State aid - United Kingdom

Aid C 87/2001 (ex NN 108/1999) - Orkney Islands Council track record scheme

Invitation to submit comments pursuant to Article 88(2) of the EC Treaty and Article 6 of Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 88 of the EC Treaty

(2002/C 38/02)

(Text with EEA relevance)

By means of the letter dated 28 November 2001, reproduced in the authentic language on the pages following this summary, the Commission notified the United Kingdom of its decision to initiate the procedure laid down in Article 88(2) of the EC Treaty concerning the abovementioned aid.

Interested parties may submit their comments within one month of the date of publication of this summary and the following letter, to: European Commission Directorate-General for Fisheries

Direction D - Legal Issues

B - 1049 Brussels Fax (32-2) 295 19 42

These comments will be communicated to the United Kingdom. Confidential treatment of the identity of the interested party submitting the comments may be requested in writing, stating the reasons for the request.

SUMMARY

In the United Kingdom, annual fishing quotas have been fixed since 1999 on the basis of the track records for fisheries for the years 1994 to 1996. These track records are transferable in certain circumstances. The aim of the scheme implemented by the Orkney Islands local authorities is to allow track records to be bought in order that Orkney Islands fishermen can receive the quotas to which they confer entitlement.

Purchases representing GBP 1543000 have been made on proposals from the Orkney Islands fishermens' association, with funding provided by the Council. The track records are held by the Shetland Islands producer organisation in a trust set up for the benefit of the Council.

The quotas are then rented to the Orkney Islands fishermen on a proposal from the fishermens' association.

The track records have been bought by the Council because the Orkney Islands fishermen were not in a position to do so themselves. The banks refused to lend them the necessary funds because the track records could not be used as security.

The Commission, in its position on public authorities' holdings in company capital (Bulletin EC 1984-9), said that where fresh capital is contributed in circumstances that would not be acceptable to a private investor there is State aid. In the case under consideration, the Commission notes that the banks refused to lend the fishermen the funds needed to buy the track records. From this it deduces that the Orkney Islands Council provided the necessary funds in circumstances that were unacceptable to the banks. There is consequently State aid.

What is more, the Commission has been unable to verify whether the contracts for the rental of the quotas were concluded under normal market conditions for those quotas as established in the United Kingdom. It has no proof that there was not an element of State aid in these contracts and consequently there may have been State aid here too.

The aid must be examined in the light of the Guidelines for the examination of State aid to fisheries and aquaculture(1), which applied when the events occurred.

At first sight, track records appear to be non-durable goods. They constitute a basic product which businesses can purchas in order to increase their output in a current year but once that year has expired, the basic product no longer has any value. The United Kingdom authorities, in introducing a system of annual quotas based on track records, indicated that it was not intended that it should evolve into a system of transferable quotas. Despite that, a market in track records developed and the question may be asked whether these track records cannot now be described, to a certain extent, as durable goods. The Commission is unaware, however, of any legal provisions or court judgments to this effect. Accordingly, aid for the purchase of track records would appear to be linked to the operating costs of the businesses concerned and, consequently, in accordance with the principle set out in the Guidelines, to be incompatible with the common market.

Moreover, since the scheme for the purchase of quotas was introduced for the benefit of the members of a producer organisation, the question may be asked whether it could not be regarded as a "measure(s) implemented by members of the industry" within the meaning of the last paragraph of point 2(7) of the Guidelines. If that is so, it would seem that an aid for the implementation of such a scheme could not be regarded as being compatible with the common market as it does not appear to satisfy the conditions laid down in point 1(2) of the Guidelines and, hence, the aims of the common fisheries policy. The second paragraph of that point states that aid may not be protective in its effect: it must serve to promote the rationalisation and efficiency of the production (of fishery products) and the adaptation of the industry. But this scheme seems to be protective in its effect rather than provide an incentive for the adaptation of the fishing industry in the difficult situation in which it now finds itself.

Consequently, on the basis of the above Guidelines, the Commission doubts the compatibility of the aid measures with the common market.

The Commission recalls also that under Article 14 of Council Regulation (EC) No 659/1999, where negative decisions are taken in cases of unlawful aid the Commission shall decide that the Member State concerned shall take all necessary measures to recover the aid from the beneficiary.

TEXT OF THE LETTER

"The Commission wishes to inform the United Kingdom of Great Britain and Northern Ireland that, having examined the information supplied by your authorities on the aid referred to above, it has decided to initiate the formal investigation procedure laid down in Article 88(2) of the EC Treaty and Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for the application of this Article.

1. PROCEDURE

In February 1999, the Commission was informed by a Member of the European Parliament of a scheme involving the purchase of quotas by Orkney Islands Council, where the quotas acquired would be rented to fishermen.

By a letter of 25 March 1999, the Commission requested the United Kingdom authorities to send information about this scheme. After a reminder, the first information was sent by the United Kingdom authorities by a letter dated 9 August 1999.

The Commission requested further information by letters of 1 September 1999, 12 April and 22 June 2000. The United Kingdom authorities sent information by letters of 6 March, 9 March and 16 May 2000, but did not reply to the letter of 22 June. A meeting was held with these authorities at the Commission offices on 18 October 2000 at which they were reminded to send the information requested. The Commission has still not received it, despite informal contacts with those authorities since then.

2. DESCRIPTION

2.1. In the United Kingdom, the national fisheries quotas are allocated to three groups of fishermen: the 'sector' which is constituted of fish producers' organisations on behalf of their members with vessels over 10 m, the 'non-sector' which comprises fishermen with over 10 m vessels not in membership of a producers' organisation and the 'under 10 m fleet'.

The allocations of quotas are made annually on the basis of 'track records' which are the catch levels of each vessel over a certain period. Before 1999, the track records were based on the catches made by fishing vessels during the three years immediately preceding each quota year. Since 1 January 1999, they have been based on the period from 1994 to 1996. This system is known as 'fixed quota allocation' (FQA).

The track records can be, under certain conditions, sold outwith the vessel. This situation is a very specific one among Member States. Except for the Netherlands which have a system of individual transferable quotas (ITQ) set up by law, the fisheries quotas or the track records giving access to them are not usually transferable.

Under this system, in the United Kingdom, a specified market for track records has developed; during the year 2000, it was possible to follow the market prices for FQA trade and the market lease costs for quotas allocated in respect of the track records in the trade newspaper Fishing News.

It is in this context that the Orkney authorities, in 1998, decided to implement the scheme under examination. According to the United Kingdom authorities, this scheme of quota purchase was set up because the Orkney fleet was unable to borrow from commercial sources as quotas are intangible assets and cannot be used as security.

2.2. The bodies involved in the scheme are:

- Orkney Islands Council (OIC),

- Shetland Fish Producers' Organisation Limited (SFPO) which is a fish producers' organisation, as defined in the Community legislation,

- Orkney Fisheries Association (OFA) which is an unincorporated association.

2.3. The scheme works as follows:

The funds for this scheme come from the 'Reserve Fund' established by OIC. The funds come from a number of sources, in particular surplus income of the Council from harbour dues and fees in relation to the oil terminal and payments of a non-statutory nature made by oil companies and other parties which make use of the harbour or harbour-related facilities of the Orkney Islands.

OIC had entered into an agreement with SFPO which acts as the proper holder of the track records. The agreement between OIC and SFPO states: 'Notwithstanding that the track record is held by SFPO, the track record shall vest in OIC and SFPO hereby assigns to OIC its whole right, title and interest in and to the track record such as the same shall vest absolutely in OIC and, to the extent that the track record shall fail to vest effectively in OIC as aforesaid, SFPO shall hold the trust property in trust for the benefit of OIC. During the period of this agreement, SFPO shall each year make available the quota for the utilisation by OIC ...'.

There is also an agreement between OIC and OFA which is the manager for the purpose of acquisition of track records and of the benefits of those acquired track records. Under this agreement, first, OFA makes a proposal to OIC to purchase track records which OFA considers would be suitable for OIC to acquire; second, OFA seeks a rental agreement for those track records and directs SFPO regarding the transfer of quotas to the lessee.

OFA is required to use all reasonable endeavours to obtain a net rental in respect of any quota, after deduction of its management fee (1 %), representing a return to the Council of no less than 7 % par annum on the acquisition cost of the relative track record. The SFPO management fee is also 1 %.

The vessels eligible for rental of these quotas under this scheme are vessels which are in membership of OFA and on which at least 50 % of the crew members are resident in Orkney.

2.4. According to the information sent by the United Kingdom authorities by letter of 9 August 1999, the track records acquired cost GBP 1543000; no further purchases were planned under this scheme. According to the following letter of 6 March 2000, eight vessels had benefited from that scheme. All of these vessels are members of OFA.

The Commission requested copies of the quota rental agreements. The United Kingdom authorities replied that the process had been put on hold and did not send them, although they gave the names of the eight vessels involved.

3. ASSESSMENT

3.1. It must be determined, first, if there is State aid and, second, if this is the case, if this aid is compatible with the common market.

Existence of State aid

3.2. With this scheme, the track records are bought by a producers' organisation, SFPO. But, in reality, the decision to buy track records rests with OIC.

According to the United Kingdom authorities, this scheme was set up because the Orkney fleet was unable to borrow from commercial sources in order to buy track records; the track records acquired under this scheme are rented to that fleet. In other words, OIC made funds available to SFPO to buy track records in conditions which were not acceptable for banks to give loans to the vessel owners concerned.

As Point 3(3) of the Commission's position about public capital injections lays down (Bulletin EC 9-1984), there is State aid where fresh capital is contributed in circumstances that would not be acceptable to a private investor operating under normal market conditions. The case under examination is such a case as banks were not prepared to give loans for the purchase of track records while a public body (OIC) injected fresh capital to allow for this purchase for the benefit of the vessel owners concerned.

3.3. According to the agreement between OFA and SFPO, OFA is required to use all reasonable endeavours to obtain a net rental in respect of any quota, after deduction of its management fee, representing a return to the Council of no less than 7 % per annum on the acquisition cost of the related track record.

The Commission requested copies of the individual rental agreements between OIC, OFA and the lessees. The United Kingdom authorities did not send them, arguing that they had been put on hold. But the Commission does believe that those agreements have been in existence since the scheme was launched in 1999 and the United Kingdom authorities informed the Commission about the amount dedicated to the purchase of track records and the number of beneficiary vessels. The track records acquired are apparently always held by SFPO for the benefit to OFA members; there is no contradictory indication. Despite reminders, copies of those agreements have still not been sent to the Commission.

Consequently, the Commission has not been able to check whether the rentals were fixed under normal market conditions. These 'normal market conditions' could have been determined from the conditions of this specific market which are known from quota lease rates published in the trade newspaper Fishing News. Aid would have existed if the rental rates mentioned in the individual rental agreements had been lower than those rates (some flexibility should indeed have been used when making the appreciation because of the apparently high elasticity of this market).

In addition, the Commission observes that OFA must use 'all reasonable endeavours' to obtain a net rental representing a return to OIC to 7 %. Consequently, there is no firm commitment concerning this return rate which, in fact, remains unknown.

Thus, the Commission did not receive evidence showing that those rentals were operated under normal market conditions and that aid does not exist.

3.4. As explained above, first, public aid existed through the purchase of track records and, second, the Commission does not have any evidence that public aid did not exist and does not still exist in the rental agreements concerning the quotas allocated in respect of those track records.

These aids constitute an economic advantage to the fishing undertakings concerned.

By favouring certain undertakings, aid in any form whatsoever distorts or threatens to distort competition. The trade between Member States is affected when the undertakings concerned carry on an economic activity involving trade between those States.

The aids under examination are directed to a definite category of undertakings, the fishing undertakings whose vessels are members of OFA. They are selective and affect the balance between these undertakings and other undertakings. Thus, they are State aids in the sense of Article 87 of the EC Treaty.

Compatibility with the common market

3.5. Point 3(4) of the current Guidelines (OJ C 19, 20.1.2001, p. 7) establishes that illegal aids will be examined under the guidelines that were in force at the time of the grant of the aid. The aid scheme examined in this decision was adopted in 1998. Therefore, this aid scheme must be assessed in the light of the 1997 Guidelines for the examination of State aid to fisheries and aquaculture (OJ C 100, 27.3.1997, p. 12).

3.6. In a circular letter dated 11 June 1998 and addressed to all parties concerned and describing the workings of the FQAs system (see above Paragraph 2.1.), the United Kingdom Government said that it had no plans to introduce by law a system of individual transferable quotas (ITQs), i.e. a system of tradable quotas; such action would not have been taken without consultation with the industry. It clearly added that, in moving to FQAs, there will not be a free trade in quota units.

One could argue that free trade in FQAs has indeed developed in practice. From the moment the plan for purchase of track records was launched (in 1998), the track records acquired have remained controlled by SFPO. Since that time, these track records have entitled SFPO to the annual corresponding quotas without interruption. In theory, the question could therefore be posed as to whether, to some extent, these track records could be qualified as durable goods. However, the Commission is not aware of any rule made by law or case-law going in this direction.

In any event, it appears that quotas and track records are by nature not durable goods. Even if they can be bought, they are only raw products that the fishing enterprises have to acquire regularly if they want to increase their output; those quotas and track records do not have theoretically any more value at the end of each calendar year. Aid for the purchase of track records can therefore appear as aid related to operating costs for the running of the fishing vessels concerned.

3.7. According to Paragraph 1(2), fourth indent, third dash, of the Guidelines, aid related to operating costs are incompatible with the common market unless the aid scheme is directly linked to a restructuring plan considered to be compatible with the common market.

As this scheme is not linked to such a plan, it does not appear to be considered compatible with the common market.

3.8. In addition, as this scheme has been established for the benefit of fishermen in membership of a specified Producers' Organisation (SFPO) and as track records purchased are managed by that PO, the question could be posed whether it could be considered as a measure implemented by members of the industry falling under Paragraph 2(7) of the Guidelines.

The last indent of this Paragraph states that aid for measures implemented by members of the industry may be deemed to be compatible with the common market provided that it covers joint schemes of limited duration and contributes to attaining the objectives of the common fisheries policy.

Although this purchase scheme had a limited duration, it does not appear to contribute to attaining those objectives. According to Paragraph 1(2), second indent, aid may not be protective in its effect; it must serve to promote the rationalisation and efficiency of the production and marketing of fishery products in a way which encourages and accelerates the adaptation of the industry to the new situation it faces.

The Commission has doubts about the effects of this scheme with regard to the objectives laid down in this provision. By ringfencing track records rather than letting the market forces work in this track records market which now exists in the United Kingdom, this aid seems to be more protective than to encourage the industry to adapt to the new situation it faces.

4. DECISION

The Commission observes that it exists, at this stage of the preliminary examination, as provided for by Article 6 of Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 88 of the EC Treaty, serious doubts on the compatibility of this aid scheme with the Guidelines for the examination of State aid to fisheries and aquaculture and, therefore, with the EC Treaty.

In the light of the foregoing conditions, the Commission, acting under the procedure laid down in Article 88(2) of the EC Treaty and Article 6 of Regulation (EC) No 659/1999, requests the United Kingdom of Great Britain and Northern Ireland to submit its comments and to provide all such information as may help to assess the aid scheme, within one month of the date of receipt of this letter. It requests your authorities to forward a copy of this letter to the recipients of the aid immediately.

The Commission wishes to remind the United Kingdom of Great Britain and Northern Ireland that Article 88(3) of the EC Treaty has suspensory effect and would draw your attention to Article 14 of Council Regulation (EC) No 659/1999, which provides that all unlawful aid may be recovered from the recipient."

(1) OJ C 100, 27.3.1997, p. 12.