July 2008

The European Commission has requested Greece, following an in-depth investigation under EC Treaty state aid rules, to recover more than EUR 230 million of illegal state aid from Hellenic Shipyards S.A. (HSY).

Why did the Commission open proceedings against Hellenic Shipyards only in 2004 and 2006?

Despite Member States' obligations under EU state aid rules to notify aid to the Commission, the various support measures were not notified before they were implemented and the Commission only learned about them much later.

On the basis of several sets of questions it sent to Greece and a detailed complaint filed by a competitor, the Commission progressively gathered indications that between 1996 and 2002 Greece had granted various loans, guarantees and capital injections to Hellenic Shipyards (HSY), which seemed to constitute state aid. During this process, the Commission also discovered that Greece and HSY did not seem to have complied with conditions linked to two Commission decisions authorising aid to HSY in 1997 and 2002. The Commission further found that Greece seemed to have granted a guarantee to the consortium HDW/Ferrostaal, when the latter purchased HSY in 2002.

The Commission therefore decided to open proceedings in April 2004 concerning four measures implemented by the State in favour of HSY. In July 2006, as further measures had been discovered, the proceedings were extended to twelve additional measures. During the same period, but in the framework of a separate proceeding, the Commission was already investigating other aid measures granted at the time of the privatisation of the yard in 2001-2002, and eventually concluded in October 2004 that these were incompatible aid that had to be recovered.

Why does the Commission request the recovery of past aid whereas HSY was privatised in 2002?

The Commission is aware that the yard has been sold to the consortium HDW/Ferrostall in 2002 and is now part of the ThyssenKrupp group.

However, the privatisation did not eliminate the effect of the unfair advantages HSY had enjoyed over its competitors through the incompatible past aid, which remains in HSY. After the privatisation, HSY continues to have significant civil economic activities, in particular ship repair. Therefore, to restore the situation which would have prevailed on the market if no incompatible aid had been granted and if no aid had been misused, it is necessary that HSY pays back the illegal aid.

Moreover, some measures were granted at the time of the 2001-2002 privatisation and not before and the misuse of the closure aid, that is the breach of the capacity limitations the Commission had imposed as a condition to authorise the aid in 2002, started only after 2002, when HSY was already under the control of the new owner.

Are the military activities of HSY concerned by the Commission's decision?

In its previous decisions concerning HSY, the Commission has consistently held that the support given to the military activities of HSY – repair and construction of military ships and submarines for the Hellenic Navy – could be exempted from EC state aid rules on the basis of Article 296 of the EC Treaty. In the final decision just adopted, the Commission found that Greece provided some loans, guarantees and capital to HSY without earmarking them for the financing of a given activity. As a large part of HSY's activities are military, the Commission concluded that an equivalent part of this funding has exclusively financed military activities and could be exempted from the state aid rules. The Commission has assessed under the state aid rules only the aid granted to the civil activities of HSY and requested Greece to recover a part of this aid. The decision just adopted does not affect Greece's support to military activities of HSY that it deems necessary for its security.

However, the Commission found that some advance payments made by the Greek Navy were by far exceeding the amounts necessary to execute the military contracts concerned and had been, according to statements made by HSY itself, temporarily used for other activities. The Commission therefore concluded that these excess advance payments, for the period during which they were not used for the execution of the military contract concerned, are equivalent to an interest free loan. As no private market operator would accept to give interest free loans, they constitute aid, which is incompatible. Greece has to recover the interest, HSY should have paid on such a loan.

Why did the Commission conclude that aid it had previously endorsed had been misused and needed to be recovered?

Among the sixteen measures investigated, three concerned the potential misuse of aid previously endorsed by the Commission.

In 1997, the Commission approved €23 million investment aid. During the investigation, Greece indicated that this aid had not been paid out yet to HSY and the Commission asked Greece not to proceed with the payment before it adopted its decision. The Commission's investigation found that HSY had only partially implemented the investment plan and that delays had occurred. The Commission concluded that the aid for investment expenses carried out with a limited delay could be paid to HSY, especially since part of the delays were due to an earthquake in September 1999. Conversely, the Commission prohibited aid for investments carried out years after the date set for the completion of the investment plan.

In 1997, the Commission also authorised €160 million restructuring aid. However, the Commission's investigation revealed that the investment plan, the execution of which was a condition for approving the aid as it was necessary to replace obsolete and outdated equipment and to increase the productivity of the yard had been implemented only partially and with long delays. In addition, the endorsement of the aid was conditional upon the execution of the partial privatisation agreement signed in September 1995, according to which HSY's employees would pay €24 million over 12 years to purchase a 49% stake in HSY. However, the Commission's investigation revealed that Greece had transferred the shares for free to the employees, without requesting the payment of the purchase price as provided for in the contract. This clearly violates the approval decision and the aid therefore needs to be paid back.

The €29.5 million closure aid endorsed in 2002 and paid to HSY at the same time was conditional on the reduction of the production capacity of HSY. The investigation has revealed that HSY has expanded its ship repair activities so that it has breached the capacity limitation of 420 000 man-hours per year. The aid therefore has to be recovered.

Why did the Commission conclude that the guarantee granted by Greece to the buyer of HSY in 2002 constitutes aid?

In the framework of the privatisation of HSY in 2001-2002, Greece committed to refund the purchaser of HSY (i.e. the consortium HDW/Ferrostaal, whose successor is ThyssenKrupp) for any state aid which HSY would need to pay back. The Commission's investigation found that a private seller operating on market terms would not have accepted to give such a guarantee, which would expose him to indemnification payments of tens of millions of euros. Greece accepted to issue this guarantee only because it wanted to find a purchaser for the civil activities of HSY and thereby to save them. Without such a guarantee, promised already in the tender documents submitted to potential bidders, no investor would have been ready to purchase HSY. The Commission therefore concluded that this guarantee constitutes incompatible state aid to HSY. In addition, such a guarantee would be per se contrary to the state aid rules, as it neutralises the effect of any recovery decision by indemnifying the company from which the aid is recovered. This guarantee can therefore not be implemented.

Why did the Commission conclude that most of the loans, guarantees and capital given by the Greek State and the then state-owned bank ETVA to HSY constitute State aid?

In order to determine whether these measures constitute aid or not, the Commission has assessed whether HSY could have raised all these funds on the same terms from the financial markets. In other words, it verified whether the Greek State and ETVA provided financing at terms acceptable for a normal financial institution.

Since HSY did not receive any loan or guarantee from another bank during the period concerned, this assessment has been based on a detailed analysis of the creditworthiness of the yard during the years concerned. The Commission concluded, as regards the loans and guarantees granted between 1997 and mid-1999, that the Greek State and ETVA charged too low interest rates and guarantee premiums. The price was insufficient to compensate for the high risk of lending to HSY. Indeed, even if a return to viability could be expected, the financial situation of the yard, which had twice been put into liquidation in the last fifteen years, was still fragile. The Greek State and ETVA therefore provided aid to HSY in the form of a reduction of its financing costs. As regards the period after mid-1999, the Commission concluded that the financial situation of HSY had become so bad that no normal bank would have lent to HSY anymore, even at a high interest rate. The entirety of the loans and guarantees granted by the State and ETVA during that period constitute aid since HSY could not have received them from the financial market, even by paying a high interest rate. Only one loan contract signed in 2002 is not concerned by this assessment, as it never was paid out to HSY.

As regards the capital injections made by ETVA in 1996-1997 at a time when it held 51% of HSY, the Commission concluded that they constitute aid because ETVA did not receive any new shares for this injection. As regards the capital injections in 1999 and 2000, they were carried out at a time when no return to long term viability could be expected and therefore no normal investor would have made such an investment. Only as regards the capital injection made in 1998 in parallel with HSY employees, does the Commission consider that it does not constitute aid since at that time a return to viability could still be expected.

Why did the Commission conclude that most of this aid is incompatible with the Single Market?

The Commission found two measures to be compatible with the state aid rules. First, as regards the capital injection made in 1996-1997, it financed a reduction of the workforce and, in combination with other measures, led to a reduction of the production capacity. It fulfilled therefore the conditions for qualifying as compatible closure aid. Second, the Commission considers that part of a state funding granted at the end of 1999 constitutes compatible aid since it was proportionate with the damage caused to HSY by the earthquake of September 1999.

The Commission concluded that the rest of the aid measures were not compatible with state aid rules, for the following reasons:

First, the Commission found that some loans, guarantees and capital injections had been granted to finance the investment plan of HSY. As the Commission had already endorsed aid in favour of the investment plan up to the maximum aid intensity of 50% in 1997, no additional aid to finance that plan could be authorised.

Second, the Commission found that some of the loans and guarantees granted to HSY constituted operating aid. Such aid was prohibited in the ship repair sector. It was authorised in the shipbuilding sector, but HSY was not active in civil ship construction during that period.

Finally, the Commission considered that none of the restructuring aid could be found compatible. During the period under investigation, the authorisation of restructuring aid was subject to the Commission's 1994 and 1999 restructuring guidelines. According to these guidelines, restructuring aid could only be authorised under strict conditions, such as the existence of a restructuring plan that is capable of restoring the long-term viability of the firm. These conditions were not met. In addition, HSY had already received restructuring aid before and was therefore not eligible for receiving restructuring aid a second time.

Were other measures investigated?

The Commission also assessed whether Hellenic Railway Organization (OSE) and Athens-Piraeus Electric Railways (ISAP), which had signed contracts with HSY concerning the supply of rolling stock, have not waived penalties and renegotiated contracts in a way favourable to HSY, when the latter was unable to deliver the products concerned in accordance with the contractual calendar. The final decision just adopted concludes that OSE and ISAP behaved in a way which would have been acceptable to a normal company dealing with delays of delivery by suppliers. These measures therefore do not constitute state aid to HSY.

List of the sixteen measures investigated:

1. Alleged misuse of the € 22.9 million investment aid endorsed in 1997
2. Loan guarantee of € 13.7 million granted by the State in 1999
3. € 4.5 million loan granted by ETVA in 1999
4. € 13.7 million loan granted by ETVA in 2002
5. Alleged misuse of the € 160 million restructuring aid authorised in 1997
6. Alleged misuse of the € 29.5 million closure aid authorised in 2002
7. Capital injection of € 25.6 million by ETVA in 1996-1997
8. Capital injection of € 4.4 million by ETVA between 1998 and 2000
9. State counter-guarantees on advance payments of € 39 million made by OSE and ISAP to HSY in 1998 and 1999
10. Deferment/rescheduling of obligations and waiver of penalties owed by HSY to OSE and ISAP in 2002 and 2003
11. Loan of € 49.7 million granted by ETVA in 1999
12. Advance payments guarantees of € 6.6 million granted by ETVA in 1999
13. Loan guarantee of € 29.3 million granted by the Greek State in 1999
14. Loans of € 5.9 million, USD 10 million and USD 5 million granted by ETVA in 1997 and 1998
15. Excess advance payments by the Greek Navy in 2000 and 2001, temporarily used to finance other activities.
16. Indemnifying clause in favour of HDW/Ferrostaal in the case where aid would be recovered from.

Source: European Commission