EU Probes Ford’s Romanian Plant In Craiova

In a turn of events, the European Commission has launched a formal investigation under EC Treaty state aid rules into possible aid granted in the context of the privatization of the Romanian “Automobile Craiova” plant (former Daewoo Romania) and its sale to Ford in September 2007 (see here). The EU said it was investigating whether conditions attached to the privatization, including a write-off of debts of Automobile Craiova and a guarantee concerning the payment of debts towards other former Daewoo subsidiaries resulted in a lower sales price than if the privatization had been unconditional. -Continued after the jump

EU Competition Commissioner Neelie Kroes said: "The Commission fully supports Romania in its privatisation policy. However, we have to ensure an open and transparent privatisation process free of unlawful state aid. In this particular case, I have concerns that the state aid rules might have been breached."

Ford of Europe CEO John Fleming said in a statement, “We accept fully the EU Commission's right to open a formal investigation into the privatization process. We will cooperate fully with the Commission to help bring this investigation to a satisfactory conclusion as quickly as possible.”

European Commission Press Release

State aid: Commission opens in-depth investigation into possible aid in privatisation of Romanian car producer Automobile Craiova

The European Commission has opened a formal investigation under EC Treaty state aid rules into possible aid granted in the context of the privatisation of Automobile Craiova (former Daewoo Romania) and its sale to Ford Motor Company in September 2007. The Commission has also required Romania to suspend the granting of any unlawful aid until the Commission takes a decision on its compatibility. The Romanian authorities attached specific conditions to the privatisation, in particular the achievement of a minimum production level of 200 000 cars in the fourth year after the privatisation, the continuation of the current activity for four years and the maintenance of all former employees of Automobile Craiova and Daewoo Romania. The Commission has to verify whether these conditions resulted in a lower sales price than if the privatisation had been unconditional. If this is the case, the privatisation could involve elements of state aid. In addition, Romania seems to have changed the terms of the privatisation at a later stage of the process, which might have involved additional aid elements. The opening of an investigation gives interested parties the possibility to comment on the measures under examination. It does not prejudge the outcome of the procedure.

EU Competition Commissioner Neelie Kroes said: "The Commission fully supports Romania in its privatisation policy. However, we have to ensure an open and transparent privatisation process free of unlawful state aid. In this particular case, I have concerns that the state aid rules might have been breached."

Daewoo Automobile Romania was created in 1994. In 2000, the parent company Daewoo went bankrupt and most subsidiaries were sold. However, no investor could be found for Daewoo Romania because of its critical debt situation. Daewoo Romania was therefore taken over in 2006 by the Romanian State and renamed Automobile Craiova. The company is currently not producing any vehicles but is active only in the trade of spare parts.

A further attempt to sell the company was launched earlier this year. Following a public tender, Ford Motor Company was the only company to submit a binding offer and thus won the tender. The technical and financial negotiations started in July 2007 and the sale-purchase agreement was signed on 12 September 2007.

The Romanian privatisation agency AVAS attached specific conditions to the privatisation contract. In particular, the successful bidder had to ensure the achievement of a minimum production level of 200 000 cars in the fourth year after privatisation, to continue the current activity for four years and to maintain the 3900 former employees of Automobile Craiova and Daewoo Romania.

Furthermore, it was reported that the Romanian government passed a special law for the privatisation of Automobile Craiova. Allegedly, the law provides for a write-off of the debts of the car producer and a guarantee concerning the payment of debts towards the other former Daewoo subsidiaries. Such debt write-off was not offered to the other potential bidders in the tender procedure.

The Commission has concerns that the privatisation of Automobile Craiova through a conditional tender might have resulted in a lower sales price and could therefore involve state aid. The conditions would ensure the maintenance of a certain production level and the aid could therefore support Automobile Craiova. This advantage would be financed by the revenue that the State had foregone through the sale. Furthermore, if the new investor were to benefit from a debt write-off by the state, whereas the debt situation of Automobile Craiova allegedly deterred a number of potential investors from submitting a bid, the investor would have received state aid as well.