C-278/92

OPINION OF MR JACOBS — JOINED CASES C-278/92 TO C-280/92

OPINION OF ADVOCATE GENERAL JACOBS delivered on 23 March 1994 *

My Lords, number of factories in and around Seville. Hytasa's financial difficulties did not cease with nationalization and a restructuring plan was launched which involved the injection of a large sum of capital (PTA 6 600 million), provided by the State, in the years up to 1986.

1. This Opinion relates to three joined cases in which the Kingdom of Spain contests Commission decisions finding that Spain granted State aid in breach of Articles 92 and 93 of the Treaty. Although some of the issues raised by the three cases are related, there are also important differences. I shall therefore deal with the three cases one by 3. Following a complaint the Commission one. requested the Spanish authorities on 4 April 1989 to send it all relevant information on alleged capital contributions made by the State after Spain's accession to the Commu­ nity on 1 January 1986. On 24 Novem­ ber 1989 the Spanish authorities informed the Commission that PTA 7 100 million had Case C-278/92 (Hytasa) been injected into Hytasa out of State funds since 1986.

2. Hilaturas y Tejidos Andaluces SA (or Hytasa) was founded as a private undertak­ ing but was taken over by an organ of the 4. On 30 May 1990 the Spanish authorities Spanish State (the Patrimonio del Estado) informed the Commission that Hytasa was in 1982 as a result of its financial difficulties. in the process of being privatized. Under the It manufactures various textile products at a privatization scheme the capital sum of PTA 4 300 million was to be injected into the company by the Patrimonio del Estado, * Original language: English. the company was to be sold for PTA 100

6. In the course of the proceedings under Article 93(2) Spain argued that the capital injections of PTA 7 100 million made between 1986 and 1988 did not constitute State aid since the investments carried out by the government were based on sound criteria 8. Commission Decision 92/317/EEC ' on which would equally have been applied by a State aid in favour of Hilaturas y Tejidos private investor. Spain also contended that Andaluces SA, now called Mediterráneo Téc­ those capital contributions took place in nica Textil SA, and its buyer was adopted response to circumstances which developed on 25 March 1992. According to Article 1, before Spain's accession to the Community. the aid granted to Hytasa in the form of cap- As regards the privatization scheme, Spain argued that that did not involve State aid, in view of the fact that the undertaking was 1 — OJ 1992 L 171. p. 54.

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OPINION OF MR JACOBS —JOINED CASES C-278/92 TO C-280/92

ital contributions of PTA 7 100 million over dance with the procedures and provisions of the period 1986 to 1988 was granted illegally, national law, in particular those relating to since the procedural rules established in interest. Article 93(3) of the Treaty were not com­ plied with. Article 1 went on to state, how­ ever, that that aid met the conditions laid down in Article 92(3)(c) of the Treaty and was therefore compatible with the common market. 11. Article 4 of the decision stated that any agreement providing for an indemnity for the buyers by the State or the Patrimonio del Estado in respect of the obligation to reim­ burse the aid should not be carried out.

'The Commission shall be informed, in suf­ 'Concerning the legal status of the aid to ficient time to enable it to submit its com­ Hytasa under Community law, it has to be ments, of any plans to grant or alter aid. If it concluded that it is illegal, since the Spanish considers that any such plan is not compati­ Government failed to notify it in advance to ble with the common market having regard the Commission as provided for by Arti­ to Article 92, it shall without delay initiate cle 93(3) of the EEC Treaty.' the procedure provided for in paragraph 2. The Member State concerned shall not put its proposed measures into effect until this procedure has resulted in a final decision.'

months whether to initiate a full review The Commission is oversimplifying matters under Article 93(2). When that period has when it maintains that the payment of the expired, the Member State may implement purchase price of PTA 100 million was the the plan, but the requirements of legal cer­ only burden accepted by the buyers of tainty mean that prior notice should be given Hytasa in return for the acquisition of a to the Commission. company into which capital amounting to PTA 4 300 million had just been injected. The buyers also undertook to carry out a restructuring programme to ensure the via­ bility of the undertaking. Under that pro­ gramme they were required to invest PTA 2 500 million and to disburse, in addi­ 16. In the present case it is clear from the tion, PTA 2 040 million on reducing the contested decision and from the account of workforce. The buyers also undertook, in the facts in Spain's application that the Com­ the contract of sale, to forego a claim held by mission was first informed of the plan to Hytasa against the State for the sum of privatize Hytasa on 30 May 1990 and that PTA 822 750 396. The claim had been upheld the terms of the proposed sale were not noti­ by the Spanish Supreme Court. fied to the Commission until 25 June 1990. Details of the recovery plan were not noti­ fied until 9 July 1990. In the circumstances Spain was clearly not justified in proceeding with the sale on 25 July 1990. By doing so it flagrantly infringed the procedural rules laid down in Article 93 of the Treaty.

21. Secondly, Hytasa was sold to the highest 23. Thirdly, the injection of capital into bidder in accordance with a procedure which Hytasa by the Patrimonio del Estado was was in conformity with Community law. action that a private investor would have Here, Spain refers to a passage in the con­ 4 taken. Spain cites Belgium v Commission in tested decision in which the Commission which the Court held that an increase in the stated that in order to prove that no element capital of a State-owned undertaking, pro­ of State aid was involved it had to be shown vided out of public funds, does not consti­ not only that the company was sold to the tute State aid if the undertaking would have highest bidder but also that 'the sale took been able to obtain the sums in question on place in an unconditional open bid, that is to the private capital markets, that is to say if say, through a tendering process where any 'in similar circumstances a private share­ potential buyer is invited to bid for the com­ holder, having regard to the foreseeability of pany and where the State does not impose obtaining a return and leaving aside all social, any condition for settling the sale'. 3 The regional-policy and sectoral considerations, contested decision went on to note that would have subscribed the capital in ques­ Spain imposed certain conditions on the 5 tion'. buyers, 'limiting temporarily the disposal of the share-holding acquired'.

22. Spain states that Hytasa was offered to 160 potential buyers, not all of which 24. Spain argues that a private investor were Spanish. The conditions of the contract would willingly have paid PTA were not determined in advance but were the 3 377 300 000 (i. e. PTA 4 200 million minus 6 result of negotiations with the buyers. They PTA 822 700 000 in respect of the judg­ are balanced, proportionate and directly ment debt referred to in paragraph 18 above) related to the object of the contract. The contractual term prohibiting disposal of 4 — Case 234/84 [1986] ECR 2263. 5 — Ibid., paragraph 14 of the judgment. 6 — Spain sometimes quotes the precise figure stated in para­ 3 — Decision 92/317, part IV, sixth paragraph. graph IS and sometimes rounds the figure off.

in order to rid himself of a company which 26. In my view, none of the above argu­ was likely to lose PTA 5 000 million in the ments can undermine the Commission's next three years and which could only have finding that Spain's action, which consisted been liquidated at a cost of PTA in injecting PTA 4 300 million of public 5 312 600 000. Spain observes that in its money into a State-owned company and judgment in Italy v Commission (ENI- simultaneously agreeing to sell that company 7 Lanerossi) the Court held that a subscrip­ for PTA 100 million, amounted to the grant­ tion of capital by a parent company was ing of State aid. acceptable if the aim was to close down a subsidiary in the best possible conditions and that one of the relevant considerations was the need to maintain the image of the parent company. The image of the Patrimo­ nio del Estado would be severely damaged if it closed down its operations in an area of high unemployment and social deprivation. A private company in the same situation as the Patrimonio del Estado would also be sensitive to trade union pressure or to polit­ 27. As to the argument that there was a rea­ ical pressure. sonable balance between the burdens and benefits arising under the contract for the sale of Hytasa, that is not in my view the most appropriate way to approach the ques­ tion whether Spain granted State aid to the buyers of Hytasa or the question how much State aid was granted. Those questions must be answered, not so much by reference to the benefits conferred (or the burdens imposed) on the alleged recipient of aid, but rather by reference to the net cost of the operation to the State. The approach taken by Spain would in the circumstances of the 25. Fourthly, the contested decision does not present case make it practically impossible to establish that the Community market in fin­ quantify the financial assistance provided to ished cotton and wool products was affected the buyers of Hytasa, since some of the bur­ by the financial operation carried out by the dens allegedly assumed by them cannot be Patrimonio del Estado. The decision refers measured in pecuniary terms. exclusively to the market in yarns and woven cloth. After the sale of Hytasa, that under­ taking will cease to supply such products and will in fact become a consumer of them. As regards finished products, on which Hytasa will henceforth concentrate its activ­ ities, the Commission simply complains — in the contested decision ·— about the absence of statistics.

30. Once matters are seen in this light many of the issues debated by the parties at con­ siderable length cease to be relevant. Cer­ tainly the uncontested fact that Hytasa was sold to the highest bidder as a result of a properly conducted tendering procedure is irrelevant. That other undertakings were 29. Spain recognizes that the 'private inves­ unwilling to take Hytasa over unless an even tor test' is the essential yardstick, but seeks higher amount of public finance was offered to establish that its action was consistent as an inducement does not prove that the with that test because the only alternative terms agreed with the successful tenderer did course of action — namely, to wind Hytasa not involve State aid. Also irrelevant in my up — would have been more costly to the view is the argument based on the need to State. The flaw in that argument is that, since safeguard the image of the Patrimonio del Hytasa was constituted as a limited com­ Estado. It is difficult to accept that a State- pany, the Patrimonio del Estado would not, owned holding company would be so con­ as the owner of its share capital, have been cerned about the damage' to its collective required to inject further money into the image ensuing from the failure of one of its company in the course of its winding-up. If enterprises that it would, for that reason the company's liabilities exceeded its assets, alone, offer huge sums of money to a private its creditors would not have been able to call company as an inducement to take the enter­ upon the Patrimonio del Estado to make prise over. good the difference. As the Commission rightly points out, a distinction must be made between the obligations of the Patri­ monio del Estado, as owner of the share cap­ ital in Hytasa, and the obligations of the Spanish State as provider of social security and unemployment benefits. The latter type

principle, if the Spanish State owed a certain between Member States is easily satisfied. In sum of money to Hytasa as a result of a nor­ Philip Morris v Commission the Court stated mal commercial transaction (and hence not that: ? as a result of an undertaking to grant some form of State aid) and if the buyers of Hytasa agreed to forego that claim, it would be logical to take that sum into account when calculating the amount of aid granted to Hytasa. (This point does not of course affect the question whether Hytasa and its buyers were the beneficiaries of State aid; it merely affects the quantification of the aid.) 'When State financial aid strengthens the However, as the Commission has pointed position of an undertaking compared with out, Spain failed to bring this matter clearly other undertakings competing in intra- to the Commission's attention in the course Community trade the latter must be of the proceedings under Article 93 of the regarded as affected by that aid.' Treaty. All that the Commission knew was that a clause in the contract of sale provided for a waiver of possible rights against the State pursuant to a judgment of the Supreme Court. Therefore I do not see how the Com­ mission's decision adopted at the conclusion of those proceedings can be annulled, even partially, on this ground.

35. In the present case very substantial sums 37. Spain observes in the first place that it of money were disbursed by the State in appears to be common ground that the order to save from extinction a textile manu­ Seville region is in principle eligible for State facturer which could not have survived if aid under Article 92(3)(a), which permits aid market forces had been allowed to operate to promote the economic development of freely. As a result that undertaking will pro­ areas where the standard of living is abnor­ duce large quantities of goods for sale in mally low or where there is serious under­ Spain, in other Member States or outside the employment. Community. The goods in question are cot­ ton and wool fabrics and finished garments. One does not need a battery of statistics or volumes of OECD reports to know that such goods are the subject of international trade both within the Community and out­ side it: jackets, trousers, skirts and shirts made in Seville may satisfy the needs of con­ 38. Spain criticizes the Commission for hav­ sumers in Hamburg, Paris and Athens, just ing stated in the contested decision that the as sheets, towels, table cloths and napkins amount of aid granted (PTA 4 200 million, made in Lancashire may find their way into according to the Commission) greatly homes in Andalusia. In the circumstances I exceeded the sum invested by the buyers of do not think that it can seriously be con­ Hytasa (PTA 2 500 million). Spain observes tended that the aid granted to the buyers of that the buyers were required to carry out a Hytasa did not have an appreciable effect on recovery plan for Hytasa and to spend trade between Member States. approximately PTA 2 040 million on reduc­ ing the workforce by 314.

41. The central concern throughout the privatization process was, according to the Spanish Government, to bring about the via­ bility of the company by means of substan­ tially modifying its production and by bring­ ing in valuable know-how, design capability, 43. It is to be noted that Spain has invoked fashion awareness and technological innova­ both subparagraphs (a) and (c) of Arti­ tion. The recovery plan envisaged a substan­ cle 92(3) of the Treaty. Since both those pro­ tial reduction in Hytasa's workforce: the visions allow aid for the development of cer­ number of employees was to fall from 1 034 tain areas to be declared compatible with the to 720. The company was to reduce its pro­ common market, there is an obvious overlap duction of yarns and woven cloth by between them. There are however some amounts varying from 20.8% to 30.2% and important differences: in particular, para­ was to cease selling those products com­ graph (a) provides only for regional aids, its pletely (the production being used internally application being confined to 'areas where for the manufacture of finished goods). The the standard of living is abnormally low or company would henceforth concentrate on where there is serious underemployment'; the manufacture of finished garments. paragraph (c), on the other hand, allows the Commission to authorize, in addition to regional aids (which are not however limited under paragraph (c) to particularly disadvan­ taged regions), sectoral aids, meaning aids for the development of certain activities. Para­ graph (c) is thus of potentially unlimited geographical application, which doubtless explains why the authors of the Treaty sub­ 42. Spain criticizes the Commission for hav­ jected its application to the further condition ing concluded that the recovery plan was not — not present in paragraph (a) — that the likely to bring about the viability of the aid must 'not adversely affect trading condi­ company. Spain cites the judgment in Inter- 12 tions to an extent contrary to the common mills v Commission, where the Court held interest'. that the Commission had not shown 'why

45. In the present case it is not contested that the Seville region is afflicted by serious underemployment, which means that Arti­ cle 92(3)(a) is capable of application in prin­ ciple. As I have noted above, that provision does not expressly require the Commission 'In respect of the State aid element to Hytasa to satisfy itself that the aid would not of PTA 4 200 million contained in the capital adversely affect trading conditions to an contribution made just before the company's extent contrary to the common interest. That sale, Article 92(3)(a) lays down an exception is not to say of course that the Commission for aid that promotes the development of may disregard the common interest entirely areas where the standard of living is abnor­ when applying Article 92(3)(a); but the dif­ mally low or where there is serious under­ ference in the wording of paragraphs (a) and employment. In this respect, although (c) of Article 92(3) clearly implies that the Hytasa is situated in Seville, which is an Commission must grant the Member States assisted area pursuant to Article 92(3)(a) greater latitude in relation to aid granted to qualifying for regional aid, the aid measure to Hytasa in question was not granted under the corresponding regional aid schemes but 14 — Case C-301/87 [1990] ECR I-307, paragraph 49 of the on the basis of ad hoc decisions of the Span­ judgment; see also Philip Monis (cited above, note 9), para­ ish government, taking the form of discre­ graphs 17 and 24, and Case 310/85 Denfil v Commission [1987] ECR 901, paragraph IS. tionary capital contributions.

47. The Commission cannot be criticized for taking the view that aid granted pursuant to Article 92(3)(a) must contribute to the long- On the other hand, even though the term development of the region in question, PTA 4 200 million aid element was explicitly with the result that in the present type of granted by the State on the condition that case the aid must serve to restore the compa­ part of it be used by Hytasa in investments ny's viability. Any other view would open — a requisite feature for aid to facilitate the the door to operating aid, the evils of which development of certain economic areas as are well recognized. established in the 1979 Commission commu­ 15 nication on the principles of coordination of regional aid systems — this aid to Hytasa cannot be considered automatically as com­ patible since, in view that its grant was made outside the scope of aid regimes approved by the Commission, the Commission must assess its compatibility on its own merits verifying, amongst other aspects, both that 48. The key issue is therefore whether the the aided investment projects are in line with restructuring plan accepted by Hytasa's buy­ the interest of the Community for the sector ers was likely to bring about the desired result. Unfortunately the reasoning on this point, in the contested decision, is extremely 15 — OJ 1979 C 31, p. 9. exiguous.

I-4118

SPAIN v COMMISSION

50. In fact part IV deals with completely dif­ ferent issues and was presumably referred to by mistake, part III being the one that deals with the soundness of the restructuring plan. I shall examine part III shortly. As for the statement that the question whether Hytasa's investment projects contribute to a sound restructuring of the company is 'discussed further below', that is not entirely accurate. The remainder of the decision gives no rea­ sons for considering that the investment 51. As to part III of the decision, that is projects would not achieve the desired result. almost equally silent on the question why It is true that part VI of the decision con­ the restructuring plan was not likely to cludes with the observation that the aid ensure Hytasa's viability. Part III refers to a granted to Hytasa affects trading conditions revised restructuring plan submitted to the within the Community to an extent contrary Commission by the Spanish authorities to the common interest, 'for it does not con­ on 13 June 1991. The plan foresaw 'radical tribute to a genuine restructuring fully changes in the productive and commercial ensuring the viability of the company'; but policy of Hytasa'. In particular, the company

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was to sell only finished goods, production (720 instead of 700) when a reduction in pro­ of which would increase by amounts varying duction is foreseen.' between 50% and 320%, according to the product. The company was to decrease its spinning and weaving operations by amounts 1 varying between 13% and 25 %. 6 The plan foresaw a revised workforce of 720 and fore­ cast profits of PTA 716 million (a 9% margin on sales) in the final year. After thus summa­ 52. Such a statement of reasons seems rizing the revised plan the contested decision wholly inadequate, especially since the via­ states: bility of Hytasa in the light of the restructur­ ing plan is an issue of crucial importance. Wide though the Commission's margin of appraisal is under Article 92(3), it must at least give a coherent, albeit summary, state­ ment of reasons to support its findings on such an essential point.

I - 4120

SPAIN v COMMISSION

account the cost of reducing an undertak­ That approach is illogical. If Hytasa was to ing's workforce. That approach seems be restructured and rendered economically wholly illogical in the case of aid which is viable, it had to manufacture something. The intended to enable a loss-making company whole point of the operation was to enable to restructure itself, scale down its opera­ the undertaking to discontinue activities tions and become economically viable. If which it could not pursue profitably and to economic viability can only be achieved by commence the manufacture of goods which reducing the workforce and if that entails it could sell at a profit. To criticize the redundancy costs as a result of legislation to restructuring plan on the ground that the protect the rights of workers, it is appropri­ reduction in Hytasa's output of intermediate ate to regard those costs as an essential part products would be offset by increases in the of the restructuring programme; they are as manufacture of finished products is to mis­ necessary as investment in new machinery to understand the whole concept of restructur­ adapt the company's production. ing.

56. In view of the abovementioned defects in the reasoning of the contested decision I consider that the second paragraph of Arti­ cle 2 of the decision, which declared the aid 55. Secondly, the decision states (in the 15th granted to Hytasa incompatible with the paragraph of part VI) that: common market, must be annulled.

Fourth submission

rationalization investments of PTA 5 000 59. Deficient though its reasoning is, I do million and redundancies costing PTA 700 not think that the contested decision should million. In the later period PTA 2 040 mil­ be annulled simply on account of the dispar­ lion were to be spent on redundancies and ity of treatment as between the earlier aids PTA 2 500 million were to be invested by and the later ones. It might well be con­ the buyers of Hytasa, but the Commission tended that the Commission was exception­ gave no explanation as to why that did not ally lenient with regard to the aid granted represent rationalization and restructuring between 1986 and 1988. With the benefit of such as to justify a contribution from hindsight one may question the finding that the State of PTA 4 200 million that aid represented a major effort to create (PTA 3 377 300 000 if Hytasa's abandoned the basis for a definitive viable restructuring claim against the Patrimonio del Estado is of the company. However, the fact that the taken into account). The only explanation Commission displayed leniency with regard for the difference in treatment was that the to the earlier aid does not mean that it must earlier aid was a response to circumstances be equally benevolent towards the aid that arose before Spain's accession to the granted in July 1990. On the contrary, the Community. The Spanish Government con­ Commission was entitled to take the view tends that the action taken in 1990 was the that a more indulgent attitude was required culmination of the process initiated in the in the early years of Spain's membership of earlier period and therefore also constituted the Community, so as to allow the Spanish a response to pre-accession circumstances. In authorities and the undertakings concerned a short, Spain regards the different treatment period of grace in which to become accus­ of the aid granted in 1986-88 and the later tomed to the rules of the Treaty. By the same contribution as evidence of arbitrariness on token the Commission was entitled to the part of the Commission. The failure to assume that by July 1990 there was no longer give adequate reasons for the different treat­ a case for special treatment. ment is alleged to be a breach of Article 190 of the Treaty.

Spain contends that that obligation is con­ 63. The most important point to bear in trary to the principle of proportionality and mind is that the question of recovery would that the contested decision does not contain never arise if Member States complied with a sufficient statement of reasons for imposing their obligation to inform the Commission, such an obligation. Reference is also made to in advance, of any plans to grant or alter aid, the legitimate expectations of the recipients in accordance with the first sentence of Arti­ of the aid. It is contended that the distortion cle 93(3) of the Treaty, and with their obliga­ of competition caused by the aid was not tion to refrain from implementing plans to serious enough to justify action that might grant aid until the Commission has given its lead to the demise of a viable firm and thus final decision, as required by the last sen­ result in further unemployment in a socially tence of Article 93(3). Where Member States deprived region. flout those obligations, the prohibition of State aids decreed by Article 92(1) would be deprived of its effectiveness if the Commis­ sion were not empowered to require the recovery of aid that is held to be incompati­ ble with the common market. Thus it is futile to invoke the principle of proportion­ ality as a ground for not recovering such aid: action that is necessary in order to ensure the 61. Obviously, if the second paragraph of effectiveness of one of the fundamental pro­ Article 2 of the contested decision is hibitions of the Treaty cannot be contrary to annulled, as I have just proposed, that will the principle of proportionality. In Belgium 17 automatically entail the nullity of the provi­ v Commission (Tubemeuse) the Court sions requiring the Spanish authorities to expressly recognized that the recovery of recover the aid (Article 3) and to refrain unlawfully granted State aid cannot in prin­ from carrying out any agreement by which ciple be regarded as disproportionate to the those authorities are to indemnify the buyers objectives of the Treaty in regard to State of Hytasa for an obligation imposed by the aids. decision (Article 4). Article 5, which requires Spain to inform the Commission of the mea­ sures taken to comply with the decision, will likewise cease to be applicable.

many (BUG-Alutechnik) 8the Court held Case C-279/92 (Imepiel) that a Member State whose authorities have granted aid contrary to the procedural rules laid down in Article 93 may not rely on the legitimate expectations of recipients of the aid to justify a failure to comply with the obligation to take the steps necessary to implement a Commission decision instruct­ 19 ing it to recover the aid. In the same judg­ 66. Industrias Mediterráneas de la Piel (or ment the Court held that the recipients of Imepiel) is a manufacturer of hides and foot­ aid may not in principle entertain a legiti­ wear, with premises located in Vall d'Uxó in mate expectation that the aid is lawful unless the province of Castellón de la Plana. It was it has been granted in compliance with the taken over by the Spanish State in 1976, procedure laid down in Article 93. The when it was on the verge of bankruptcy. Court noted that a diligent businessman Thereafter 99.94% of its capital was owned should normally be able to determine by the Patrimonio del Estado. Throughout 20 whether that procedure has been followed. its period of public ownership the company lost money. Over the ten years to 1987 losses amounted to PTA 12 700 million.

also exchanged. The subject of the discus­ pany by a group of Spanish entrepreneurs. sions was a viability plan for Imepiel. By a The offer required financial assistance from letter dated 14 December 1988 the Commis­ the State in excess of PTA 23 000 million. sion informed Spain that it was initiating proceedings under Article 93(2) of the Treaty in relation to the PTA 3 329 million injected into Imepiel by Spain. Spain replied to the Commission's letter on 25 January 1989, stating that the money contributed to Ime­ piel from 1986 to 1988 had to be viewed in 70. After further exchanges of correspon­ the context of a three-year recovery plan that dence between the Spanish authorities and would lead to the privatization of the com­ the Commission in the course of 1989, the pany. The plan foresaw inter alia: Commission was informed on 24 Janu­ ary 1990 of the latest details of the proposed privatization plan. The purchaser was a com­ pany called Círculo de Financiación y Ges­ tion SA, which had a share capital of PTA 2 500 million, of which 25 % was paid (1) a return to profitability within three up. The purchase price was PTA 100 million. years, The purchaser was to retain ownership of Imepiel for at least three years. The Patrimo­ nio del Estado was to provide a capital injec­ tion of PTA 8 500 million. The purchaser intended to increase production of shoes (from 1 250 000 pairs in 1989 to 3 445 000 pairs in 1994) and of hides (from 8 600 000 (2) a reduction in capacity (footwear from square feet to 15 500 000 square feet). 3.2 million pairs a year to 1.74 million pairs and hides from 20 million square feet a year to 14.1 million square feet),

cle 93(2) of the Treaty to include inter alia 75. According to Article 2 of the decision, the capital contribution of PTA 8 500 million the net State aid of PTA 8 400 million (i. e. that was to take place in connection with the the capital injection of PTA 8 500 million privatization. minus the purchase price of PTA 100 mil­ lion) contained in the capital contribution provided by the Patrimonio del Estado to Imepiel simultaneously with its privatization on 2 February 1990 was illegal since it was granted in breach of Article 93(3). Further­ more, the aid was found not to meet any of the conditions which must be fulfilled in order for one of the exceptions laid down in Article 92(2) and (3) to apply and was there­ 73. In the course of the proceedings under fore incompatible with the common market. Article 93(2) the Governments of Denmark, Germany, Italy, Portugal and the United Kingdom all objected to the financial assis­ tance provided to Imepiel by the Spanish authorities. The British Footwear Manufac­ turers Federation also objected, noting that Spanish exports of footwear to the United Kingdom had increased and that Spanish shoes competed at the lower end of the mar­ ket where competition was based on price rather than quality. 76. Article 3 of the decision required the Patrimonio del Estado to recover the aid of PTA 8 400 million from the beneficiaries in accordance with the procedures and provi­ sions of national law, in particular those relating to interest, with interest starting to run on the date on which the illegal aid was granted. 74. On 25 March 1992 the Commission adopted Decision 92/318/EEC on aid granted by Spain to Industrias Mediterráneas 22 de la Piel SA (Imepiel). Article 1 of the decision declared that aid of PTA 6 029 mil­ lion provided to Imepiel between 1986 and 1988 was granted illegally in breach of the procedural rules laid down in Arti­ cle 93(3) of the Treaty. That aid was however declared compatible with the common mar­ ket on the ground that it met the conditions 77. Article 4 required the Spanish Govern­ laid down in Article 92(3)(c) of the Treaty. ment to inform the Commission, within two months of the date of notification of the decision, of the measures taken to comply 22 — OJ 1992 L 172, p. 76. with it.

82. Spain observes that Article 92(1) of the 23 — Article 5 simply states that the decision is addressed to the Treaty declares aid incompatible with the Kingdom of Spain. common market if it 'distorts or threatens to

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distort competition by favouring certain Imepiel did not threaten to 'distort competi­ undertakings or the production of certain tion by favouring certain undertakings or the goods' and 'in so far as it affects trade production of certain goods' or that it would between Member States'. not affect trade between Member States. As a result of that grant of aid a loss-making undertaking was able to remain in business and to plan a huge increase in its output: its production of shoes was to rise from 1250 000 pairs in 1989 to 3 445 000 pairs in 1994 and its production of hides from 8 600 000 square feet to 15 500 000 square feet in the same period. Those are 83. Spain considers that the capital contribu­ very substantial quantities of goods and they tion made by the Patrimonio del Estado did were capable of satisfying the needs of con­ not impair competition between Member sumers in Spain, in other Member States or States. Imepiel's share in the European mar­ ket is minimal and the capital contribution in non-member countries. The consider­ did not entail any discrimination against ations set out above in paragraphs 33 to 35 competitors. Spain gives precise figures to apply with equal force to the shoe trade. quantify Imepiel's market share: after priva­ tization it had 1.5% of the Spanish market and 0.8% of the Community market; since 1988 its production has not exceeded 0.2% of total Community production.

87. As regards the argument that the capital that is to say aid designed to facilitate certain provided by the State was to be used to wipe adjustments or the discontinuance of certain out Imepiel's existing debts, that is irrele­ activities. The aid granted to Imepiel satisfied vant. Without the aid the company would the requirements of Article 92(3)(c) because have had to seek an alternative source of (i) it was absolutely necessary in view of the finance to wipe out those debts and might situation of the industry in question, (ii) its not have been able to survive. Whichever ultimate purpose was to restore the long- way the matter is looked at, the aid clearly term viability of the undertaking, (iii) it was helped to strengthen Imepiel's competitive bound up with a restructuring programme position. which involved a viability plan subscribed to by the Patrimonio del Estado and by the buyers and (iv) the aid was proportionate since the distortion of the market was mini­ mal.

88. As for the argument that the aid did not entail discrimination against competitors, that is simply absurd. The essence of State aid is that it distorts competition by favour­ ing certain undertakings (i. e. those who receive it) to the detriment of others (i. e. those who do not receive it). In order to be 90. The main objective of the aid was to non-discriminatory aid would have to be enable Imepiel to adjust to a market based granted at the same rate to every shoe man­ on free competition. Imepiel had been ufacturer in the Community. nationalized at a time when the Spanish State pursued an industrial policy that was not always based on free-market principles. Spain's accession to the Community necessi­ tated radical changes in that policy. The aid to Imepiel was intended to facilitate that process of adaptation. Third submission

92. The remarks made in paragraph 44 grounds: the intensity of the aid exceeded the above, concerning the Commission's margin ceiling (30% of productive capital invest­ of appraisal in determining whether aid is ment) which the Commission had estab­ compatible with the common market, apply lished for regional aid in the Vall d'Uxó area; equally in this case. the decision to accept that area as eligible for regional aid had been taken by the Commis­ sion to stimulate diversification, in particular as a safety net for redundancies at Imepiel, and not to aid Imepiel itself; the aid in ques­ tion was granted on the basis of an ad hoc decision and was moreover in the nature of operating aid to a firm in difficulties, since it was not conditional on investment or job creation. The Commission concluded that, even if the aid were to be considered as 93. Although Spain refers to the high unem­ regional aid, it could only be justified if it ployment in the Vall d'Uxó region, it is not contributed to the long-term development of invoking Article 92(3)(a) of the Treaty in the the region by bringing about the viability of present case and relies solely on Arti­ the undertaking concerned and if that under­ cle 92(3)(c). In the contested decision the taking was required to follow a restructuring Commission had in fact stated that Arti­ plan which enhanced the competitive situa­ cle 92(3)(a) could not apply because Vail tion. Although somewhat laconic on this d'Uxó did not suffer from an abnormally point, the contested decision seems to imply low standard of living or serious underem­ that those conditions were not satisfied. ployment. I have already remarked that the different wording of paragraphs (a) and (c) of Article 92(3) implies that the Commission should be more stringent when applying paragraph (c). In particular, the Commission must consider whether the aid adversely affects trading conditions to an extent con­ trary to the common interest.

sion went on to state that the Commission undertaking from the normal consequences required that aid to firms in difficulties must of its failure to remain competitive, must be be strictly conditional on the implementation judged by particularly stringent criteria. of a sound restructuring or conversion pro­ gramme capable of restoring the long-term viability of the beneficiary. There must also be 'a compensatory justification for the aid in the form of a contribution by the benefi­ ciary to the development of the sector as a whole on a Community level by a reduction of its presence on the market'. The contested decision did not pronounce on the viability of Imepiel in the light of the restructuring plan put forward at the time of its privatiza­ 97. When a formerly profitable undertaking tion, but rejected that plan on the ground consistently makes a trading loss over a that it did not contain any compensatory period of several years, that indicates that it justification for the grant of aid. The Com­ has failed to adapt to a changing market, mission's fundamental objection seems to meaning that it has not responded either to have been that Imepiel, far from scaling changes in demand or to more intense com­ down and redirecting its activities, was sim­ petition from other undertakings. If Member ply going to increase the output of its exist­ States made a practice of rescuing undertak­ ing products. ings which find themselves in such a situa­ tion, the consequences for the Community as a whole would be disastrous: competition would be distorted; efficient firms would be deprived of the competitive advantage, as against inefficient ones, which would nor­ mally be their reward for sound management and commercial foresight; unemployment would be transferred from one Member State to another; and in the long term there would be little hope of an efficient Community industry able to compete with undertakings in non-member countries.

to continue its existing activities, but on a view entitled to consider that the aid was not much greater scale, there is little prospect of compatible with the common market. the beneficiary's achieving long-term viabil­ ity, for it is unlikely that, once rescued from the brink of insolvency, the firm will do profitably that which it has done unprofit- ably in the recent past. If on the other hand Fourth submission the aid is conditional on the beneficiary streamlining its operations, or reallocating its resources so that loss-making activities are abandoned in favour of more profitable ones, then prima facie there is a case for authoriz­ ing the aid. 100. This submission corresponds closely to the fourth submission in Case C-278/92. Spain contends that the contested decision infringed Article 190 of the Treaty because the statement of reasons on which it was based was contradictory. The essence of the argument is that there was no justification for treating the aid granted between 1986 and 1988 differently from the aid granted in connection with the privatization of Imepiel. If any difference in treatment was justified, it was the latter aid which should have been treated more generously. 99. In this respect there is an important dif­ ference between the present case and that of Hytasa, where the beneficiaries of the aid put forward a restructuring plan that, on the face of things, represented a genuine attempt to alter the focus of the company's activities. In the case of Imepiel, there is little evidence 101. In my view, this submission must be that the purchaser of the company intended dismissed for the reasons set out in para­ to carry out any major restructuring. Cer­ graph 59 above. tainly the information contained in Annex II to the application, which was supplied to the Commission by Spain on 30 January 1990, contains very few details about how the pur­ chasers of Imepiel intended to achieve their objective of restoring the company to profit­ Fifth submission ability within four years, other than by pro­ ducing more and more shoes. If every loss- making shoe manufacturer in the Community attempted to overcome its diffi­ culties by doubling its output with the ben­ efit of State aid, that would result in market 102. Spain contends by its fifth submission saturation and financial ruin for all. In the that the obligation to repay the aid is con­ circumstances the Commission was in my trary to the principles of legal certainty and

25 — See Case C-142/87, cited above in note 11, paragraphs 58 24 — Cited above in note 14. to 63 of the judgment.

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OPINION OF MR JACOBS — JOINED CASES C-278/92 TO C-280/92

Case C-280/92 (Intelhorce) dated 4 April 1989, to supply information on alleged capital contributions that the State had made to cover operating losses of Intel­ horce after Spain's accession to the Commu­ nity. In a series of letters sent between August 1989 and May 1990 Spain supplied the information requested. According to that information, the State contributed a total of PTA 7 820 million to Intelhorce in a series of 108. Industrias Textiles de Guadalhorce SA five grants between June 1986 and May 1989. was established in 1957 by the Instituto The grants were used mainly to finance the Nacional de Industria, a holding company replacement of equipment and reductions in owned by the Spanish State. The company the workforce. Between 1986 and 1989 Intel­ produces and markets cotton products. Its horce spent PTA 5 000 million on invest­ factory is located near the city of Malaga in ments and over PTA 1 100 million on redun­ the region of Andalusia. Its production activ­ dancy payments. Its workforce was reduced ities are vertically integrated: they include from 1 883 at the end of 1986 to 1 617 by spinning, weaving and the manufacture of June 1989. Intelhorce recorded losses in 1986 finished garments. In the late 1960s the com­ and 1988 of PTA 2 093 million and pany operated at a loss for several years. It PTA 2 413 million respectively. was privatized in 1972. It changed its name to Intelhorce in 1975. In the second half of the 1970s the company's trading position worsened and it was again nationalized, apparently as a means of keeping it in busi­ ness and thus safeguarding employment, in 1980. The renationalization took place through the agency of the Patrimonio del Estado, which launched a restructuring plan designed to secure the company's viability. Between 1980 and 1985 the company carried out investments totalling PTA 6 000 million and the workforce was reduced from 2 785 to 2 094. During that period the State made capital contributions to the company of PTA 17 000 million. Despite these invest­ ments Intelhorce lost PTA 1 300 million in 1985 on a turnover of PTA 9 400 million.

112. On 25 July 1990 the Commission decided to initiate proceedings under Arti­ cle 93(2) of the Treaty in respect of capital contributions of PTA 13 689 million made The new owners were to subscribe an by the State to Intelhorce between Spain's increase in Intelhorce's capital of PTA 2 000 accession to the Community on 1 Janu­ million, of which 25% was to be paid up at ary 1986 and the privatization of Intelhorce the moment of sale. in August 1989. (That represented the 7 820 million contributed between June 1986 and May 1989, plus the additional capital of 5 869 million subscribed on privatization.) The procedure also covered the potential additional aid the State might have granted in connection with the privatization by accept­ It was also agreed that the new owners ing a purchase price below its net value. The would not apply to the State for authoriza­ Commission's decision to initiate proceed­ tion of temporary redundancies in Intelhorce ings under Article 93(2) was notified to during a period of three years after the pur­ Spain on 18 September 1990.

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OPINION OF MR JACOBS —JOINED CASES C-278/92 TO C-280/92

114. As regards the terms of the sale of Intelhorce, the Spanish authorities stated that they did not involve State aid either, since 117. On 25 March 1992 the Commission the company had been sold to the highest adopted Decision 92/321/EEC concerning bidder after being offered on the interna­ aid awarded by Spain to Intelhorce SA (ex tional market. Moreover, in valuing Intel­ Industrias Textiles de Guadalhorce SA), now horce account must be taken of its trading called GTE General Textil España SA, a position, in particular the heavy losses 26 State-owned producer of cotton textiles. incurred in 1988 and 1989. Account must Article 1 of the decision declared that the aid also be taken of the cost of reducing Intel- horce's workforce: the elimination of 650 jobs under the restructuring programme would cost PTA 3 600 million. 26 — OJ 1992 L 176, p. 57.

I-4136

SPAIN v COMMISSION

granted to Intelhorce in the form of capital 119. Article 3 of the decision required the contributions of PTA 7 820 million over the Patrimonio del Estado to recover PTA 4 405 period 1986 to May 1989 was granted ille­ million from Intelhorce (or GTE General gally, since it was granted in breach of the Textil España SA, as it had now been procedural rules established in Article 93(3) renamed). The aid was to be recovered in of the Treaty. That aid was however declared accordance with the provisions of national to be compatible with the common market law, with interest from the date on which the in accordance with Article 92(3)(c) of the aid was granted. Treaty.

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OPINION OF MR JACOBS — JOINED CASES C-278/92 TO C-280/92

First submission The only alternative to privatization would have been to liquidate the company. The cost of that would have been far higher because it would have been necessary to make redun­ dancy payments to 1 671 workers (PTA 11 362.8 million) and to pay unem­ ployment benefit (costing the State PTA 3 000 million). Spain also refers to the 123. Spain argues that the capital contrib­ cost of aids to regenerate the industrial fabric uted to Intelhorce did not constitute State of the region affected and states that liquida­ aid, within the meaning of Article 92 of the tion would not have been politically and Treaty, for two reasons. socially feasible since Intelhorce was a public undertaking in an area with high unemploy­ ment, a considerable industrial deficit and 'strong social opposition' to such a step. The province of Malaga is economically underde­ veloped and has a high rate of unemploy­ ment (28.8% compared with a national aver­ 124. First, the capital contribution did not age of 18.5%). Intelhorce is the largest affect trade between Member States. Spain employer in the province, its workforce rep­ contends that in the contested decision the resenting 1% of total employment. Finally Commission simply analysed the general sit­ Spain invokes, as in Case C-278/92, the need uation of the textile sector in the Commu­ to avoid damage to the image of the Patri­ nity and gave no information about the monio del Estado. Spanish market or about Intelhorce's specific situation. The contested decision thus gave no reasons for the finding that trade between Member States was affected by the financial assistance provided to Intelhorce.

about the scale of intra-Community trade in not the action of a rational private investor cotton goods. The decision noted (in part applying ordinary standards of commercial IV) that total Community production of tex­ prudence. Moreover, as in Case C-279/92, it tiles in 1988 amounted to ECU 86 691 mil­ is clear from the terms of Spain's application lion, of which 20% corresponded to the cot­ that its understanding of the private investor ton industry; the Spanish production test is flawed: in attempting to prove that the represented 11% of the Community output cost of winding up Intelhorce would have of spun yarns and 13% of fabrics; intra- exceeded the cost of its privatization on the Community trade in cotton textiles was sub­ terms agreed with Benservice and Benorbe, stantial, amounting to 22, 34 and 63% of the Spain refers to the cost of unemployment respective Community production of spun, benefit and of aids to regenerate the indus­ woven and finished goods; Intelhorce partic­ trial fabric of the region affected, as well as ipated in that trade and held 'an important emphasizing the political and social dimen­ position in the Spanish market, as recognized sions of the problem. Such considerations are by the Spanish authorities'. The decision also not relevant to the private investor test. noted that the market for cotton textiles was 'one of those occupying the highest positions in the scale of sensitivity because of stagna­ tion on the demand side and an increasing pressure of imports from third countries that provoke depressed prices and large propor­ tions of idle capacity'. Even though the deci­ sion did not indicate the precise market- share held by Intelhorce or the percentage of its goods exported to other Member States, 128. Finally, the argument based on the need that statement of reasons is adequate in the to safeguard the image of the Patrimonio del light of the case-law cited in paragraphs 33 Estado must be rejected for the reasons given and 34 above. in paragraph 30 above.

130. As regards Article 92(3)(a), Spain observes that the buyers of Intelhorce under­ took a considerable effort, financially and 132. Spain accuses the Commission of con­ organizationally, with a view to bringing tradicting itself by holding that the aid about the viability of the company, the deci­ granted between 1986 and May 1989 satisfied sive element being their know-how. The sale the requirements of Article 92(3)(c) but that was not designed to keep the firm in busi­ the aid granted in order to privatize Intel­ ness artificially but to guarantee its full eco­ horce did not. According to Spain, the con­ nomic recovery. The recovery plan foresaw a tested decision does not give any reason to reduction in the workforce of 40% and a cut justify such a difference in treatment. in the output of Intelhorce's traditional products. By the end of 1993 its production of yarns was to fall by 21 % and its produc­ tion of woven cloth was to fall by 50%.

133. It is to be noted that, as in Case C-278/92, Spain is invoking both paragraphs (a) and (c) of Article 92(3) of the Treaty. It is not contested that the Malaga region, like the 131. As regards Article 92(3)(c), Spain chal­ Seville region, is afflicted by serious under­ lenges the Commission's view that that pro­ employment, which means that Arti­ vision could not be applied in the absence of cle 92(3)(a) is capable of application in prin­ a solid restructuring or conversion pro­ ciple. The remarks made above in gramme. Spain insists that the entire privati­ paragraphs 43 to 45 about the relationship zation operation was centred on the viability between paragraphs (a) and (c) of Arti­ plan presented by the purchasers. Moreover, cle 92(3) are also valid in this case.

137. In the contested decision the Commis­ 135. The notion of compensatory justifica­ sion refused to authorize the aid to Intel- tion, which is a recurring theme of Commis­ horce on the ground that the two restructur­ sion decisions in this field, seems to imply ing programmes put forward by Intelhorce that the undertaking concerned must, in and the Spanish authorities did not provide order to justify the granting of State aid, for sufficient compensatory justification, as make some positive contribution to the com­ defined above, and were not likely to ensure petitive situation in the Community as a the company's long-term viability. As to whole, for example by reducing its produc­ compensatory justification, the Commission

I-4141

OPINION OF MR JACOBS —JOINED CASES C-278/92 TO C-280/92

138. As to the long-term viability of Intel­ 139. Although the Commission's reasoning horce, the Commission noted that the key on the issue of long-term viability is not as objective in the initial programme was to fully developed as it might have been, there strengthen Intelhorce's position by means of are in my view sufficient elements in the the creation of two networks of shops selling above account of the relevant parts of the own-produced household linen and clothing. contested decision to support the Commis­ For household linen Intelhorce planned 15 sion's finding that neither the initial nor the of its own shops and 22 franchised shops, revised programme was likely to transform while for clothing the figures were 14 and 50 Intelhorce from a chronically unprofitable shops respectively: see the 3rd and 4th para­ company into an economically viable enter­ graphs in part IV. It was anticipated that the prise. The Commission sums up the dismal shops would generate a profit of PTA 1 741 situation well when it states (in the 16th million in 1994 and that Intelhorce's global paragraph of part VII) that in both the initial profit in that year would be PTA 1 044: see and revised versions of the programme 'the the 4th paragraph in part IV. The initial pro­ company recorded persistent negative finan-

I - 4142

SPAIN v COMMISSION

ciai results'. There was also little evidence of Third submission any 'compensatory justification' as defined above in paragraph 135.

141. In the light of the above considerations 144. Apart from the argument concerning I conclude that the second submission the quantification of the aid granted to Intel­ should be dismissed. horce, all the arguments adduced under this

I-4143

OPINION OF MR JACOBS — JOINED CASES C-278/92 TO C-280/92

submission correspond closely to those primary argument — namely, that the funds pleaded under the fifth submission in Cases granted to Intelhorce bore interest, for the C-278/92 and C-279/92. They must be dis­ benefit of Intelhorce and its buyers, from the missed for the reasons given above in para­ date of the transfer of the undertaking — graphs 63 to 65 and 104. and concentrates entirely on the secondary argument. In this regard, it states that the dates on which Intelhorce had access to the successive slices of the capital contribution were advanced by a few months as provided for in the contract.

I - 4144

SPAIN v COMMISSION

Conclusion

148. I thus reach the conclusion that in Case C-278/92 (Hytasa), the second para­ graph of Article 2 and Articles 3 and 4 of Decision 92/317/EEC should be annulled; in Cases C-279/92 and C-280/92 Spain's actions should be dismissed. There remains the question of costs. If the actions had not been joined, I would have taken the view that in Case C-278/92 each party should bear its own costs under Article 69(3) of the Rules of Procedure since each party has succeeded on some and failed on other heads; and that in Cases C-279/92 and C-280/92 Spain should be ordered to pay the Commission's costs under Article 69(2) of the Rules of Procedure. Since however the cases were joined with effect from the Commission's defence, it seems more appropriate to treat the costs collectively and to order each party to bear its own costs in relation to the entirety of the proceedings.

149. Accordingly, I am of the opinion that:

(1) in Case C-278/92, the second paragraph of Article 2 and Articles 3 and 4 of Commission Decision 92/317/EEC should be annulled;