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 (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

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Official Journal of the European Communities

12.2.2002

STATE AID (cid:151) UNITED KINGDOM

Aid C 87/2001 (ex NN 108/1999) (cid:151) 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 (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 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.

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 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.

the Commission notes that

Purchases representing GBP 1 543 000 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.

is more,

the contracts for

the Commission has been unable to verify
What
whether
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 rental of

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 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.

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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.
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 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
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.

to this effect. Accordingly, aid for

judgments

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

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
information
reminded
The
Commission has
received it, despite informal
contacts with those authorities since then.

the
still not

requested.

send

to

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’ organi-
sation and the (cid:145)under 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
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 (cid:145)fixed quota allocation(cid:146) (FQA).

The track records can be, under certain conditions, sold
outwith the vessel. This situation is a very specific one
among Member States. Except
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 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
FQA trade and the market
for quotas
allocated in respect of the track records in the trade
newspaper Fishing News.

lease costs

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that

is in this context

the Orkney authorities,

in
It
1998, decided to implement the scheme under exam-
ination. 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:

(cid:151) Orkney Islands Council (OIC),

(cid:151) Shetland Fish Producers’ Organisation Limited
(SFPO) which is a fish producers’ organisation, as
defined in the Community legislation,

(cid:151) Orkney Fisheries Association (OFA) which is an

unincorporated association.

2.3. The scheme works as follows:

The funds for this scheme come from the (cid:145)Reserve
Fund(cid:146) 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
(cid:145)Notwith-
agreement between OIC and SFPO states:
standing 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 . . .(cid:146).

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 1 543 000; 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
the

producers’ organisation, SFPO. But,
decision to buy track records rests with OIC.

in reality,

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.

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capital

injections

there is State aid where fresh capital

the Commission’s position about
As Point 3(3) of
lays down (Bulletin EC
public
is
9-1984),
that would not be
contributed in circumstances
investor operating under
acceptable to a private
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
in respect of any quota, after
obtain a net rental
representing a
deduction of
return to the Council of no less than 7 % per annum
on the acquisition cost of the related track record.

its management

fee,

they had been put on hold. But

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
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 bene-
are
ficiary
track
apparently always held by SFPO for the benefit
to
there is no contradictory indication.
OFA members;
Despite reminders, copies of
those agreements have
still not been sent to the Commission.

vessels. The

acquired

records

Consequently, the Commission has not been able to
check whether the rentals were fixed under 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 quota
lease rates published in the trade newspaper Fishing
rates
News. Aid would have existed if
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).

the rental

In addition, the Commission observes that OFA must
use (cid:145)all reasonable endeavours(cid:146) 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.

the Commission did not

evidence
Thus,
showing that
rentals were operated under
normal market conditions and that aid does not exist.

receive

those

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
in the rental agreements
and does not
concerning the quotas allocated in respect of
those
track records.

still exist

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
are
whose vessels
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.

are members of OFA. They

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).

system (see above Paragraph 2.1.),

3.6. In a circular letter dated 11 June 1998 and addressed to
all parties concerned and describing the workings of
the
the FQAs
United Kingdom Government
it had no
plans to introduce by law a system of individual trans-
ferable quotas (ITQs), i.e. a system of tradable quotas;
such action would not have been taken without consul-
tation with the industry.
in
moving to FQAs, there will not be a free trade in
quota units.

It clearly added that,

said that

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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
these track records have
SFPO. Since that
entitled SFPO to the annual corresponding quotas
the question could
without
In theory,
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.

interruption.

time,

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

the purchase of

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
the question
purchased are managed by that PO,
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
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.

to Paragraph 1(2),

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
this letter to the
your authorities to forward a copy of
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)