The three doubts raised in the opening decision will be analysed successively.

As regards the breach of the condition that loans have to be raised at market rates and without State guarantees, the Commission considers that this breach affects the compatibility of the latter measures and not the compatibility of the investment aid. Indeed, the purpose of such a condition is to avoid the granting of additional aid in favour of the investment programme (i.e. to avoid the accumulation of aid above the intensity laid down in the decision N 401/97). Anyway, as will be explained later in the present decision, the Commission finds on the basis of other legal grounds that the State guarantee granted to HSY constitutes incompatible aid that has to be recovered. As regards the loans, the Commission also finds that the aid element has to be recovered. Since the aid elements will be recovered, the initial situation will be restored and the financing costs of HSY will not be lower than the market rate. In other words, by means of these recoveries, the objective of the condition laid down in decision N 401/97 will be fulfilled, namely to avoid the granting of additional aid by means of financing granted to HSY below market price. The Commission therefore rejects Elefsis’ aforementioned claim that both the aid element in the loans and guarantee and the investment aid endorsed by decision N 401/97 have to be recovered.

As regards the absence of yearly reporting raised in the opening decision, the Commission considers that the non-submission of yearly reports does not as such constitute a misuse of the aid. Indeed, it does not change the characteristics of the aid, its effect or the characteristics of the investment programme. However, since Greece has not provided this information in due time and has therefore not informed the Commission about the delays at the moment when they occurred, it has prevented the Commission from adopting a decision on these issues at the appropriate moment. Consequently, this absence of reporting entails that the burden of proof falls on Greece: it is for Greece to prove that the Commission would have endorsed the successive prolongations of the period to implement the investment programme.

From the foregoing, the Commission concludes that respecting the date of 31 December 2000 was important to ensure the success of the restructuring plan. In addition, any investment implemented significantly after 2000 could not be considered as linked to the restructuring plan which is described in decision N 401/97, as requested by Directive 90/684/EEC.

After this analysis of the decision N 401/97, the Commission has to determine whether it would have granted a prolongation of the period to carry out the investments if Greece had requested it and correctly informed the Commission about the delays. In September 1999, an earthquake partially damaged the following of the yard’s facilities: walls, roofs, windows, structure of three buildings, tubes, electrical networks, piers, and cranes’ rails. Greece claims that the earthquake forced the yard to stop the investment plan and to focus on the repair of these damages.

Justifying the delay on the basis of the earthquake, the yard asked in November 2000 a first delay of the date to complete the investment programme until 31 December 2001. The question is whether the Commission would have accepted this request if it had received it. The Commission observes that, if it had applied paragraph 52 of the 1999 R & R guidelines, it would not have approved the first prolongation since the restructuring plan approved in 1997 had become clearly insufficient to restore viability in view of the situation prevailing in November 2000 and no other restructuring plan allowing a return to viability was available at that time. However, the Commission doubts that it would have applied paragraph 52 of the 1999 R & R guidelines since the aid had not been approved on the basis of these guidelines, since there was no ‘amendment’ of the content of the plan but only a delay of the date to complete the investments, and since there were not clear provisions regarding the modification of the date for completing the investments in decision N 401/97 and in Directive 90/684/EEC. In addition, since a severe earthquake is an event beyond responsibility of the yard and of the Greek authorities, which is exceptional and not related to the economy and the business, the Commission would have probably considered that it can justify some months of delay. In addition, the implementation of an investment plan is something difficult, which may necessitate some additional months. Consequently, even if one year is a long delay, it is reasonable to consider that the Commission might have accepted the prolongation.

In conclusion, the Commission considers that any aid supporting investment expenses incurred after 31 December 2001 fall outside the scope of decision N 401/97.

Greece claims that even if the Commission finds that aid in favour of some investment expenses would not fall within the scope of decision N 401/97, this aid should nevertheless be considered compatible as restructuring aid on the basis of the 1999 R & R guidelines. The Commission must therefore analyse whether aid in favour of the investment expenses incurred by HSY after 31 December 2001 could be found compatible. The Commission notes that there is no doubt that HSY was a firm in difficulty after 31 December 2001. For instance, the losses accumulated over the preceding years were so important that the net equity was negative. Therefore, any aid granted to the firm, and especially aid supporting the modernisation of obsolete equipment, should have been considered as restructuring aid. The Commission considers however that the firm did not comply with the conditions for receiving aid under the 1999 R & R guidelines. For instance, the ‘one time, last time’ condition laid down in paragraph 48 of these guidelines was breached because Greece had already granted restructuring aid to HSY by Ministerial decision of December 1997. Indeed, the investment aid approved by decision N 401/97 was a restructuring aid according to Directive 90/684/EEC and according to decision N 401/97 itself. Paragraph 48 of the 1999 R & R guidelines allows an exemption from the ‘one time, last time’ condition in ‘exceptional and unforeseeable circumstances’. The Commission fails to identify which exceptional and unforeseeable circumstances could justify restructuring aid to be granted in favour of investment expenses incurred after 31 December 2001. In particular, the earthquake of September 1999 may, as concluded previously, justify a limited delay in the implementation of the investment plan. But it is not the cause of the delay of the implementation of the investment plan after 31 December 2001. As regards the freezing of the plan during the privatisation process, it does not fulfil the definition of ‘exceptional and unforeseeable circumstances’. Greece claims that the ‘one time, last time’ condition would not be breached since the aid would take place in the adaptation of an existing restructuring plan. As has been extensively explained, the Commission considers that the investment implemented after 31 December 2001 are not part of the investment programme described in decision N 401/97. In addition, paragraph 52 of the 1999 R & R guidelines indicates that ‘the revised plan must still show a return to viability within a reasonable timescale’. According to the initial plan the yard should have its viability restored by 2000. The Commission therefore considers that the planned restoration of viability in June 2004 was a too long delay compared to the initial plan and was not within a reasonable timescale anymore. Finally, the Commission observes that accepting such a long prolongation of the restructuring period would be similar to a circumvention of the ‘one time, last time’ condition.

In conclusion, the Commission considers that aid in favour of the investment expenses incurred until 31 December 2001 and related to the investment programme described in decision N 401/97 can be considered to be covered by decision N 401/97. Any other aid does not fall within the scope of decision N 401/97. In addition, any other aid in favour of the other investment expenses that have been incurred by HSY is incompatible with the common market. Since Greece has indicated that the investment aid has not been paid out to HSY yet, no aid has to be recovered from HSY.

It first needs to be verified whether the State guarantee fulfils the conditions to be State aid in the meaning of Article 87(1) of the Treaty.

First, in order to fall under Article 87(1), a measure must involve State resources. This is the case for measure P2 since, by granting this guarantee, the State put State resources at risk.

Second, it needs to be established whether the measure is selective. Greece claims that the State has granted several guarantees to other firms and charged also a premium of 1 %. Greece provided a list of these firms. The Commission considers that this fact does not show that the measure was a general measure. In order to be a general measure, a measure must be open to all economic agents operating within a Member State. It must be effectively open to all firms on an equal access basis, and they may not de facto be reduced in scope through, for example, the discretionary power of the State to grant them or through other factors that restrict their practical effect. The present measure can therefore not be considered to be a general one. In particular, it is not because certain firms have received a State guarantee that all the firms could receive one. Greece has not shown that the granting of a State guarantee is open to all economic agents on an equal access basis. In addition, all the firms that appear in the list provided by Greece are State-owned firms or firms carrying out some military activities. It seems therefore that private firms could not have received such a guarantee for the financing of their normal activities. In fact, Greece does not indicate the legal basis on the basis of which the Minister of Finance decided on 8 December 1999 to grant the guarantee. It is likely that it is Law 2322/1995, which is a selective measure as it will be explained in the assessment of measure E12b.

Third, the existence of an advantage must be demonstrated. In accordance with point 2.2.2 of the Notice on guarantees, since the guarantee was granted before the granting of the loan and not ‘ex post’, there is no presumption of aid to the lender. It is therefore the aid to the borrower that needs to be investigated, as defined in point 2.1.1 of the Notice on guarantees. Greece claims that there is no advantage since HSY could have obtained a similar loan by offering a bank other securities instead of a State guarantee. The Commission considers that it does not have to investigate whether, by offering other securities, HSY could have obtained this loan. Indeed, the Commission must assess whether the actual transaction implemented by the State, namely granting a guarantee on a loan without benefiting of any security, would have been acceptable to a market economy investor. A guarantee on a loan secured by a lien on some assets or by the conveyance of claims constitutes a different transaction. As indicated in section 2.1.1 of the Notice on guarantee, one of the potential advantages of the State guarantee is the possibility for the borrower ‘to offer less security’. In addition, even if the possibility to obtain a financing by offering more securities had to be assessed, the Commission has already concluded in section 3.1 of the present decision that after 30 June 1999 HSY would not have received loans or guarantees from private banks, even by offering a security to the bank. The Commission concludes that, since the State guarantee was granted in December 1999, it gave an advantage to HSY by providing financing which HSY could not have received from the market.

Greece also claims that the guarantee fee of 1 % was the market price and there is therefore no advantage. The Commission notes that Greece did not provide any market data showing that banks were ready to grant a guarantee at that price. Greece only provided a list of guarantees provided by the State during the same period for the same price. The Commission fails to understand how this list of State guarantees could prove that the guarantee fee asked from HSY is market conform and does not constitute aid. In particular, this list can not be considered as ‘a State guarantee scheme [which] does not constitute State aid under Article 87(1)’ since, as the guarantee in favour of HSY illustrates, it does not fulfil many of the conditions laid down in section 4.3 of the Notice on guarantees. Furthermore, even if a guarantee fee of 1 % might have been market conform for other (healthy) companies, this would not automatically make it market conform for a company in difficulties like HSY.

As regards the claim that a guarantee fee below the market price could be acceptable for a private investor in similar circumstances because Greece was shareholders of HSY, the Commission has already dismissed this claim in section 3.1 of the present decision.

Section 3.1 also shows that from 30 June 1999 there was sufficient information available to conclude that HSY had not succeeded to conclude enough shipbuilding contracts to restore its viability and would face heavy losses in 1999 and 2000. Therefore, whereas the fact that the loan was financing an investment plan approved in 1997 by the Commission would have comforted a potential lender in 1997 and 1998, it would not have comforted a bank in December 1999 since it was clear that the business plan had failed. The corresponding point made by Greece must therefore be dismissed.

From the foregoing, the Commission considers that the measure gives an advantage to HSY.

Since it fulfils all the conditions laid down in Article 87(1) of the Treaty, the guarantee constitutes State aid. Since, contrary to the requirement laid down in Article 88(3) of the Treaty, it was granted without prior notification, it constitutes unlawful aid.

Since the Commission has just demonstrated that a selective advantage granted to HSY distorts competition and trade, the Commission will not repeat the analysis of the existence of a distortion of competition and trade anymore when it will assess the remaining measures.

On the basis of the foregoing, the Commission considers that the State guarantee constitutes unlawful and incompatible aid, which must be recovered. If it is still outstanding at the time of this decision, the State guarantee has to be stopped immediately. This is however insufficient to restore the situation that would have prevailed without aid since HSY has during several years benefited from a loan which it would not have received without State intervention. In order to recover this advantage, the Commission considers, in accordance with the conclusion reached in section 3.1 of the present decision, that the difference between the total cost of the guaranteed loan (interest rate and guarantee premium) and the reference rate for Greece increased by 600 basis points needs to be recovered for the years during which the guarantee was running.

The Commission considers that this will restore the situation that would have existed without a State guarantee. Thereby, the breach of the prohibition of State guarantees and financing below market rate laid down in decision N 401/97 is eliminated.

The Commission has already concluded in the assessment of measure P2 that measure P3 does not fall within the scope of Article 296 of the Treaty. It must therefore be assessed under State aid rule.

First, the Commission notes that the loan has been granted by ETVA and was not covered by a State guarantee.

As regards the selectivity of the measure, Greece observes that other firms received loans from ETVA at similar interest rates. However, as already explained in the assessment of measure P2, a measure is a general measure only if it fulfils strict conditions, which are clearly not fulfilled in the present case. For instance the measure is not open to all firms on an equal access basis, since interest rates vary from one borrower to the other and depend on the decision of ETVA to grant the loan or not, and on which conditions. The measure is therefore selective.

As regards the existence of an advantage, the Commission notes that this loan was granted after 30 June 1999, at a time when the firm had no access to the loan market anymore, as explained in section 3.1 of the present decision. The fact that ETVA charged a similar interest rate for some loans to other firms during that period does not prove that this interest rate would have been acceptable for a private bank in similar circumstances. First, the interest rate demanded by a private bank on a particular loan depends on the creditworthiness of the borrower. Greece has not shown that the other borrowers in the list had a risk of default similar to the risk of default of HSY. The Commission recalls that the situation of HSY was very bad at the time. It is therefore likely that a market economy investor would have requested a higher interest rate for loans to HSY than for loans to healthy firms. Second, even if the other borrowers had a risk of default as high as HSY, the list provided by Greece would still be insufficient to conclude that this interest rate was the market price. Indeed, the list provided by Greece contains only loans granted by ETVA, which was a State-owned bank (and in addition a development bank), and it is therefore possible that the other loans also contain an aid element. It therefore does not prove that they would have been acceptable to a private bank.

Greece also claims that, since ETVA was the shareholder of HSY, it served its interests by providing this loan to HSY. In section 3.1.3 of the present decision, the Commission has already rejected this claim.

Finally, regarding the fact that the loan has been reimbursed, the Commission has already explained in the assessment of measure P2 why such a fact does not show that a private bank would have accepted to provide this financing to HSY at that moment.

From the foregoing considerations, the Commission concludes that the loan gives an advantage to HSY since it could not have received this loan from the market.

The Commission concludes that measure P3 constitutes aid in the meaning of Article 87(1) of the Treaty. Since, contrary to the requirement laid down in Article 88(3) of the Treaty, the aid was granted without prior notification, it constitutes unlawful aid.

The Commission has previously concluded in the assessment of measure P2 that measure P4 does not fall in the scope of Article 296 of the Treaty. It must therefore be assessed under State aid rule.

First, the Commission notes that the loan has been granted by ETVA and was not covered by a State guarantee.

The Commission observes that, since ETVA refused to pay out the loan to HSY, HSY never received any money under the loan contract. Therefore, there is no advantage to HSY and the Commission can immediately conclude that the measure does not constitute aid.

The two following elements concerning measure P4, even if they are irrelevant for the assessment of measure P4, may cast doubts on the validity of the assessment of other measures. Therefore the Commission will analyse them.

First, Greece claims that the fact that ETVA, because there was a risk that the investment aid would not be paid, decided not to disburse the loan to HSY illustrates that ETVA acted as a normal private lender and did not offer to HSY a favourable treatment. The Commission notes that Greece’s claim fails to take into account the fact that when ETVA refused to pay out the loan it was already under the control of Piraeus Bank and not under State control anymore. Therefore, the refusal to pay out the loan can not be taken as an illustration of the way ETVA behaved when it was under State control. Conversely, this confirms that a private bank would have avoided to lend to HSY.

Article 296 does not apply to the present measure since it concerns the write-off of debts exclusively related to the civil activities of the yard. In addition, decision C 10/94 was based on State aid rules and not on Article 296 of the Treaty

As regards the implementation of the investment plan, the Commission considers that it was a condition laid down in decision C 10/94. Indeed, the second before last paragraph indicates ‘The investment plan has not yet started […]. Once it is executed, the ongoing restructuring should be completed and the yard should return to viability’ In the one before last paragraph, the Commission recalls the prohibition of further restructuring aid. Finally, the last paragraph indicates ‘In the light of the above, the Commission has decided to close the procedure pursuant to Article 93(2) by authorising the aid subject to the conditions described in this letter. Should the Commission consider that any of these conditions have not been complied with, it may require the suppression and/or recovery of the aid’. The fact that the Commission used the word ‘conditions’ in plural indicates that there was at least a second condition in addition to the prohibition of additional restructuring aid. On the basis of the structure and the content of the decision, it can be concluded that the implementation of the investment plan was a condition. The Commission has already assessed in detail the implementation of the investment aid when analysing measure P1. The Commission has concluded that HSY has not implemented the investment plan in a reasonable period. On 31 December 2001 — after one prolongation of the date for completing the investment plan — HSY had executed only 63 % of the plan. The Commission concludes therefore that this condition has not been complied with.

Greece claims that the implementation of the investment plan is not a condition laid down in Regulation (EC) No 1013/97, which is the legal basis of decision C 10/94. The Commission recalls that the aid was authorised by decision C 10/94. Therefore, the conditions laid down in the latter decision have to be respected. If Greece considered that the conditions laid down in decision C 10/94 did not comply with the conditions laid down in Regulation (EC) No 1013/97, it should have contested decision C 10/94. However, it has not done so within the time limit set by article 230 of the Treaty. As a subsidiary element, the Commission recalls that Regulation (EC) No 1013/97 is simply an amendment of the Directive 90/684/EEC and aimed at increasing the aid amount which can be granted to three groups of yards. With regards to HSY, Regulation (EC) No 1013/97 indicates that ‘All other provisions of Directive 90/684/EEC shall apply to this yard.’ The Commission recalls that the Directive 90/684/EEC authorises aid to Greek yards if ‘granted for the financial restructuring of yards in connection with a systematic and specific restructuring programme linked to the disposal by sale of the yards.’ This indicates that the Council could not be satisfied with the mere submission of a restructuring plan but really needed the implementation to be carried out. Indeed, how aid could be granted ‘in connection with a systematic and specific restructuring programme’ if this programme is not implemented.

Since the condition has not been complied with, the aid has been misused and, in accordance with the last paragraph of decision C 10/94, it has to be recovered.

The one before last paragraph of decision C 10/94 indicates that ‘the Commission notes that Regulation (EC) No 1013/97 was adopted by the Council with the condition that no further operating aid for restructuring purpose will be made available for the yards covered by the regulation. Accordingly, no such restructuring aid can be granted to this yard in the future.’ The parties to this procedure disagree on the interpretation of this condition. According to Greece and HSY, this entails that any operating aid for restructuring purpose which would be granted after the adoption of the decision would be automatically incompatible and should be recovered. According to Elefsis, this condition entails that the grant of any operating aid for restructuring purposes after the adoption of the decision would be a misuse of the aid authorised by decision C 10/94 and should therefore lead to the recovery of the aid authorised by the decision C 10/94, in addition to the recovery of the additional operation aid for restructuring purposes.

The Commission observes that the goal of the prohibition of further operating aid for restructuring is to avoid the accumulation of aid above the level set in the decision. The Commission considers that this objective is reached if any additional operating aid granted after the adoption of decision C 10/94 is recovered. Indeed, by the recovery of the additional aid, the initial situation is restored and accumulation of aid above the level set in decision C 10/94 is avoided. The Commission therefore concludes that the grant of additional operating aid for restructuring purpose after the adoption of decision C 10/94 does not trigger the obligation to recover the aid approved by decision C 10/94, as long as the additional aid is actually recovered.

The Commission observes that, in order to determine whether the aid authorised by decision C 10/94 should be recovered, it is not necessary to determine which of the aid measures unlawfully implemented after the adoption of decision C 10/1994 constitute ‘operating aid for restructuring purpose’. Indeed, in the present decision, the Commission will conclude that all the aid measures unlawfully implemented after the adoption of decision C 10/94 should be recovered. Consequently, any measure which could potentially qualify as further operation aid for restructuring purposes will have to be recovered. The recovery will restore the initial situation and therefore any potential accumulation of restructuring aid is avoided. Therefore, the objective of the condition laid down in decision C 10/94 will be complied with.

In the course of the deeper analysis of the case that took place during the investigation procedure, the Commission discovered an additional infringement of decision C 10/94: in the whole period during which the employees — as holder of a 49 % stake in HSY — were participating in the management of HSY, they have never paid the purchase price they were supposed to pay under the partial privatisation contract of September 1995.

In order to understand this breach of decision C 10/94, it is first necessary to analyse the text of this decision and of the legal acts on which it is based.

As indicated in section 2 ‘Prior decisions of the Commission and of the Council’ of the present decision, the Commission took in July 1995 a negative decision in the procedure C 10/94 because HSY had not been sold, as requested by Directive 90/684/EEC. Greece asked the suspension of that decision by claiming that the sale was imminent. Greece itself then presented the contract of September 1995 as a sale of the yard. On that basis the Commission revoked its negative decision.

The preamble of Regulation (EC) No 1013/97 indicates ‘Whereas, in spite of the efforts made by the Greek Government to privatise all its public yards by March 1993, the Hellenic shipyards was only sold in September 1995 to a cooperative of its workers, the State having kept a majority holding of 51 % for defence interests; Whereas the financial viability and the restructuring of the Hellenic shipyard necessitates the provision of aid which allows the company to write-off the debt accumulated before its delayed privatisation’. Article 1(3) of Regulation (EC) No 1013/97 indicates ‘Drachma aid in the form of a waiver of debts of “Hellenic shipyards”, up to the amount of Dr 54 525 million, corresponding to debts relating to civil work by the yard, as existing on 31 December 1991 and with accrued interest rates and penalties until 31 January 1996 may be regarded as compatible with the common market. All other provisions of Directive 90/684/EEC shall apply to this yard’. Regulation (EC) No 1013/97 was therefore adopted because, in order to become viable, HSY needed more aid than what was authorised under Article 10 of the Directive 90/684/EEC. More precisely, the former regulation authorised the waiver of the interests and penalties related to debts existing on 31 December 1991 and which had accrued since then. Regulation (EC) No 1013/97 was applicable until 31 December 1998. The Commission observes that the Council again used the words ‘sold’ and ‘privatisation’ in respect of HSY. The Council authorised the aid because it considered that a valid sale contract had been concluded in September 1995, in compliance with the condition laid down in the Directive 90/684/EEC. In other word, it was not necessary to put the sale of the yard as a condition since a valid sale contract already existed.

Decision C 10/94 starts by recalling that Article 10 of the Directive 90/684/EEC required the sale of the yard. Decision C 10/94 then indicates than this condition was fulfilled since ‘49 % of the shares in the yard were sold on 18 September 1995 to a cooperative of the yard’s workers’. However, since the aid amount is larger than what the Directive 90/684/EEC authorised, ‘The Commission could not give its approval on the basis of the provisions of the 7th Directive’ which therefore was amended by Regulation (EC) No 1013/97 to increase the amount of aid that can be granted to HSY. Since the conditions laid down in the latter regulation and the conditions laid down in Directive 90/684/EEC were met, Decision C 10/94 authorised the aid. The Commission observes that Decision C 10/94 again used the word ‘sold’ and considered that the contract between ETVA and the employees concerning the sale of 49 % of HSY shares was a valid sale. The Commission underlines that it had received a copy of the sale contract before the adoption of decision C 10/94 and was therefore aware of its content. The Commission concludes that, when adopting decision C 10/94, the Commission had no reason to request the sale of HSY (i.e. to put it as an explicit condition to be respected in the future) since a valid sale contract had already been signed in September 1995.

However, the Commission recalls that the contract of September 1995 contained unusual provisions regarding the payment of the purchase price: the purchase price of GRD 8,1 billion (EUR 24 million) would not be paid immediately by the employees but it would be paid in 13 annual instalments after a grace period of 2 years, therefore from 1998 until 2010. Nevertheless, the ownership of the shares would be immediately transferred to the employees. Until the payment of the purchase price by the employees, ETVA will keep a pledge on the shares. In order to finance the payment of the yearly instalments to ETVA, HSY would retain a part of the monthly salary and of the allowances of the employees. In the months following September 1995, a contract was signed between ETVA, HSY, the association of the employees and each individual employee of HSY (the contract of September 1995 was concluded between ETVA and the association of employees). By this contract, each employee agreed to purchase a given number of shares in accordance with the terms of the September 1995 contract. These contracts also repeat that HSY will retain a part of the monthly wage and of the Easter and Christmas allowance to finance the annual instalments.

The Commission has now established that the employees have never paid the yearly instalments. This means that they have not paid them while they were participating in the management of the yard as owner of 49 % of the shares. The first three instalments defined in the September 1995 contract — the ones that should have been paid in 1998, in 1999 and in 2000 — were not paid. In 2001, in the framework of the privatisation of HSY, the employees and ETVA concluded a contract by which the employees gave up their claim on 49 % of the revenue from the sale of HSY’s shares to HDW/Ferrostaal. In exchange, ETVA gave up its claim toward the employees concerning the payment of the purchase price of 49 % of HSY’s shares which should have been paid by the employees according to the September 1995 contract. This means that the employees as owners were never financially exposed to the success or failure of the restructuring.

The Commission indicated to Greece and HSY that the non-payment of the purchase price by the employees seems to constitute a misuse of decision C 10/94 since it entails that the partial privatisation, aiming at restoring the competitiveness of the yard, never took place.

Greece and HSY contest these conclusions. Among others, they raise the following three grounds to dismiss the Commission doubts.

The Commission has reached the conclusion that the three grounds raised by Greece and HSY which have been summarised earlier should be dismissed.

As regards the second ground raised by Greece — the payment of the purchase price was not a condition laid down in decision C 10/94, and even if it was the case, the Commission considered it as already fulfilled after having examined the September 1995 contract — the Commission has earlier recalled that the sale of the yard was a condition laid down in the Directive 90/684/EEC and explained what was the reason for this condition. The Commission has also already explained that it took a negative decision in July 1995 because the yard had not been sold. It was therefore evident to Greece that the Commission would not be satisfied by a mere transfer of ownership to the employees and it finally accepted the September 1995 contract only because it was a real sale, i.e. the employees would pay a significant purchase price and would thus have a real financial interest in restoration of competitiveness. The Commission also recalls that Regulation (EC) No 1013/97 amended Directive 90/684/EEC only in respect of the amount of operating aid for restructuring that can be granted to HSY. Since the September 1995 contract had already been submitted to the Commission and the Council at the time of the adoption of Regulation (EC) No 1013/97 and decision C 10/94, these legal acts did not need to repeat the condition of the sale of the yard. They simply recall that the shares of HSY have been ‘sold’. On that basis, decision C 10/94 concludes that ‘The conditions set in Article 10 of the Directive […] were met’ In other words, the assessment made by the Commission in Decision C 10/1994 (and the one made by the Council in Regulation (EC) No 1013/97) takes into account the existence of the September 1995 contract, which was presented as a sale by Greece and, above all, which contractually obliges the employees to pay EUR 24 million to ETVA for the purchase of 49 % of HSY and which precisely determines how this purchase price would be collected from the employees and paid to ETVA. Since the obligations and rights of the parties where precisely determined in a contract, since Greece itself presented the contract as a sale of HSY, and since the Greek government itself had adopted a law obliging the employees to pay the purchase price to ETVA (see footnote 100), the Commission had no reason to doubt that the State would correctly implemented the contract. In particular the Commission could not expect that the State itself will consciously refrain from collecting the purchase price from the purchaser. The Commission was entitled to consider that HSY had been sold and did not have to repeat that HSY had to be sold.

In relation to the third ground raised by Greece, the Commission also rejects the claim that the enforcement of the pledge on the unpaid shares and their sale in the framework of the privatisation of 2001–2002 is similar to obtaining from the employees the payment due under the September 1995 contract. First, since ETVA did not seek to obtain the payment of the purchase price from the employees, they did not expect to actually have to invest the corresponding amount of money and consequently did not risk losing this money if the value of the shares would decrease. As explained earlier, this is in contradiction with decision C 10/94, which supposed that HSY had been ‘sold’, i.e. that a private investor put a precise and large amount of its own money at risk by purchasing shares of HSY and it would therefore be incited to manage the yard with the objective of maximising the value of its holding. Second, the cash received by ETVA — and therefore by the State — is totally different. By enforcing the pledge on the shares, ETVA supported 100 % of the risk related to the value of HSY (thereby it reverted the partial privatisation). In addition, ETVA received only EUR 6,1 million when it sold 100 % of the shares of HSY to HDW/Ferrostaal. This means that ETVA received only EUR 3 million from the sale of the 49 % stake. This is much less than what ETVA should have received from the employees under the terms of the September 1995 contract, namely EUR 24 million paid in yearly instalment from December 1998 to December 2010.

Finally, as regards the claim that a real privatisation took place when HDW/Ferrostaal acquired 100 % of HSY, the Commission does not contest that point. However, it recalls that Article 10 of the Directive 90/684/EEC authorised aid only in connection with a sale of the yard. Similarly, Regulation (EC) No 1013/97 and decision C 10/94 authorised aid because the yard had just been ‘sold’. Therefore, the aid had to be granted in the context of the sale of the yard. It could not be granted for a sale taking place several years later. Therefore, the fact that HSY was really privatised by the sale to HDW/Ferrostaal does not change the conclusion that decision C 10/94 has been misused. It is also recalled that at the time of the sale to HDW/Ferrostaal, both Directive 90/684/EEC and Regulation (EC) No 1013/97 had expired for several years. Therefore, HSY would not have been able to receive the aid approved by decision C 10/94 in the framework of the 2001-2002 privatisation.

The Commission concludes that none of the grounds raised by Greece can dismiss the earlier conclusion that, by not seeking to obtain the payment of the purchase price from the employees, the State-controlled ETVA has misused decision C 10/94. This constitutes therefore a second misuse — besides the non implementation of the investment plant — of Decision C 10/94 and a second reason for the recovery of the aid authorised by this Decision.

As regards the potential application of Article 296 to the present measure, the Commission recalls that the separation between the military activity and the civil activity was already done in decision N 513/01, which considered that the part of the State support falling under State aid rules was 25 %. The EUR 29,5 million aid was therefore entirely related to the civil activities of HSY and can be assessed under State aid rules.

The Commission has reached the conclusion that each of the following elements is individually sufficient to conclude that the limitation laid down in the authorising decision was not respected and therefore the aid was misused.

First, since it was subject to a limitation of the number of man-hours, HSY had to put in place a mechanism to calculate precisely these hours. By having not put in place a mechanism to calculate precisely the number of man-hours carried out by subcontractors, and therefore by preventing a precise calculation of the number of man-hours carried out by the yard, HSY has misused decision N 513/01. This is especially the case since it is Greece that proposed to use the indicator ‘number of man-hours’ to prove that HSY was reducing its production capacity.

Since there are several independent grounds from which the misuse can be concluded, the Commission concludes that the aid must be recovered.

This measure financed the entire activity of the yard and was not earmarked to support the civil activities only. Since, as concluded in section 3.3 of the present decision, 75 % of the activities of yard are military and Greece invokes Article 296 of the Treaty, only 25 % of the measure, which is GRD 2,18 billion (EUR 6,4 million), may be assessed under State aid rules.

The Commission observes that the State, through ETVA, gave money to HSY without receiving new shares, whereas it held only 51 % of HSY. A market economy investor would not make such a present to the other shareholders. It would have asked new shares or a pro rata capital injection by the other shareholders. Consequently, a private investor in similar circumstances would not have carried out this capital injection.

Since the State provided resources to HSY which it would not have received from the market, this measure gave a selective advantage to HSY. The measure therefore constitutes aid in the meaning of Article 87(1) of the Treaty. Since, contrary to the requirement laid down in Article 88(3) of the Treaty, it was granted without prior notification, it constitutes unlawful aid.

As regards the compatibility of this aid, the Commission observes that it is undisputed that HSY’s workforce was reduced from 3 022 persons in 1995 to 1977 persons in 1997. This reduction of the workforce was also reported in the two decisions adopted on 15 July 1997 (Decisions C 10/94 and N 401/97) because it constituted one pillar of the restructuring plan. Decision N 401/97 authorises investment aid, which, according to Directive 90/684/EEC, can be found compatible only if it is ‘linked to a restructuring plan which results in a reduction in the overall ship repair capacity’ and ‘which does not involve any increase in the shipbuilding capacity’. Decision N 401/97 considers there is ‘a reduction in the yard’s repair capacity equivalent to the reduction in the number of employees, which will not be possible to compensate with the envisaged increase in productivity and a reduction of docking capacity for commercial vessels’. The Decision also indicates that there is a small reduction of the shipbuilding capacity. Since the Commission itself acknowledged in decision N 401/97 that the workforce reduction in combination with the other measures proposed by Greece would lead to a reduction of the ship building and ship repair capacities, the Commission considers that there was a capacity reduction, as requested by Article 7 of Directive 90/684/EEC. As regards the amount and the intensity of the aid, the Commission observes that the aid amounted to EUR 25,6 million for a reduction of the workforce by 1 000 persons. In 2002, just six years later, the Commission found compatible an amount four time larger for a workforce reduction of a smaller size. The Commission considers therefore that the amount and the intensity of the aid are justified. In conclusion, the Commission considers that the conditions laid down in Article 7 of Directive 90/684/EEC were met and therefore finds that the aid is compatible with the common market.

As regards the potential application of Article 296 of the Treaty, the Commission observes that the capital increases aimed at financing the investment plan. As already concluded in the framework of the assessment of measures P1, P2, P3 and P4, this investment plan and the State support financing it can be assessed under State aid rules.

The Commission has reached the following conclusions. On the basis of the partial privatisation agreement of September 1995, ETVA was contractually obliged to participate at a level of 51 % in the future capital increase of HSY, the remaining 49 % being contributed by the employees. The capital increase was necessary to partially finance the investment plan. In decision N 401/97 regarding the investment aid, the Commission implicitly considered that this participation of ETVA in the future capital increase of HSY will not constitute State aid. This was coherent with decision C 10/94 adopted the same day, in which the Commission considered that the sale of 49 % of HSY’s shares to the employees was a valid partial privatisation and a return to viability could be expected.

As regards ETVA’s participation in the capital increases of 20 May 1998, the Commission considers that there are no sufficient grounds to deviate from the implicit non-aid assessment made in the decision N 401/97. In particular, the circumstances in May 1998 were not sufficiently different from the ones forecasted at the time of the adoption of the decision. In addition, the Commission found no proof of a (secret) commitment of the State to reimburse the employees any amount they would pay in the framework of the capital increases.

• First, as explained earlier, both decisions adopted on 15 July 1997 were based on the fact that Greece would implemented the partial privatisation agreement of September 1995, and in particular that the employees would pay the purchase price to ETVA, as laid down in the contract, thereby assuming a financial risk which would incentivise them to support the necessary measures for restoring competitiveness. Whereas the employees had to pay the first instalment of the purchase price to ETVA before 31 December 1998, no payment occurred. The State did not seek to obtain the payment. As indicated in the assessment of measure E7, this meant that the employees were not put in the situation of investors having to pay in total GRD 8,17 billion (EUR 24 million) over the next 12 years, contrary to what the Commission expected in July 1997 when the two decisions were adopted. This non payment also meant that the employees were not respecting their obligation under the partial privatisation contract of September 1995. ETVA was not contractually bound by the partial privatisation agreement anymore118 since the employees had breached it. In conclusion, contrary to what could legitimately be expected at the time of the decision N 401/97 on the basis of the existing contracts, no real partial privatisation had taken place and the contract was not binding ETVA anymore. The Commission considers that these are major differences compared to what the Commission expected at the time of adopting decision N 401/97 on the basis of the September 1995 contract. This is therefore sufficient to revise the non-aid assessment made at that time,

• Second, as already analysed in detail in section 3.1 of the present decision, the commercial and financial success planned at the time of decision N 401/97 did not materialise. The company did not succeed in building a large and profitable orderbook in 1997 and 1998. Therefore, from the end of 1998, it progressively became more and more certain that the yard would be loss making in the next years. The Commission established the date of 30 June 1999 as the date from which no return to viability could reasonably be expected. It is certain that at the beginning of June 1999, most of the bad news was already known and a return to viability was highly hypothetical on the basis of the existing restructuring plan.

Since such a capital injection provides a selective advantage to HSY, the Commission concludes that the participation of ETVA to the second and third capital increase constitutes State aid in favour of HSY. Regarding the compliance with Article 88(3) of the Treaty, the Commission observes that it has never adopted any decision explicitly assessing and authorising ETVA’s participation to the capital increases of HSY. The Commission therefore considers that the aid has been put into effect in contravention of Article 88(3) of the Treaty.

The Commission observes that, even if it were considered that this measure has been authorised by Decision N 401/97 (the decision N 401/97 describes that ETVA will participate in the capital increases of HSY and, by not raising doubts on the compliance with State aid rules, implicitly considers that this participation would not be an aid), it would not change the forthcoming conclusion that the aid has to be recovered. Indeed, in such a case, it should be considered that this Decision has been misused by the State-owned bank ETVA which has not collected the purchase price from the employees in accordance with the September 1995 contract. Indeed, the conclusion that ETVA’s participation to the future capital increases was not an aid was based on the expectation of the employees would pay the purchase price in accordance with the September 1995 contract. It should therefore be concluded that the part of Decision N 401/97 authorising ETVA’s participation has been misused and therefore that ETVA’s participation should be recovered from HSY.

Greece claims that this measure could constitute compatible restructuring aid. The Commission recalls that the aim of the capital increases was to finance the investment plan. In the framework of the assessment of measure P2 and measure P3, the Commission has already explained why additional restructuring aid in favour of the investment plan can not be considered compatible with the common market.

Since the two capital increases constitute incompatible aid, they have to be recovered from HSY.

The present measure does not fall within the scope of Article 296 of the Treaty since it directly supports a civil activity.

It needs first to be clarified which of the two types of measures — the down payments guarantees granted by ETVA and the counter-guarantees granted by the State to ETVA — could constitute an aid measure. Since Greece claims that the State counter-guarantees were already firmly promised to ETVA when the latter granted the advance payment guarantees, it has to be concluded that when ETVA granted the guarantees, it was fully protected by the State counter-guarantees. Therefore, since ETVA run no risks (thanks to the State counter guarantees) while receiving a fee of 0,4 % per quarter, this measure would have been acceptable to a market economy investor in similar circumstances. Conversely, the State granted counter-guarantees, which were not secured by any collateral, and for which it received a guarantee premium of only 0,05 %. This second measure would clearly not be acceptable to a market economy investor. It is therefore this second measure which constitutes State aid. The Commission however observes that since the State owned 100 % of ETVA and all the measures implemented by the latter bank are imputable to the State, the separation between the two measures (i.e. guarantee and counter-guarantee) is somehow artificial.

Since Greece claims that the beneficiary were OSE and ISAP, it needs to be clarified who is the beneficiary of this measure. The Commission observes that in the framework of contracts for the supply of rolling stock material, the seller has usually to provide bank guarantees to the purchaser for the advance payments the latter makes. Indeed, the purchaser wants to be sure to recover these amounts if the seller does not deliver the material, for instance because it went bankrupt. Therefore, it is the seller that has to obtain these guarantees from a bank and to supports their costs. In other words, it is a normal cost that a seller of rolling stock material has to support. In the present case, the State counter-guarantee allowed HSY to obtain from ETVA guarantees at a price of only 0,4 % per quarter. As will be shown afterwards, without State counter-guarantee, a private bank would have at least charged 480 bps per year for guarantees granted before 30 June 1999. After that date, no private bank would have provided such guarantees. It is therefore clear that in the period before 30 June 1999 the State counter-guarantees allowed HSY to obtain guarantees at a lower price. In the period after 30 June 1999, the State counter-guarantees allowed HSY to obtain guarantees, which HSY could not have received from the market at all. In conclusion, the beneficiary of the aid is HSY.

As regards the claim of the first Deloitte report that HSY could have received these down payment guarantees from a private bank by giving to the bank a lien on certain assets as collateral instead of giving to the bank a State counter-guarantee, the Commission considers that this claim is irrelevant in the analysis of the measure. Indeed, the Commission has to analyse whether the terms of the measures which were actually granted by the State constituted aid to the yard. The Commission does not have to verify whether by providing more security, the yard could have received the same guarantee from the market. As indicated in section 2.1.1 of the Notice on guarantee, one of the potential advantages of the State guarantee is the possibility for the borrower ‘to offer less security’. In the present case, none of the State counter-guarantees was secured by a lien on some assets of the yard. Therefore, a counter-guarantee with an asset as security constitutes a different transaction, which does not have to be assessed. As a subsidiary ground, the Commission notes that, even if the claim of the first Deloitte report had to be assessed, HSY would not have been able to convince a private bank to provide such down payment guarantees by providing securities. Indeed, the assets of yards were already encumbered and they had a low liquidation value (see the second and third items discussed in footnote 43 of the present decision). Therefore, even a security in the form of a lien on certain assets of HSY would not have been sufficient to convince a market economy investor to lend to HSY.

The counter guarantees related to the advance payments of OSE were granted after June 1999, at a time where no bank would have provided any guarantee anymore. Therefore, these entire counter-guarantees constitute aid. Since, contrary to the requirement laid down in Article 88(3) of the Treaty, the aid was granted without prior notification, it constitutes unlawful aid. If these aid measures are found to constitute incompatible aid and if they are still outstanding, they will have to be stopped immediately. This would however be insufficient to restore the initial situation since HSY would have during several years benefited from a guarantee which it would have not received from the market. For the period until the expiration of the guarantee, aid amounting to the difference between 680 basis points and the premiums actually paid by HSY would also have to be recovered.

The Commission observes that the aid constitutes operating aid since it reduces the costs that HSY should normally have supported in the framework of commercial contracts. Since operating aid was not allowed in the sector of the production of rolling stock material, the aid can not be considered compatible with the common market and has therefore to be recovered.

The present measure does not fall within the scope of Article 296 of the Treaty since it concerns exclusively civil activities.

The Commission observes that the Greek authorities have provided detailed information on the contracts concerned, as requested in the extension decision. On the basis of this information, the doubts raised by the Commission have been allayed. Indeed, HSY paid the penalty and relevant interest amounts in accordance with its contractual obligations, and, when renegotiations of contracts took place, the Commission did not find evidence that the renegotiations were not affected in accordance with accepted commercial practice. As acknowledged by Elefsis itself, the delays in the execution of the contracts have cost tens of millions of euro to HSY precisely because OSE and ISAP requested the payment of the penalties and default interest, or, alternatively, the supply of equivalent rolling stock. As regards Elefsis’ claim that OSE and ISAP, if they had been private firms, would have turned down all the amendments proposed by the consortia, would have therefore requested the entire payment of the penalties and default interest and would have requested a rapid payment in cash rather than spreading the payments over a longer period, it can be said that this seems highly unlikely. Indeed, if OSE and ISAP had adopted such an inflexible approach before the closure of the sale of HSY, this would have probably deterred the new owner to purchase the yard. Without such a purchase, the yard, as will be explained in the analysis of measure E18c, would most probably have gone bankrupt. Even after the purchase by HDW/Ferrostaal, the financial situation of the yard did not improve. Consequently, if OSE and ISAP would have adopted a totally inflexible approach, there was a real risk that HSY would go bankrupt. This means that the execution of the existing contracts would have been stopped. This means that OSE and ISAP would have had to organise a new call for tender, the contract would have been awarded to a new supplier, and the delivery would have been delayed by several years. In such circumstances, the Commission considers that a market economy purchaser may accept a partial renegotiation which allows the completion of the existing contract within a reasonable timeframe, such that the purchaser finally receives the ordered railstock material with a limited delay. In this respect, the Commission observes that the probability that the contracts would be completed in a reasonable timeframe increased when HSY was privatised since the new private owner had experience with the management of complex projects and was a private firm motivated by profit and therefore willing to limit the delay to limit the negative financial consequences.

In conclusion, the Commission considers that there is not convincing evidence that the behaviour of OSE and ISAP would not have been acceptable to a private company in similar circumstances. The Commission therefore concludes that the way in which the contracts with OSE and ISAP were implemented and the limited amendments of the contracts accepted by OSE in 2002–2003 do not involve aid elements.

The present measure does not fall within the scope of Article 296 of the Treaty since it directly supports a civil activity.

As regards the assertion of Greece, HSY and Deloitte that the interest rate of the loan granted to HSY was similar to the interest rate of many other loans granted during the same period by ETVA and by Greek banks, it does not show that the loan granted to HSY is not an aid. Indeed, Greece, HSY and Deloitte have neither analysed nor shown that the financial situation of the other borrowers used as comparison point was similar to the one of HSY, i.e. that their financial situation was as bad as the situation of HSY. They have therefore not shown that private banks were ready to lend to firms in difficulty at an interest rate similar to the one of the present loan. Comparing the interest rate of loans granted to different firms without verifying that the risk supported by the lending banks is similar is a pointless exercise. The Commission therefore concludes that no market economy investor in similar circumstances would have granted this loan to HSY, which therefore constitutes aid. Since, contrary to the requirement laid down in Article 88(3) of the Treaty, the aid was granted without prior notification, it constitutes unlawful aid.

The present measure does not fall within the scope of Article 296 of the Treaty since it directly supports a civil activity.

The Commission observes that both guarantees were granted before 30 June 1999. As explained previously, the Commission considers that HSY had still access to the financial market at that time, but at a price which reflected the very fragile economic situation of HSY.

HSY has been able to indicate neither to the Commission nor to its own consultant (see first Deloitte report, page 4–9) whether HSY was contractually obliged to pay a guarantee premium to ETVA and what was the level of this premium. As explained in the assessment of measure E12b, HSY should normally have paid an annual premium of at least 480 basis points for such a guarantee. Knowing the level of the other guarantee premiums paid by HSY to ETVA, it is highly unlikely that the guarantee premium actually paid by HSY was as high as 480 basis points. The Commission therefore concludes that the guarantee granted by ETVA constitutes State aid, which amounts to the difference between the annual guarantee premium actually paid to ETVA and a guarantee premium of 480 basis points. Since, contrary to the requirement laid down in Article 88(3) of the Treaty, the aid was granted without prior notification, it constitutes unlawful aid.

As indicated in the assessment of measure E13a, the Commission considers that aid like the present one constitutes operating aid, which can not be found compatible on the basis of Regulation (EC) No 1540/98. It is therefore unlawful and incompatible and must be recovered.

As regards the applicability of Article 296, the text of the decision by which ETVA decided to grant the guaranteed loan shows that ETVA was among others concerned by the continuation of the military activities of HSY. However, there is no contractual provision that forces HSY to use the guaranteed loan for the financing of the military activities. In other words, ETVA wanted to keep HSY alive in order to ensure the continuation of the military activities, but it did not assign the guaranteed loan to the financing of a particular activity. HSY was free to use the money as it wished to. As already explained, for such measures which are granted to the yard as a whole, the Commission considers that 25 % of the guaranteed loan was used for civil activities and 75 % for military activities. Therefore, only 25 % of the State guarantee (this means initially an amount of GRD 2,5 billion (EUR 7,34 million) has to be assessed under State aid rules, and could be recovered if constituting incompatible aid. 75 % of the State guarantee falls within the scope of Article 296 of the Treaty and is not covered by State aid rules.

As regards the selectivity of the measure, the Commission has already shown in the assessment of measure E12b that Law 2322/1995 is not a general measure.

As regards the existence of an advantage, the Commission recalls that the guaranteed loan was granted in January 2000, at a time when no market economy investor would have provided a loan or a guarantee to HSY anymore, as previously concluded. Without a State guarantee, no bank would have therefore provided a loan to HSY. The State guarantee therefore gave a clear advantage to HSY.

In conclusion, the part of the State guarantee which is not covered by Article 296 of the Treaty constitutes aid. Since, contrary to the requirement laid down in Article 88(3) of the Treaty, the aid was granted without prior notification, it constitutes unlawful aid.

As indicated previously, since 75 % of the guaranteed loan is considered to finance military activities, only 25 % of the guarantee is falling under State aid control and was found to constitute State aid. However, it is also reasonable to suppose that only 25 % of the damage suffered by HSY related to its civil activities because the earthquake has damaged HSY’s facilities without distinction between military facilities, civil facilities and facilities used for both types of activities. In other words, there is no reason to consider that 100 % of the damage suffered by HSY should be financed by the 25 % of the State guarantee which constitutes State aid. Consequently, only 25 % of the damages can be taken into account when assessing whether the State aid is commensurate with the damages suffered. In conclusion, out of the State aid, an amount equivalent to 25 % of the part of the State guarantee considered commensurate with the damage suffered (such as defined in the previous paragraph) constitutes compatible aid on the basis of Article 87(2) b). In other words, out of part of the State guarantee constituting aid, GRD 750 million (EUR 2,20 million) — i.e. 25 % of GRD 3 billion (EUR 8,8 million) — is compatible until the payment of the indemnification by the insurers in the first quarter of 2002. After that date, only EUR 1,32 million — i.e. 25 % of GRD 3 billion (EUR 8,8 million) minus EUR 3,52 million — is compatible. The rest of the aid is incompatible with the common market.

If the State guarantee is still outstanding, the part of this guarantee which constitutes incompatible aid (i.e. 25 % of the guarantee still outstanding, minus EUR 1,32 million which is compatible) should be immediately rescinded. The cancellation of the incompatible guarantee is not sufficient to restore the initial situation. Indeed, thanks to the incompatible State guarantee, HSY has had at its disposal during several years a loan which it would otherwise not have received. In order to recover this additional incompatible aid, the Commission considers that, from the granting of the guaranteed loan until the end of the incompatible State guarantee, an aid equal to the difference between the total cost of the guaranteed loan (interest rate plus guarantee premium paid by HSY) and reference rate for Greece increased by 600 bps must be recovered. This amount has to be calculated in respect of the part of the State guarantee which constituted incompatible aid.

As regards the application of Articles 296 and 298 of the Treaty, the Commission observes that the two credit facilities granted in 1997 were secured by receivables from a military contract. However, this fact alone does not show that the facilities were granted to finance the execution of these military contracts. Greece has not brought forward evidence that there existed a contractual obligation limiting the use of these funds to financing the execution of military contracts. Conversely, Greece indicates that the two loans were granted to cover HSY’s needs for working capital. The first Deloitte report confirms that they were granted for working capital purposes and does not indicate that they were assigned to the financing of a particular activity. This is supported by the fact that an additional security related to a civil contract (i.e. contract with ISAP) was granted in respect of the USD 10 million credit facility. The Commission therefore considers that these three loans have financed the yard in its entirety and not only the military activities. As indicated in section 3.3 of the present Decision, the Commission considers in such a case that 25 % of the loans have financed the civil activities of HSY, are not covered by Article 296 of the Treaty and can therefore be assessed under State aid rules.

The Commission concludes that the part of these three loans which does not fall under Article 296, namely 25 % of these loans, contains State aid. The aid amounts to the difference between the interest rate charged by ETVA and the interest rate which would have been charged by a market economy investor, as defined above. Since, contrary to the requirement laid down in Article 88(3) of the Treaty, the aid was granted without prior notification, it constitutes unlawful aid.

These three loans were granted to cover HSY’s needs for working capital. They therefore constitute operating aid, that is to say, aid granted to finance the operation of the yard in general and not a particular project. They were granted at a time where aid to the shipbuilding sector was still regulated by Directive 90/684/EEC. Articles 4 and 5 of this Directive provides that operating aid may be granted to shipbuilding and ship conversion activities, which are both defined in Article 1 of the Directive. However, in the years during which the loans were granted, namely 1997 and 1998, HSY did not have such activities. Directive 90/684/EEC prohibits aid to ship repair, which was the main civil activity of HSY in 1997 and 1998. The aid can therefore not be found compatible with the common market and, since it has been granted unlawfully, it has to be recovered.

As underlined by Greece, the loans have been reimbursed. The aid as defined previously has therefore to be recovered for the period from the paying out of the loans to HSY until their reimbursement.

As regards the application of Articles 296 and 298 of the Treaty, the Commission rejects Greece’s argument that any advance payment paid in the framework of a military contract would automatically fall under Article 296. In particular, in the present case the management of HSY itself acknowledged that some advance payments exceeded by far the amounts needed for the execution of the contracts in the short term and therefore were temporarily used for other purposes. A measure falls in the scope of Article 296 only if Greece considers it to be ‘necessary for the protection of the essential interests of its security which are connected with the production of or trade in arms, munitions and war material’. The Commission observes that Greece has not explained why the part of the advance-payments that exceeded the funds necessary to execute the military projects concerned would have contributed to ‘the protection of the essential interests of its security’. The Commission itself fails to understand why it would be the case since the yard did not need them to produce the war material concerned and did not use them for that purpose. In such a case, where the facts indicate that Article 296 does not apply, Greece should have explained why it nevertheless considers that these excess advance payments have contributed to its security. Since it was not done, the Commission concludes that these advance payments, in the period during which they were not necessary for the execution of the military contracts concerned, do not fall within the scope of Article 296 of the Treaty.

Since the advance payments have initially been used for financing all the activities of the yards, the Commission considers that 75 % of these advance payments has financed military activities and 25 % has financed civil activities. In other words, during at least one year 25 % of EUR 81,3 million and 25 % of EUR 40 million fell under State aid rules.

The Commission has not found a basis on which this aid could be found compatible. Since this aid supports the general operation of the yard, it seems to be operating aid, but, as already explained in the assessment of prior measures, this yard was not entitled to receive operating aid in 1999, 2000 or 2001.

Since the aid is unlawful and incompatible, it must be recovered.

As regards the separation of accounts, the Commission will deal with this issue at the end of the present decision.

Some parties claim that, without this guarantee, no investor would have purchased HSY and the yard would probably have gone bankrupt. Therefore, even if it relates exclusively to the civil activities of HSY, this measure was nevertheless indispensable to ensure the survival of the military activities of HSY and therefore falls under Article 296. The Commission cannot accept this argument. On the basis of Article 296, Greece could have granted to the military activities the financial support they needed to ensure their continuation. Greece would have thereby avoided the demise of the military activities. Alternatively, Greece could have granted the financial support necessary to render the military activities attractive for a potential investor, such that these military activities would have been purchased and thereby their continuation would have been ensured. An investor purchasing the military activities would not have needed a guarantee like the present one since, as just explained, no aid could be recovered from the military activities of HSY. Consequently, the present measure was solely necessary in order to find a purchaser for the entire HSY, i.e. including the civil activities. The effect of the present measure was thus to permit to find a purchaser for the civil activities of HSY, and thereby to ensure the continuation of these activities. It was not necessary to ensure the continuation of the military activities. It does therefore not fall within the scope of Article 296 of the Treaty.

Since some parties contests that the two guarantees — the one granted by the State to Piraeus Bank and the one granted by ETVA to HDW/Ferrostaal — constitute one single guarantee mechanism and that HSY is the beneficiary of the two guarantees, the Commission will first assess separately the guarantee granted by ETVA to HDW/Ferrostaal and demonstrates that it constitutes State aid in the meaning of Article 87(1) of the Treaty.

• First, during the privatisation process of HSY, this guarantee was appearing in the documents submitted to the potential bidders146. In other words, already during the privatisation process, there was a promise that the purchaser of HSY would be indemnified for any State aid recovered from HSY. In addition, on 14 September 2001, ETVA explicitly and unambiguously committed to provide this guarantee to HDW/Ferrostaal if the European Union would not give clearance regarding past and present State aid granted to HSY147. Clause 1.2.3 of HSY SPA signed on 11 October 2001 explicitly refers to the document signed on 14 September 2001. The discussion regarding the precise wording of the guarantee continued in the following months148. Since the Commission did not give a letter of comfort/negative clearance regarding past and present aids to HSY, ETVA had on 31 May 2002 to issue the guarantee in favour of HDW/Ferrostaal, as had been agreed by the parties on 14 September 2001 and in Clause 1.2.3 of HSY SPA. All the foregoing illustrates that, even though the Addendum containing the guarantee to HDW/Ferrostaal was signed on 31 May 2002, ETVA already committed to grant this guarantee (if the EU did not clear past and present aids) at a time when ETVA was still under the control of the State. In other words, the Addendum of 31 May 2002 is the execution of a contract entered into by ETVA when it was still under State control. As shown in section 3.2 of the present decision, when ETVA was under State control, all the actions it took towards HSY can be considered imputable to the State149. All these elements were confirmed by Greece in its letter of 23 May 2005150,

• Second, even if it were considered that, on the basis of the aforementioned documents concluded by ETVA when it was under the control of the State (i.e. until end March 2002), there existed no contractual obligation of ETVA to grant this guarantee to HDW/Ferrostaal, the measure would still be imputable to the State. Indeed, the Commission observes that Greece continued to manage the sale of HSY even after the sale of ETVA to Piraeus Bank. Article 8.2.2 of the Agreement of 20 March 2002 between the State and Piraeus Bank provides that ETVA will not be responsible for the sale process of HSY, which the State will continue to manage. Article 8.2.2.(b) for instance provides that the State ‘shall assume the control, care and responsibility of the acts and negotiations with the third purchaser of the Holding in Hellenic Shipyards’. In accordance with Article 8.2.2 of the Agreement of 20 March 2002, Piraeus Bank asked by letter of 28 May 2002 the agreement of the State regarding the guarantee that ETVA intended to grant to HDW/Ferrostaal. The State gave its authorisation by letter of 31 May 2002. All this shows that the grant of the guarantee is imputable to the State,

• Third, even if the two foregoing points were dismissed, the guarantee would still be imputable to the State. The Commission indeed observes that the State decided to privatise HSY151. When Piraeus Bank took control of ETVA, it was therefore obliged by law to privatise HSY. As acknowledged by TKMS/GNSH itself, HDW/Ferrostaal would not have purchased HSY if they would not have received such a guarantee. Since the State decided that HSY had to be sold, and since the grant of the guarantee was indispensable to sell HSY, it can be concluded that the State put ETVA in a situation where it was forced to issue the guarantee. Therefore, even if it would be concluded that ETVA decided to grant the guarantee in May 2002 without any direct involvement of the State, the measure would remain imputable to the State,

• Fourth, even if all the previous points were dismissed, it should be concluded that ETVA accepted to grant the guarantee on 31 May 2002 only because its controlling shareholder (i.e. Piraeus Bank) had received a guarantee from the State protecting him against any financial damage stemming from this guarantee. Indeed, as will be shown, a market economy investor would never have granted such a guarantee without having received a counter guarantee from the State. The granting of the guarantee occurred only because the State had protected the economic unit (i.e. the group) granting the guarantee from any negative consequence (by granting a counter guarantee). In such a case, where a firm simply transfer an aid to a second firm, the granting of the measure is imputable to the State.

In order to constitute a State aid in the meaning of Article 87(1) of the Treaty, a measure must be financed by State resources. The Notice on guarantees indicates that ‘The aid is granted at the moment when the guarantee is given, not the moment at which the guarantee is invoked or the moment at which payments are made under the terms of the guarantee. Whether or not a guarantee constitutes State aid […] must be assessed at the moment the guarantee is given’. As indicated above, the Commission considers that ETVA contractually committed to grant this guarantee to HDW/Ferrostaal at a time when the State still owned the large majority of the shares of ETVA. Since the Notice on guarantees indicates that the existence of aid has to be analysed at the time of the grant of the guarantee and not later when the guarantee is invoked, it can be concluded that by committing to grant the guarantee, the State put State resources at risk and the guarantee therefore involves State resources. The fact that ETVA was sold to Piraeus bank shortly after does not affect this conclusion. Indeed, if the State has correctly informed the bidders about the contractual obligations of ETVA — including this commitment of ETVA to provide the guarantee to HDW/Ferrostaal if the Commission does not issue a comfort letter — the bidders must have taken into account this commitment of ETVA. They must therefore have revised downwards the price they were ready to pay to purchase ETVA. This means that the State sold ETVA at a lower price and therefore lost resources. As indicated above, even if it were concluded that, at the time when ETVA was still under State ownership, ETVA did not contractually commit to issue the guarantee, the Commission considers that by deciding to privatise HSY in January 2001 — at a time when ETVA was still under State ownership — the State put ETVA in a situation where it was forced to issue such a guarantee since the latter was indispensable to find a purchaser for HSY. This entails that when the bidders made their bid for ETVA, they must have taken into account the fact that ETVA would have to issue this guarantee. According, they proposed a lower price for purchasing ETVA and this therefore also leads to the conclusion that State resources have been lost.

In order to prove the existence of a State aid in the meaning of Article 87(1) of the Treaty, it is necessary to show that the State did not behave as a market economy investor would have behaved in similar circumstances. In this respect, Greece, HSY and TKMS/GNSH claim that in similar circumstances a market economy investor would have accepted to issue this guarantee in favour of HDW/Ferrostaal. They argue that the test of the market economy investor should be applied at the level of ETVA, which was the legal entity which sold HSY, and at the level of the Greek government, which was the seller of ETVA.

The Commission recalls that, as has been indicated in section 3.2 of the present decision, when ETVA purchased HSY and directly thereafter injected capital to keep it alive, it did not acted as a market economy investor but as a public authority granting aid to keep alive a firm deemed important for the Greek economy. Therefore, no market economy investor would have found itself in the situation of ETVA. No market economy investor would have found itself in the situation of selling these shares of HSY. Therefore, the Commission considers that the market economy investor test can not be used in the present case to justify the fact that the State is putting additional State resources at risk (by granting the guarantee).

Even if nevertheless one considers that the market economy investor test should be applied, the Commission considers that if the State had been a private firm acting under normal market conditions, it would not have accepted to grant the guarantee. Each of the three following points is alone sufficient to prove this.

Greece, HSY and TKMS/GNSH claim that the risks of HSY having to reimburse State aid were very limited, since at that time there were no ongoing investigations by the Commission. They therefore claim that the risk for ETVA and the State of having to pay indemnification under the guarantee was small. The Commission can not accept this claim. It is akin to claim that, since Greece over the prior years had succeeded to hide the grant of unlawful and incompatible State aids to HSY and the misuses of aid previously approved by the Commission, it was allowed to grant this guarantee. As a subsidiary ground, the Commission observes that HDW/Ferrostaal insisted to receive this guarantee and was not ready to sign the closing of the sale of HSY before receiving the guarantee. The importance attached to the guarantee by HDW/Ferrostaal proves that this private investor considered that the probability that HSY would have to reimburse State aid was not small. The fact that, from the beginning of the privatisation procedure, Greece committed to grant such a guarantee to the highest bidder proves also that Greece considered that a private investor would find such a guarantee very important (a condition sine qua non, according to Greece’s letter of 23 May 2005 quoted in footnote 148 of the present decision and according to the second Deloitte report), which can only be the case if a private investor considers that the probability of recovery is not very limited.

The Commission also observes that in this context where the amount of aid which could be recovered from HSY was difficult to estimate, a market economy vendor selling HSY would have at least introduced in the sale contract a ceiling limiting the potential payment to the purchaser. A market economy vendor would not have accepted to run the risk of having to pay hundreds of millions of Euros, even if it were accepted that the probability of such a high payment could be very low. Therefore, the fact that no ceiling was introduced in the guarantee constitutes an additional proof that ETVA and the State did not behave in a way acceptable to a market economy operator.

On the basis of each of the three foregoing considerations, the Commission concludes that a market economy investor would not have granted the guarantee.

The Commission concludes that the guarantee granted by ETVA to HDW/Ferrostaal constitutes State aid in the meaning of Article 87(1) of the Treaty and the beneficiary of this aid is HSY. Since, contrary to the requirement laid down in Article 88(3) of the Treaty, the aid was granted without prior notification, it constitutes unlawful aid.

As regards the guarantee granted by the Greek State to Piraeus Bank, it also constitutes aid. It is a selective measure financed by State resources. A market economy investor selling ETVA would not have granted such a guarantee. Indeed, the only justification for granting this guarantee was the guarantee granted by ETVA to HDW/Ferrostaal. If the latter guarantee had not been granted, it would not have been necessary to provide the guarantee to Piraeus Bank. Since, as has been explained, no market economy investor would have granted the guarantee granted by ETVA, which constitutes State aid, no market economy investor would have granted the guarantee to Piraeus Bank (since the latter guarantee would not have been necessary, i.e. it would have been irrelevant). As regards the identification of the beneficiary of the guarantee granted by the State to Piraeus Bank, the Commission recalls that the present procedure concerns potential State aid to HSY. No other potential beneficiary is mentioned in the extension decision. Therefore, only aid to HSY can be investigated in the framework of the present procedure. If the guarantee granted by the State to Piraeus Bank were to constitute aid to HSY, it would not constitute additional State aid on top of the State aid included in the guarantee granted by ETVA to HDW/Ferrostaal. Indeed, it is thanks to the latter guarantee that a private investor accepted to purchase HSY and that the civil activities of HSY were thereby saved. In other words, the guarantee granted by the State to Piraeus Bank does not provide an additional advantage to HSY and can therefore not constitute additional aid to HSY: all the advantage to HSY is granted by the guarantee granted by ETVA to HDW/Ferrostaal. In the present procedure which concerns potential State aid to HSY, the Commission therefore does not have to take a final view on the identity of the beneficiary of the guarantee granted by the Greek State to Piraeus Bank and the Commission does not have to further investigate the latter guarantee. It is sufficient to investigate the former guarantee — the guarantee of ETVA to HDW/Ferrostaal — and to cancel it if it constitutes incompatible aid to HSY.

Since the guarantee granted by ETVA to HDW/Ferrostaal constitutes incompatible aid in favour of HSY, the Commission considers that it has to be stopped immediately.

As indicated in the extension decision, the guarantee granted to HDW/Ferrostaal is incompatible with the common market for a second reason. The Commission considers that it is per se incompatible since, by preventing any recovery of aid from HSY to have an ‘effect utile’, it prevents the application of the State aid rules.

TKMS/GNSH and HSY contest this position. In particular, they recall that HSY is not the recipient of any indemnity payment. Indeed, the guarantee issued by ETVA insures HDW/Ferrostaal and not HSY. Therefore, if the Commission would order the reimbursement of aid, HSY would have to make the reimbursement and this would restore the initial situation. TKMS/GNSH fails to understand why the indemnification of TKMS/GNSH (as successor of HDW/Ferrostaal) would invalidate this conclusion. Indeed, there is no obligation for TKMS/GNSH to re-invest in HSY the indemnification received.

The Commission observes that 100 % of the shares of HSY were purchased by HDW/Ferrostaal and are now held by TKMS/GNSH. This means that, even if HSY and its shareholder are two different legal entities, they form one single economic unit. Thanks to the guarantee, this economic unit would be 100 % indemnified for any aid it would have to reimburse to the State. The Commission therefore considers that this constitutes an elimination of the ‘effet utile’ of any recovery decision.

As regards the absence of a legal provision forcing TKMS/GNSH to re-inject into HSY any indemnification received, the Commission fails to understand how it would invalidate the prior conclusion. In addition, the Commission observes that, if there is no obligation, there is also no prohibition to do it. Therefore, TKMS/GNSH could inject in HSY the indemnification received. Moreover, one can reasonably assume that, since TKMS is a successful private group, its financial resources are optimally allocated among the different legal entities of the group. Therefore, it is reasonable to suppose that, if one legal entity of the group has to pay a fine and another legal entity receives an indemnification for that fine, the management of the group will decide to transfer the latter amount to the former entity, thereby re-establishing the optimal allocation of resources among the different legal entities of the group. In other words, even if there is no obligation for TKMS/GNSH to re-inject the funds in HSY, it seems likely that the management will decide to do it.

The Commission concludes that the guarantee granted by ETVA to HDW/Ferrostaal is per se incompatible with State aid rules.