State aid - United Kingdom

Aid C 88/2001 (ex NN 109/1999) - Loans for the purchase of quotas scheme (Shetland Islands)

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 38/03)

(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 Shetland Islands local authorities is to allow track records to be bought so that Shetland Islands fishermen can benefit from the quotas to which they confer entitlement.

Purchases representing GBP 2000000 have been made, with funding provided by a discretionary trust controlled by the Council which lent this amount to a commercial company held by a charitable trust, also under Council control. The track records purchased are held by the Shetland Islands producer organisation in a trust set up for the benefit of this commercial company.

The quotas are then rented with preference being given by the producer organisation to Shetland Islands fishermen. The amount of the rental for fishermen who are members of the producer organisation is equivalent to a percentage of the taxable income of a vessel (up to 5 % if all the quotas on which the vessel fishes come from the track records purchased by the scheme).

The track records have been purchased by the commercial company because the Shetland 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 rate at which the loan was made by the discretionary trust to the company was 9 %. In 1998, the base rate used by the Commission as a reference when assessing whether loans were subsidised was 7.77 %. Since an additional 4 % must be added to the rate where loans are unsecured, the lending rate (9 %) must be set against the rate of 11.77 %. There is consequently a public subsidy of 2.77 %.

The Commission, moreover, 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 therefore 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 purchase 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 has 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 in which the authorities of the Shetland Islands were involved. 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 2000 and 22 June 2000. The United Kingdom authorities sent information by letters of 6 March, 16 May, 17 October and 8 December 2000.

The Commission has not received the information requested by the last letter, despite subsequent informal contacts with those authorities.

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); a FQA unit represents a 100 kg track record unit in respect of which annual quotas are allocated.

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 has 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 this trade and the market lease costs for quotas allocated in respect of these track records in the trade newspaper Fishing News.

It is in this context that the Shetland authorities decided to implement the scheme under examination. According to the United Kingdom authorities, this scheme of quota purchase was set up to ringfence them for the benefit of fishing vessels in the fisheries dependent area of Shetland, as the Shetland fleet had great difficulty in sourcing commercial finance for the purchase of quotas due to the escalating costs and the fact that quotas are intangible assets and cannot be used as security.

2.2. The bodies involved in this scheme are:

- Shetland Islands Council (SIC),

- Shetland Development Trust (SDT), which is a discretionary trust. SDT was set up for the purpose of economic development in Shetland and is operated with funding from Shetland Islands Council. All Shetland Islands Councillors are trustees of that trust, but there are, in addition, trustees who are not Councillors. The principal source of funds for SDT is the reserve fund, established and operated by SIC; the source of funds of this reserve fund are the surplus revenues of the harbour undertaking of the Council,

- Shetland Leasing and Property Ltd (SLAP) which is a commercial limited company operated for profit and the shares of which are wholly owned by the Shetland Islands Council Charitable Trust (SICCT); the funds of this charitable trust are originated from oil companies. The task of SLAP is to act and invest on a commercial basis, in relation to the local economy of the Islands,

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

2.3. The scheme works as follows:

SLAP entered into an agreement with SFPO that it would act as the proper holder of the track records. The agreement between SLAP and SFPO states: 'Upon payment of the purchase price ... and the acquisition on behalf of SLAP of the relevant track record, the ownership of all such track record ... shall vest in SLAP and SFPO hereby assigns to SLAP its whole right title and interest to the track record absolutely such that the same shall vest absolutely in SLAP and, to the extent that the track record shall fail to vest effectively in SLAP as aforesaid, SFPO shall hold the trust property in trust for the benefit of SLAP...'.

Under this agreement, SFPO acts as SLAP's agent, both for the acquisition and rental of track records:

- for acquisition, SFPO shall submit from time to time notification of track records or quotas which SFPO considers would be suitable for SFPO to acquire on SLAP's behalf,

- for rental, SLAP appoints SFPO to manage the track records in accordance with the conditions set out in the agreement between the two parties.

To assist SLAP in the purchase of track records, Shetland Development Trust (SDT) procured, in 1998, a loan of GBP 2 million to SLAP at a rate of interest equal to the return required by SLAP from SFPO for the lease of quotas to fishermen (average of 9 %). The track records acquired cost that amount of GBP 2 million.

The track records are first used for the benefit of the fishing industry in Shetland but surplus quotas can also be leased for a commercial return to vessels outside Shetland or to other POs for the benefit of their members.

The following order of priority is observed for the rental agreements:

- first, preference is given to persons, partnerships or companies newly established and actively operating in the fishing industry in Shetland,

- second, to persons, partnerships or companies who own and are actively operating fishing vessels registered with a port letter in Shetland,

- third, persons, partnerships or companies already established and actively operating in the fishing industry in Shetland,

- fourth, other POs and non-sector vessels.

SFPO, which manages the track records, was entitled to charge an additional 1 % to meet its running costs. Thus, the average minimum rental had to be 10 % so that the 9 % return could be achieved. However, in their letter of 17 October 2000, the United Kingdom authorities informed the Commission that this rental cost had been replaced for SFPO members by an additional levy to the normal levy membership. The normal levy is 1 % of the vessel's gross earnings. The additional levy was up to 4 % at the beginning of the scheme and was increased to 5 % from October 1999. The additional levy depends on the quantity of quotas a vessel leases from the quotas allocated in respect of the track records acquired under the scheme. A rate of 5 % applies for vessels with zero track record and a progressively reduced rate applies for vessels with an incomplete track record, this incomplete track record being measured with reference to the normal track record membership criteria.

According to the United Kingdom authorities, in 1998, the minimum 9 % return to SLAP was obtained from leasing quotas to vessels other than those in the membership of SFPO. In 1999, 77 % of that minimum return was obtained that way.

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. This scheme involves a public body (Shetland Island Council), a discretionary trust (SDT), a commercial limited company (SLAP) and SFPO. For the purchase of track records, SLAP funds were borrowed from SDT.

As all the SIC councillors are trustees of SDT and the principal source of SDT funds come from SIC, SDT can be considered as a trust controlled by SIC. The SDT deeds can therefore be assimilated to deeds of a public body.

State aid could exist if this public body applies conditions which would not be acceptable by a private investor in the normal conditions of a market economy.

SDT borrowed GBP 2 million for the purchase of track records at a rate of 9 %. To assess whether State aid existed in this case or not, the Commission must refer to its notice on the method for setting the reference and discount rates (OJ C 273, 9.9.1997, p. 3).

According to this notice, the rate used is a discount rate if it is lower than the average level of interest rates charged on medium and long-term loans backed by normal security. This rate is a floor rate which may be increased in situations involving a particular risk, for example when the security normally required by banks cannot be provided. In such cases, the premium may amount to 400 basis points or more.

SDT lent the GBP 2 million to SLAP in 1998. That year, the reference rate used by the Commission was 7,77 %. As the United Kingdom authorities told the Commission that the track records could not be used as security, the premium of 400 basis points must be added, which means that the SLAP's borrowing rate must be compared to 11,77 %.

Consequently, while the borrowing rate was 9 %, an aid of 2,77 % existed for the purchase of the quotas acquired under this scheme.

3.3. State aid could also exist if the functioning of the scheme has the effect of lowering the lease cost of the quotas allocated in respect of the track records acquired, with regard to the normal lease cost under normal market conditions.

First, it was foreseen that SFPO had to obtain a net rental representing a 9 % return to SLAP. As SFPO was entitled to charge an additional 1 % for running the scheme, that means that SFPO must require a 10 % rental.

However, it was decided afterwards that, for the fishermen in membership of SFPO, this rental would be replaced by an additional levy to the normal levy paid for membership. This normal levy is fixed at 1 % of the vessel's gross earnings. At the beginning of the scheme, the additional levy was up to 4 %; it was increased to 5 % in October 1999.

The Commission asked the United Kingdom authorities to let it know the economic and financial basis on which the rate of this additional levy was set and the linkage with the return required by SLAP. The relevant authorities did not reply to this request.

In addition, as those authorities indicated, the minimum 9 % return to SLAP was wholly obtained in 1998 from the leasing of quotas acquired under this scheme to vessels other than those in membership of SFPO. In 1999, 77 % of this minimum return was thus obtained.

Taking those elements in account, the Commission considers that, through the system of additional levies, the conditions offered to the vessels in the membership of SFPO were preferential to the conditions offered to non-member vessels. While the United Kingdom authorities did not provide the information which could have allowed it to assess the conditions of the linkage between the additional levy paid for quotas and the return to SLAP, the Commission assumes that those preferential conditions could result in lower lease costs and could therefore represent aid.

In addition, it must be noted that, should this 10 % rental (9 % return to SLAP plus 1 % running costs) have been the real conditions of the rental, the Commission would have had to assess whether the scheme's working would have contained or not State aid with regard to normal market conditions. These 'normal market conditions' could have been determined from the conditions of this specific market which are known from quotas lease rates published in the trade newspaper Fishing News. Aid would have existed if a 10 % rental 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). Furthermore, while the agreement between SLAP and SFPO states that 'SFPO shall use its best endeavours to obtain via rental income a minimum net return of 9 % per annum', the Commission observes that the SFPO's obligation is not binding. The 9 % return to SLAP is therefore not a firm requirement.

3.4. As explained above, first, public aid existed through the purchase of track records and, second, the Commission can assume that the system of additional levies giving access quotas to SFPO members could also have led to aid.

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 SFPO. 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 and have been managed in accordance with the agreements made between SLAP and 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.