EUROPEAN COMMISSION

Brussels, 27 June 2007 C(2007) 3049 final

In the published version of this decision, some PUBLIC VERSION information has been omitted, pursuant to articles 24 and 25 of Council Regulation (EC) No 659/1999 of WORKING LANGUAGE 22 March 1999 laying down detailed rules for the application of Article 93 of the EC Treaty, This document is made available for concerning non-disclosure of information covered information purposes only. by professional secrecy. The omissions are shown thus […].

Subject: State aid N35/2007 - Germany

Peene-Werft

Sir/Madam,

I. PROCEDURE

(1) By letter dated 15 January 2007, Germany notified the Commission that it intended to grant regional investment aid to Peene-Werft GmbH ("Peene- Werft"). A meeting between the Commission and Germany took place on 14 February 2007. By letters dated 22 February 2007, 27 March 2007 and 2 May 2007, the Commission requested further information. The Commission received the information by letters dated 16 March 2007, 18 April 2007 and 4 May 2007.

II. DESCRIPTION

1. Recipient undertaking

(2) Peene-Werft, the recipient of the aid, is situated in Wolgast, Mecklenburg- Western Pomerania (Germany). The Land of Mecklenburg-Western Pomerania is an assisted area under Article 87(3)(a) of the EC Treaty, both under the regional aid map 2004-2006 and under the regional aid map 2007-2013.

(3) Peene-Werft belongs to the Hegemann-Group and is a large undertaking. Prior to the present measures the shipyard was geared to the construction of LPG carriers, tugs and yachts. In order to meet market demand, it increasingly switched to the construction of container ships. Up to 2004, the Peene-Werft shipyard produced vessels of 168-170 metres in length and with a cargo capacity of up to 1 200 TEU, which were usually constructed from five modules.

1 (4) The shipyard currently produces mostly container ships with a length of up to 187 metres and a cargo capacity of up to 1 650 tonnes. According to Germany, the increase in length of the ships has resulted in an increase in the number of modules to six modules, and up to eight modules in the case of special ships.

(5) Peene-Werft also carries out ship repairs. The facilities used for this are separate from the facilities used for the building of new ships, and they are not involved in the present investment.1

(6) The bottleneck in the shipyard is the dry dock. Each ship must necessarily be assembled in the dry dock, so that the shipyard's maximum output cannot exceed what can be achieved if the time that ships spend in the dry dock is reduced to the minimum. No changes will be made to the dry dock itself. Ship production will therefore remain unchanged at seven container ships of the currently produced size of 1400 to 1600 TEU a year.

2. The investment measures

(7) The application for aid was made by letter dated 30 September 2005. The Regional Development Institute of Mecklenburg-Western Pomerania (Landesförderinstitut Mecklenburg-Vorpommern) confirmed receipt of the application by letter dated 19 October 2005 and authorised Peene-Werft to begin implementing the work under the national aid provisions. The first order for the overall project was made on 3 November 2005.

(8) The delay in notifying the project to the Commission, as compared with the date on which the aid application was made, was explained by reference to the fact that Germany wanted to wait and see how the Commission reacted in the Rolandwerft case, in which regional investment aid was also at issue. Rolandweft, like Peene-Werft, belongs to the Hegemann group. Once it became clear that investment designed to bring about the targeted increase in the capacity of a shipyard is not eligible for aid, the investment project relating Peene-Werft was revised and the volume of investment reduced by more than two thirds. On 26 October 2006, an aid application amended along these lines was submitted to the Regional Development Institute.

(9) Implementation of the investment project extends over the period 2006-2007. The measures comprise eight different modernisation projects. Six of the projects concern individual sections of the production process, while the other two relate to the acquisition of individual production machines.

(10) Introduction of new torch cutting technology

In a first stage in the production of sections, steel plates have to be cut to shape using torch cutting machines. This production stage is being modernised through the acquisition of a new dry plasma cutter which will allow extremely precise cutting and consequently reduce cutting costs. The contracting of cutting work to

1 The ship lift used for repairs can lift only smaller ships with a maximum breadth of 15-16 metres. Repairs are carried out mostly for the German navy, and the carrying out of the work in the hall is a precondition for the award of the contract.

2 outside firms will be considerably reduced and transport and storage costs lowered.

(11) Profile cutting robot

In 2007 it is planned to acquire a new profile cutting robot which will supplement the blow-pipe cutting technology so far used. The robot will increase cutting speed by […]∗% and improve cutting precision. The profile cutting robot will cover the shipyard's entire profile cutting requirements. Supplies from outside firms will no longer be required, and transport and storage costs will be saved.

(12) Panel line

In 2007, the panel line will also be modernised. In the panel line, profiles are welded to the cut steel plates. Various investments will automate panel production, which has previously been manual. This will allow substantial staff costs to be saved, welding speeds will be increased and welding quality improved. Production times will be reduced by […]%.

(13) Fitting out of hall 4/3 as section construction hall

Hitherto, sections have been produced at the Peene-Werft shipyard partly in the open air on the outdoor work area situated in front of hall 4/3. The hall was not equipped for the production of sections (e.g. the cranes available did not have sufficient lifting capacity to lift sections) and optimal use was not made of the space. The measure consists in extending the length of the present crane gantry and the acquisition of two 45 tonne cranes, the hall floor was redone and utility lines laid. According to the information provided by Germany, the main purpose of the measure is to allow sections in future to be constructed independently of weather conditions, since snow, rain and wind can delay work considerably and impose extra costs (e.g. through interruptions to work, difficulties in meeting deadlines, increased sick leave). It will no longer be necessary to rent wheel-mounted cranes, the degree of pre-fitting and the vertical range of manufacture will be increased, jobs can be focused on the central technical tasks, and sub-contracting can be reduced.

(14) Setting up of a module construction site

One of the most urgent investment measures is the setting up of a module construction area on a previously unoccupied part of the site. According to the information provided by Germany, deckhouses in particular are to be constructed in this area; because of their height, they cannot be produced in the module construction hall. Prior to this investment, these modules were produced on a smaller site between the entrance to the section and module construction hall and the dry dock. This blocked the path between the hall and the dock. If necessary, sections or modules had to be brought, with difficulty, through a side door into or out of the hall. The construction of a new module construction area

∗ Business secret

3 will allow the area between the hall and the dock to be kept free, so that modules can be brought without hindrance from the hall to the dock and assembled there. This will reduce the time required for carrying out work in the dock.

In addition, the area previously used for module assembly in the hall will become free, allowing cost-intensive external construction areas used for section construction to be transferred into the hall. This will further increase the ability to work independently of weather conditions and will tighten up the organisation. The pre-fitting of the modules will be increased, the dock cranes will be freed up, and the pre-assembly of the modules will relieve pressure on the dry dock. As a result, the time needed for work in the dock will be reduced.

(15) Acquisition of new keel blocks

Keel blocks are used to transport ships or parts of ships on land. They are used for welding sections to modules and to transport modules from the hall to the dock. The investment costs of the acquisition of six new keel blocks, which will increase the load-carrying capacity of the keel blocks from 200 t to 350 t. According to the information provided by Germany, the acquisition of the new keel blocks was necessary, firstly, in order to bring this transport and alignment system into line with the ever increasing weight of the modules. For example, the weight of the aft modules is increasing as a result of the ever increasing weight of the main machinery (greater customer requirements, for example, as regards speed). Secondly, it is argued that greater load-carrying capacity for the keel blocks is a basic requirement for reducing the number of modules and for further increasing pre-fitting, as a result of which the individual modules also become heavier. A further advantage of the new blocks is reported to be that they are hydraulically adjustable and easier to steer than the old keel blocks.

(16) Acquisition of a harbour mobile crane

The mobile crane will be used on the external construction areas. One example given of its use was section construction: sections are constructed upside down and subsequently have to be turned over. Previously, the Peene-Werft shipyard has used expensive rented wheel-mounted cranes. The harbour mobile crane will also allow an increase in prefinishing, since as a result of the relatively high maximum load-carrying capacity of the crane (over 100 t) the assembly weight of the sections can be increased. In addition, it will no longer be necessary to use several cranes in parallel, since the harbour mobile crane is able to lift the full weight of the sections. The crane, together with the module assembly area, will result in a further reduction in the workload of the dock cranes. Furthermore, acquisition of the cranes will reduce the need to rent lorry-mounted mobile cranes.

(17) Rationalisation/infrastructure

Lastly, the shipyard will acquire various production machines to further rationalise and improve infrastructure. The use of modern digitally-controlled welding technology will reduce processing times and improve quality. The aim is to achieve a further increase in quality through the introduction of modern

4 measuring techniques. Hydraulic presses and special tools will reduce the labour involved in section and module production and will minimise time-consuming alignment and adjustment work on the construction parts. Modernisation of the compressed air system will cut energy consumption. The measures designed to improve technical supplies will reduce down-times and off-times in the production process. The introduction of modern transport technology will cut transport and lifting times and reduce off-times in the production stages.

(18) The total eligible costs of the project amount to EUR 9 000 000 and may be broken down as follows:

EUR Torch cutting machine […] Profile cutting robot […] Panel line […] Hall 4/3 (including cranes) […] Module construction area […] Keel blocks […] Harbour mobile crane […] Rationalisation/infrastructure […] TOTAL 9 000 000

(19) Germany intends to provide the aid in the form of a EUR 2 025 000 grant, which represents an aid intensity of 22.5% of the eligible costs. The aid is being granted on the basis of two approved regional aid schemes.2 The aid was notified before the start of the project. No aid has yet been disbursed.

(20) The investment will lead to the creation of 124 jobs at the Peene-Werft shipyard. According to the information provided by Germany, these will be jobs created through the integration into the Peene-Werft shipyard of steel work previously awarded to subcontractors.

III. ASSESSMENT

1. Existence of state aid within the meaning of Article 87(1) of the EC Treaty

(21) Under Article 87 of the EC Treaty, any 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 is, in so far as it affects trade between Member States, incompatible with the common market. It is settled case law of the EU Courts that the criterion of trade being affected is met if the recipient undertaking is engaged in an economic activity which involves trade between Member States.

(22) The grant is being provided by the Land of Mecklenburg-Western Pomerania and is thus attributable to state resources. It confers an advantage on the

2 Investment Allowance Act 2005; 36th outline plan for the Joint Federal Government/Länder scheme for improving regional economic structures.

5 Peene-Werft shipyard which it would not have obtained on the market. Peene-Werft builds seagoing vessels. Since these are traded in, the measure threatens to distort competition and affects trade between Member States. Consequently, the grant constitutes state aid within the meaning of Article 87(1) of the EC Treaty and must be assessed accordingly.

2. Exemption under Article 87(2) and (3) of the EC Treaty

(23) Article 87(2) and (3) of the EC Treaty provide for exceptions to the general ban on aid laid down in Article 87(1).

(24) The Commission has adopted a "Framework on state aid in shipbuilding" (hereinafter referred to as the "shipbuilding framework")3 for assessment of aid to shipbuilding. For the purposes of the shipbuilding framework, the term "shipbuilding" means the building, in the Community, of self-propelled seagoing commercial vessels. "Ship repair" means the repair or reconditioning in the Community of self-propelled seagoing commercial vessels. Peene-Werft's activity is covered by these definitions, and the aid must therefore be assessed in the light of the shipbuilding framework. Peene-Werft does not produce any Community fishing vessels. Under the Guidelines for the examination of State aid to fisheries and aquaculture,4 no aid may be granted to shipyards for the construction of Community fishing vessels.

(25) Under point 27 of the shipbuilding framework, the proposed aid must be notified.

(26) Point 26 of the shipbuilding framework states that "regional aid to shipbuilding, ship repair or ship conversion may be deemed compatible with the common market only if … the aid [is] granted for investment in upgrading or modernising existing yards, not linked to a financial restructuring of the yard(s) concerned, with the objective of improving the productivity of existing installations".

(27) The intensity of the aid must not exceed 22.5% or the applicable regional aid ceiling under Article 87(3)(a) of the EC Treaty, whichever is the lower. In the present instance, the 22.5% ceiling is applicable. The aid must also be limited to support eligible expenditure as defined in the applicable Community guidelines on regional aid. a) Modernisation to improve the productivity of existing installations

(28) The Commission regards 2005 as the reference year for the aided investment, since the investment measures carried out in that year are limited to orders and the actual implementation of the project started only in 2006. In the period 2005 to 2008, productivity measured in terms of processed tonnes of steel per man- hour will increase by 11.66%.

3 OJ C 317, 30.12.2003, p. 11.

4 OJ C 229, 14.9.2004, p. 5.

6 (29) The planned productivity increase is to be achieved in general through the following measures:

- Integration of work previously awarded to subcontractors: according to the information provided by Germany, as a result of strong demand in new shipbuilding, the costs of outside contracting have risen sharply in recent years. The integration of a large part of this work will allow Peene-Werft to cut its costs considerably.

- Automation of stages of production.

- Maximum reduction of open-air work.

- Better arrangement of production stages.

(30) Accordingly, the dry plasma cutter, the profile cutting robot and the automation of the panel line will increase the speed and precision of steel work and as a result substantially reduce the need for corrective adjustments. The awarding of cutting and welding work to outside firms will be considerably reduced and transport and storage costs saved. The far-reaching automation of panel production will result in considerable savings in labour costs. As a result of the conversion of hall 4/3 into a section construction hall and the setting up of the module construction area, it will in future be possible to carry out a major part of the work independently of weather conditions and thus avoid additional costs. Previous obstacles to the moving of sections and modules will be removed. The pre-fitting of modules will be increased, and the number of modules will be reduced through the new keel blocks in particular, resulting in an overall reduction in throughput times. The new harbour mobile crane will also help to reduce costs and speed up work.

b) Effect of the measures on the capacity of the yard

Determining the initial capacity of the yard before the investment

(31) According to the information provided by Germany, Peene-Werft's output in 2005 was 75 330 CGT. Since this was the output which the yard was able to achieve at maximum capacity utilisation, it may be assumed that the yard's capacity must be more or less equivalent to current production. However, this contrasts with the limitation of capacity to 39 000 CGT, to which Peene-Werft was subject up to the end of 2005 within the framework of the restructuring of the shipyard.5

(32) The Commission was able to rule out the possibility that Peene-Werft had changed the shipyard's capacity during the restructuring period. Up to 2004, an annual check was carried out by an independent expert (and the check was also confirmed) that the shipyard had not altered the pre-defined technical bottlenecks of the yard (dry dock, total load-carrying capacity of the cranes in section construction and in module construction, the panel line and working

5 Council Directive 92/68/EEC of 20 July 1992, OJ L 219, 4.8.1992, p. 54; Council Regulation (EC) No 1013/97 of 2 June 1997, OJ L 148, 6.6.1997, p.1.

7 areas) and that the yard's output does not exceed 39 000 CGT. In April 2004, the European Court of Justice held in Kvaerner6 that the concept of capacity limitation was to be understood as limitation of technical capacity and not as a limitation of output. Output could therefore be higher than technically installed capacity. For the years 2004 and 2005, the independent expert therefore merely checked that Peene-Werft had not altered the technical bottlenecks of the yard and at the end of 2005 concluded in his final report that Peene-Werft had complied with the rules for the entire period of the capacity limitation.

(33) In a second stage, the Commission therefore checked the plausibility of the claim of output being twice the technically installed capacity. In 1992, a restructuring plan was worked out for all the East German shipyards with an overall 40% reduction in their capacity7. In this context, the capacity of Peene-Werft was set at 35 000 CGT, measured in terms of the then planned types of ships (LPG carriers, tugs, yachts) and the planned restructuring work (in particular construction of a new dry dock). Following the closure of one of the East German shipyards, the capacity allocated to that shipyard was redistributed among the remaining shipyards, as a result of which Peene-Werft's authorised capacity rose to 39 000 CGT. The capacity limitation was applicable initially until 2000 and was later extended to 2005.8

(34) Up to October 2004, Peene-Werft kept its output down to 39 000 CGT, but was not at this reduced production level operating at full capacity. In October 2004, the Commission formally informed Germany that, following the Court's judgment the Kvaerner in April 2004, no output restriction would in future apply.9 Peene-Werft reacted immediately, achieving an additional 117 000 production hours in 2004.

(35) According to the information provided by Germany, the following measures resulted in a more than […]% increase in output in CGT in the period from mid-2004 to the end of 2005:

- filling of order books through the acceptance of new orders (three ships more in 2005 than in 2004);

- serial production of container ships (simpler construction and hence higher throughput than with LPG carriers or tugs, synergies through the production of sister ships, higher steel throughput);

- increase in ship size;

- switch from two-shift operation to three-shift operation;

6 Judgment of 29 April 2004 in Case C-181/02 P.

7 Council Directive 92/68/EEC of 20 July 1992, OJ L 219, 4.8.1992, p. 54.

8 Council Regulation (EC) No 1013/97 of 2 June 1997, OJ L 148, 6.6.1997, p. 1.

9 Commission letter of 20 October 2004, C(2004)3918 final.

8 - cooperation with the associate shipyard Rolandwerft (fitting out of four ships)10;

- introduction of additional outside labour;

- improved productivity, e.g. through increased automation (22.31 man-hours/tonne of steel in 2005 compared with 62 man-hours/tonne of steel in 1993); reduction in throughput times in the dry dock through various measures (e.g. increase in pre-fitting).

(36) The plausibility of the arguments put forward by Germany is also reinforced by the expert who examined Peene-Werft's restructuring plan in 1993 and noted in his report that the figure of 35 000 CGT was low in terms of the actual capacity of the new dry dock, which could cope with a capacity of more than 75 000 CGT (albeit with a substantially greater use of technology in the upstream stages of production). Furthermore, the expert who drew up the concluding report on the German yards in 2005 noted in his report that in the 1992 calculation a high steel consumption figure had been applied, with which approximately twice as high a level of production of container ships was possible as with the production of the originally planned types of ships (in particular LPG carriers).

(37) For these reasons, the Commission concludes that a production figure of over 75 000 CGT with a technical capacity of 39 000 CGT was possible. After the Peene-Werft shipyard had reached maximum capacity utilisation in 2005, the Commission treats the output of […]CGT as equivalent to the actual production capacity of the shipyard and regards this figure as the initial capacity for assessment of the increase in capacity as a result of the present investment.

Impact of the investment on capacity

(38) Between 2005 and 2008, the shipyard's capacity will increase from […]CGT to a planned […]CGT as a result of the investment. This is an increase of 10.8%. Peene-Werft's order books are full until 2009. The number of ships produced will remain constant at seven ships, though the length and dead-weight tonnage of the ships will increase. This increase means a higher average CGT figure per ship, rising from 9 416 in 2005 to […]CGT in 2008.

(39) The Commission has also checked that the capacity increase is due to the increase in productivity. The higher output was made possible in particular by the fact that the time ships spent in the dry dock was reduced. One requirement for this was a further increase in the pre-fitting of the sections and modules and as great as possible a reduction in the number of modules. This was achieved solely through the present investment. There has been no increase in capacity that is not related to this.

10 There was no further collaboration with Rolandwerft after 2005, nor does the Commission expect any in the future, since the container ships produced by Peene-Werft are now too big for Rolandwerft to be able to fit them out.

9 (40) The Commission therefore finds that the capacity increase is a direct consequence of the measures designed to increase productivity and that the increased capacity in CGT (10.8%) is not disproportionately large compared to the increase in productivity in processed steel/man-hours (11.66%).

3. Further conditions governing the compatibility of the aid with the common market

(41) The Commission also notes that, in accordance with the guidelines on national regional aid, the aid is limited to the eligible costs, complying with the applicable ceiling of 22.5%.

(42) The legal bases for aid to the present investment project are the 36th outline plan for the Joint Federal Government/Länder scheme for improving regional economic structures and the Investment Allowance Act 2005. As regards the Investment Allowance Act, it is assumed, under the regional aid rules for the period 2000 to 2006, that the incentive effect of the aid is ensured if the aid application was submitted before the start of work on the project. For the award of a grant to the project under the 36th outline plan, by contrast, the stricter requirements of point 38 of the new guidelines on national regional aid for 2007-201311 apply, so that it would be doubtful whether there is an incentive effect. However, in the case of projects for which regional aid was applied for and on which work was already started after submission of the application, but the disbursement decision could not be taken before the end of 2006, the Commission accepts in exceptional cases that the incentive effect for aid decisions taken as from 1 January 2007 is ensured if:

(a) the aid applications are submitted by 31 December 2006 and before the start of work,

(b) the aid is approved under a new scheme in which the new regional aid maps and the aid intensities laid down for the period 2007 to 2013 are applied,

(c) the new scheme is expressly designated as the successor scheme to a regional aid scheme which expired on 31 December 2006. The application of the said scheme is not interrupted and the incentive effect requirements of the scheme are respected.

The Commission notes that all the above conditions are met.

IV. DECISION

(43) The Commission therefore concludes that the grant of EUR 2 025 000 which Germany intends to award to Peene-Werft is compatible with the common

11 OJ C 54, 4.3.2006, p. 13.

10 market. The Commission therefore has decided not to raise objections against the planned aid.

If this letter contains confidential information which should not be published please inform the Commission within fifteen working days of receipt. If the Commission does not receive a reasoned request by the stipulated deadline, you will be deemed to agree to the publication of the full text of this letter in the authentic language version on the website http://ec.europa.eu/community_law/state_aids/index.htm. Your request should be sent by registered letter or fax to: European Commission Directorate-General for Competition State Aid Registry B-1049 Brussels Fax No: + 32-2-296 12 42

Yours faithfully,

For the Commission

Neelie KROES Member of the Commission

11