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 (Text with EEA relevance)
Date: 2002-02-12
Institutions: European Commission
Subjects: State aid, United Kingdom, catch quota, control of State aid, financial aid, fishing industry

12.2.2002

EN

Official Journal of the European Communities

C 38/7

STATE AID (cid:151) UNITED KINGDOM

Aid C 88/2001 (ex NN 109/1999) (cid:151) 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 (cid:151) 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 2 000 000 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
fishermen. The
producer organisation to Shetland Islands
amount of the rental for fishermen who are members of the
producer organisation is equivalent
the
(up to 5 % if all the quotas on
taxable income of a vessel
which the vessel
track records
come
fishes
purchased by the scheme).

to a percentage of

from the

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.

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

C 38/8

EN

Official Journal of the European Communities

12.2.2002

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.
in introducing a system of
The United Kingdom authorities,
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
to a certain extent, as durable
cannot now be described,
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
concerned and,
consequently, in accordance with the principle set out in the
Guidelines, to be incompatible with the common market.

the businesses

costs of

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 (cid:145)measure(s) implemented by members of the
industry(cid:146) within the meaning of the last paragraph of point
it would seem that an
2(7) of the Guidelines. If that is so,
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
Commission doubts the compatibility of
with the common market.

the above Guidelines,

the
the aid measures

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
take all necessary
the Member State concerned shall
measures to recover the aid from the beneficiary.

TEXT OF THE LETTER

(cid:145)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,
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.

it has decided to initiate the formal

1. PROCEDURE

the Commission was informed by a
In February 1999,
Member of
scheme
the European Parliament of
involving the purchase of quotas in which the authorities

a

of the Shetland Islands were involved. By a letter of 25
the Commission requested the United
March 1999,
Kingdom authorities
this
to send information about
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
the (cid:145)sector(cid:146)
allocated to three groups of
which is constituted of
fish producers’ organisations
on behalf of their members with vessels over 10 m,
the (cid:145)non-sector(cid:146) which comprises fishermen with over
10 m vessels not
in membership of a producers’
organisation and the under (cid:145)10 m fleet(cid:146).

fishermen:

The allocations of quotas are made annually on the
basis of (cid:145)track records(cid:146) which are the catch levels of
each vessel over a certain period. Before 1999,
the
track records were based on the catches made by
immediately
fishing vessels during the three years
preceding each quota year. Since 1 January 1999,
they have been based on the period from 1994 to
1996. This system is known as (cid:145)fixed quota allocation(cid:146)
(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
the Netherlands
among Member States. Except
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 trans-
ferable.

for

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
for quotas
allocated in respect of these track records in the trade
newspaper Fishing News.

trade and the market

lease costs

the

under

implement

It is in this context that the Shetland authorities decided
examination.
to
scheme
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.

12.2.2002

EN

Official Journal of the European Communities

C 38/9

2.2. The bodies involved in this scheme are:

(cid:151) Shetland Islands Council (SIC),

(cid:151) Shetland Development Trust

set up for

Shetland Islands Councillors

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

(cid:151) 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,

(cid:151) 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.
(cid:145)Upon
The agreement between SLAP and SFPO states:
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. . .(cid:146).

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

(cid:151) first, preference is given to persons, partnerships or
companies newly established and actively operating
in the fishing industry in Shetland,

(cid:151) second, to persons, partnerships or companies who
own and are actively operating fishing vessels
registered with a port letter in Shetland,

(cid:151) third, persons, partnerships or companies already
established and actively operating in the fishing
industry in Shetland,

(cid:151) fourth, other POs and non-sector vessels.

levy to the normal

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
levy membership. The
additional
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
than those in the
leasing quotas
membership of
that
minimum return was obtained that way.

In 1999, 77 % of

to vessels other

SFPO.

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

3. ASSESSMENT

(cid:151) 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,

(cid:151) 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
their
members.

to other POs for

the benefit of

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

if

C 38/10

EN

Official Journal of the European Communities

12.2.2002

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 quotas
acquired under this scheme.

the purchase of

if
the
the functioning of
3.3. State aid could also exist
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.

it was foreseen that SFPO had to obtain a net
First,
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.

for

that,

it was decided afterwards

However,
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,
it was
the additional
increased to 5 % in October 1999.

levy was up to 4 %;

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.

as

those

indicated,

authorities

the
In addition,
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.

that,

through the

the Commission
Taking those elements in account,
system of additional
considers
the conditions offered to the vessels in the
levies,
membership of
to the
SFPO were preferential
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
the
Commission assumes that those preferential conditions
could result in lower lease costs and could therefore
represent aid.

return to SLAP,

and the

the rental,

it must be noted that, should this 10 %
In addition,
(9 % return to SLAP plus 1 % running costs)
rental
have been the real conditions of
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
(cid:145)normal market conditions(cid:146) 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
should indeed have been used when
flexibility
making the appreciation because of
the apparently
high elasticity of this market). Furthermore, while the
agreement between SLAP and SFPO states that (cid:145)SFPO
shall use its best endeavours to obtain via rental
income a minimum net return of 9 % per annum(cid:146),
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 under-
takings 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 grant 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 aid. The aid scheme
the time of
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).

12.2.2002

EN

Official Journal of the European Communities

C 38/11

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
aid related to
operating costs for the running of the fishing vessels
concerned.

can therefore

appear

as

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.

to Paragraph 1(2),

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

the production and marketing of

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.(cid:146)