2003/611/EC: Commission Decision of 3 June 2003 on the Orkney Islands Council track-record scheme (notified under document number C(2003) 1686)
Date: 2003-06-03
Institutions: European Commission
Subjects: State aid, United Kingdom, catch quota, control of State aid, fishing industry

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II

(Acts whose publication is not obligatory)

COMMISSION

COMMISSION DECISION

of 3 June 2003

on the Orkney Islands Council track-record scheme

(notified under document number C(2003) 1686)

(Only the English text is authentic)

(2003/611/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Community, and in particular the first subparagraph
of Article 88(2),

Having regard to Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for
the application of Article 93 of the EC Treaty (1), and in particular Article 14 thereof,

Having invited interested parties to submit their comments, in accordance with the first subparagraph of
Article 88(2) of the EC Treaty,

Whereas:

I. PROCEDURE

(1)

(2)

(3)

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 (OIC), hereinafter ‘the OIC
scheme’, whereby the quotas acquired were to be rented to fishermen. By letter dated 25 March
1999 the Commission requested the United Kingdom authorities, hereinafter ‘the UK authorities’, to
provide information about this scheme. Following a reminder, the UK authorities provided a
response by letter dated 9 August 1999.

The Commission requested further information by letters dated 1 September 1999, 12 April 2000
and 22 June 2000. The UK authorities sent information by letters dated 6 March 2000, 9 March
2000 and 16 May 2000. However, no response to the letter dated 22 June 2000 was received. A
meeting was held with the UK authorities at Commission offices on 18 October 2000.

The Commission informed the United Kingdom by letter dated 28 November 2001 of its decision
to initiate, in relation to the OIC scheme, the formal investigation procedure provided for in Article
88(2) of the EC Treaty. Following mutual agreement
to extend the deadline for a response,
confirmed to the UK authorities by Commission letter dated 20 December 2001, the United
Kingdom provided its comments on the case by letters dated 6 February and 28 February 2002.

(4)

By letter dated 7 August 2002, the Commission requested documents to which reference was made
in the reply of the UK authorities dated 28 February 2002. They were received on 27 August 2002.

(1) OJ L 83, 27.3.1999, p. 1.

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(5)

(6)

(7)

(8)

(9)

The Commission's decision to initiate the formal investigation procedure was published in the Offi-
cial Journal of the European Communities on 12 February 2002 (2). The Commission invited any inter-
ested parties to provide their observations on the case. Comments were received from the Scottish
Fishermen's Organisation Ltd (letter dated 4 March), Mrs Sheryll Murray of Torpoint, Cornwall,
(letter dated 7 March 2002) and the Aberdeen Fish Producers' Organisation Ltd (letter dated 11
March 2002). In accordance with Article 6(2) of Regulation (EC) No 659/1999, those letters were
forwarded to the UK authorities to enable them to inform the Commission of their own comments
on those observations. The UK authorities replied by letter dated 3 May 2002, saying in substance
that the issues raised had already been dealt with in their previous replies.

II. FACTS

In the United Kingdom, national fishing quotas are allocated to three groups of fishermen: (i) the
‘sector’, which is made up of the fish producers' organisations (POs) on behalf of their members with
vessels over 10 metres; (ii) the ‘non-sector’, which comprises fishermen with vessels over 10 metres
but who are not members of a producers' organisation; (iii) the ‘under 10-metre fleet’.

Quotas are allocated annually to the three groups on the basis of track records (the catch levels of
each vessel over a certain period). Before 1999, track records were based on the catches made by
fishing vessels during the three years immediately preceding each quota year. Since 1 January 1999,
track records have been based on the period from 1994 to 1996. This system is known as ‘fixed
quota allocation’ (FQA); an FQA unit represents a 100 kg track-record unit in respect of which
annual quotas are allocated.

The track records, or FQA units, can be sold from one vessel to another under certain conditions.
This situation is relatively specific to the United Kingdom. Except for the Netherlands, where a
system of individual transferable quotas is in place, fishing quotas, or track records giving access to
them, are not usually transferable. Under this system, a certain market for track records has devel-
oped within the United Kingdom. The buyers can be other fishermen or POs.

As the track records are based on catches made by fishing vessels from 1994 to 1996 and are now
no longer recalculated from one year to another, fishermen are not obliged to fish all the quotas
their track records entitle them to, and can keep their track records as a whole for the following
years. They can fully or partly let them to other fishermen or POs. In the same way, POs which have
bought such track records are allowed to let them.

(10)

It is within this context that the Orkney authorities decided in 1998 to set up the scheme in ques-
tion. According to the UK authorities, the OIC scheme was set up because the Orkney fleet was
unable to borrow money from commercial sources to buy track records.

(11)

The bodies involved in the OIC scheme are:

— Orkney Islands Council (OIC),

— Shetland Fish Producers' Organisation (SFPO), which is a producers' organisation as defined in

Community legislation (3),

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

(12)

The OIC scheme operates in the following manner. Funding for the purchase of track records comes
from the Reserve Fund established by the OIC. Monies for this fund come from a number of sources,
in particular from surplus income of the OIC from harbour dues and fees in relation to the oil term-
inal and payments made by oil companies and other parties which make use of the harbour or
harbour-related facilities of the Orkney Islands.

(2) OJ C 38, 12.2.2002, p. 2.
(3) Council Regulation (EEC) No 3759/92 of 17 December 1992 on the common organisation of the market in fishery

and aquaculture products (OJ L 388, 31.12.1992, p. 1).

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(13) OIC entered into an agreement, dated 14 to 17 December 1998, with SFPO which acts as the

proper holder of the track record. That agreement contains the following statements:

— ‘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’
(point 3.2),

— ‘During the period of this agreement, SFPO shall each year make available the quota for the utili-

sation by OIC …’ (point 4.2).

(14)

There is also an agreement, dated 16 to 17 December 1998, between OIC and OFA which manages
the acquisition of track records and the benefits of the acquired track records. That agreement
contains the following statements:

— ‘OFA shall submit from time to time notification of track records which OFA considers would

be suitable for OIC to acquire …’ (point 3.1),

— ‘OIC wishes that: (a) the quota be leased to eligible vessels so as to achieve maximum utilisation
of the quota, (b) OFA shall collect the rental therefrom, (c) OFA shall remit to OIC the balance
of the rental under deduction of the management fee …’ (point 4.1),

— ‘Eligible vessel shall mean any vessel (a) which is registered and licensed as a British fishing
vessel, (b) which is in membership of OFA and (c) in relation to which 50 % of the crew
members are resident in Orkney’ (point 1.1),

— ‘…OFA shall use all reasonable endeavours to negotiate rental agreements... (a) the rental shall
be the market rental then prevailing and … OFA shall 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 OIC of no less than 7 % per annum … on the acquisition cost of the relative track
record…; (b) the period of each rental agreement shall be no longer than one year …’ (point
4.2),

— ‘…OFA shall direct SFPO regarding the transfer of quotas to the lessee…’ (point 4.4),

— ‘OIC shall be entitled to the rental payable under any rental agreement but OFA shall … collect
all rental from lessees and shall remit to OIC the sum specified in clause 5.4 [7 %], whether or
not OFA shall have collected that sum from the lessees’ (point 5.1).

(15) According to the information sent by the UK authorities by letter dated 9 August 1999, the track
records acquired cost GBP 1,543 million. No further purchases were planned under the OIC
scheme. According to their next letter, dated 6 March 2000, eight vessels had benefited from the
scheme; all were members of OFA.

Grounds for the formal investigation procedure

(16) As the Orkney fleet was unable to borrow from commercial sources for the purchase of track
records, the OIC scheme enabled it to obtain quotas to which it would not otherwise have been
entitled. At a time when banks were not prepared to provide loans, the OIC injected fresh capital to
enable this purchase. That is to say, fresh capital was invested by a public body in circumstances not
acceptable to a private investor. According to the Commission's position on public capital injections,
this indicates a case of State aid. Moreover, as the Commission did not receive copies of the rental
agreements, despite its requests, it was not able to check whether those agreements were fixed under
normal market conditions nor that there was no State aid involved in the rental agreements.

(17) As the OIC scheme was set up in 1998, it was assessed in the light of the 1997 Guidelines for the
examination of State aid to fisheries and aquaculture (4). The Commission considered that quotas
and track records were by nature non-durable goods; even though they can be bought, in theory
they no longer have any value at the end of the calendar year. Aid for their purchase therefore
appears to be aid related to operating costs for the running of the vessels which benefit from them.

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

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As operating costs in the fisheries sector are allowed only in specific circumstances not existing here,
this aid did not appear to be compatible with the common market. In addition, the Commission
considered that the OIC scheme could not be considered as a scheme implemented by members of
the industry, permissible under point 2.7 of the Guidelines, because its effect of ringfencing track
records rather than letting the market forces work is protective in the context the industry must face
and does not contribute to attaining the objectives of the common fisheries policy.

III. OBSERVATIONS OF THIRD PARTIES

The Scottish Fishermen's Organisation Ltd (SFO)

(18)

(19)

(20)

(21)

(22)

The Scottish Fishermen's Organisation Ltd (SFO) welcomes the Commission's decision to initiate the
formal investigation procedure and is of the opinion that the OIC scheme is by its very nature discri-
minatory and contrary to the rules governing State aid. It considers that the scheme was funded by
the local authorities because no commercial financing would have been provided by banks to fund
such purchases, not only because track records are intangible assets but also because the asset base
of the local fishermen's association could not justify lending it GBP 1,543 million. The SFO has
approached commercial financial institutions for money to purchase quotas but it would have had
to mortgage its assets or effectively remove the money from its working capital. It is therefore clear
that the local authorities in Orkney put the local fishermen in an economically advantageous posi-
tion.

The SFO also indicates that it was the intervention of the Orkney authorities which caused the cost
of quotas to escalate and the development of the market for quotas. Furthermore, it believes that the
minimum net rate of return of 7 % is not a binding commitment; many in the industry think that
the GBP 1,543 million loan was interest-free and would eventually be written off.

In addition, the SFO maintains that the OIC scheme was designed from the outset to benefit Orkney
fishermen. They had ceased to be members of their original producers' organisation (Aberdeen Fish
Producers' Organisation) and set up their own local PO with membership restricted to Orkney fish-
ermen. The conditions offered to vessels in membership of OFA to rent quotas were preferential to
the conditions prevailing outwith Orkney. The SFO cites, by way of example, the case of cod. It
thinks it likely that the Orkney fishermen were able to purchase quotas at a price ranging from
GBP 1 000 to GBP 2 000 per tonne and, to meet the 8 % return criterion, a leasing price of a
maximum of GBP 160 would have sufficed. In comparison, in the year 2001, the price paid to lease
cod in mainland Britain would not have been less than GBP 350 per tonne, since the average price
was around GBP 450 per tonne.

Finally, the SFO thinks that the assistance afforded to Orkney fishermen has benefited them in terms
of operating expenses. Leasing expenditure is an operating cost and becomes a cost item in the
vessels' balance sheet. Consequently, the OIC scheme is clearly an aid to those vessels participating
in it. There has been considerable expansion in the fishing capacity of the Orkney fleet. The practical
application of the scheme is such that it disadvantages fishermen in mainland Britain and indeed in
the rest of the Community.

The Aberdeen Fish Producers' Organisation Ltd (AFPO)

The AFPO indicates that it had seven Orkney vessels in its membership in 1999. It had understood
from verbal information that one of the attractions to Orkney vessels to establish a local PO was
that quota entitlements would be acquired and made available to them under some kind of arrange-
ment. The AFPO submitted an objection to the Scottish Executive against the creation of a new PO
because it would be a very small body which could result in the unnecessary duplication of financial
contributions and because the abovementioned seven vessels seldom, if ever, landed in Orkney. The
Scottish Executive replied that the Orkney Fish Producers' Organisation met the criteria for official
recognition and that this recognition was appropriate as fisheries are an important part of Orkney's
economy.

(23)

The AFPO also mentioned that it had asked the local City Council a few years ago for preferential
loans to enable it to purchase quota entitlements and that it was advised that such assistance could
not be given as it was in breach of Community rules.

Mrs Sheryll Murray, Torpoint, Cornwall

(24) Mrs Murray is a member of Cornwall County Council and mentioned that a similar scheme was
discussed by this Council in January 2001. In her opinion, since the United Kingdom may manage
its quotas as it wishes, there is no problem with allowing local authorities to use funds to safeguard

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local Community fishing industries. She further commented on the fixing of production opportu-
nities available to each UK vessel, which would be contrary to the common organisation of the
market in fisheries products if the scheme was, in itself, contrary to this common organisation.

IV. COMMENTS FROM THE UNITED KINGDOM

(25)

In its first reply, dated 6 February 2002, the United Kingdom only forwarded comments made by
the Orkney Island Council (OIC) in a letter to the Scottish Executive dated 22 January 2002. In its
second reply, dated 22 February 2002, the United Kingdom sent its own comments, saying that they
might equally be considered to be the comments of an interested party as referred to in the invita-
tion which appeared in the Official Journal on 12 February.

Comments from the OIC

(26) As a preamble to its comments, the OIC expresses concern that the European Commission has seen
fit to investigate this matter notwithstanding the fact that the ‘deemed consent’ procedure had been
carried out and complied with by the UK authorities.

(27)

(28)

(29)

The OIC questions the accuracy of the FQA market prices quoted in Fishing News, particularly for
2000. At that point, the market was just emerging and the values quoted could not be relied upon
to determine a reasonable long-term return. It is a very volatile market and recent valuations have
shown variations in price of up to 66 % in respect of the same track records. In the absence of more
reliable indices, the best way of proceeding and assessing a reasonable return is to make use of more
reliable alternative indices, such as rates of commercial lenders, stock market returns and govern-
ment stocks. OIC gives examples of some of its other investments with a lower return obtained:
temporary loans with a return of 3 7/8 % on call, 3 21/32 % for one month and 4¼ % for a 12-month
loan and a reserve fund investment portfolio with a return of 6,3 % before capital gains and losses
for the year 2001.

The OIC refers to the Orkney County Council Act 1974 which authorises it to exercise harbour
jurisdiction, in particular to Section 69(3)(e) which allows the Council to set up a reserve fund if the
revenue of the harbour undertaking exceeds the money expended, this reserve fund being created
‘for any purpose which, in the opinion of the Council, is solely in the interest of the County or its
inhabitants’. The reserve fund is therefore not used to fund the Council's compliance with its statu-
tory obligations, nor is it used to replace public sector contributions. It is accounted for separately
and remains distinct from other accounts within the Council. The OIC refers to the Commission
document ‘Competition Law and the European Communities, Volume IIB, Explanation of rules
applicable to State aid’ in which it is stated, on page 8, that ‘on the basis of the Court's judgements,
a measure which originates directly or indirectly within the State, and which confers an advantage
on one or more specific firms, falls outside the scope of Article 92 [now Article 87] if it imposes no
extra burden on the State budget’, reference being made to the judgements of the Court of Justice of
the European Communities in Case 82/77 Netherlands v Van Tiggele (1978) ECR 25 and Joined Cases
C-72/91 and C-73/91 Sloman Neptun v Bodo Ziesemer (1993) ECR I-887.

The OIC indicates that it had received a 7 % rate of return on its investments since the inception of
the scheme to date and that this agreement was only intended to last for a year; it had thus reserved
its right to adjust the rate of return in order to ensure that that rate was a commercial one.
Although the rental agreements were not finalised because of the lengthy process that required to be
undertaken in respect of Commission consent, their terms have been honoured. Even if it is true to
say that the scheme was set up because the Orkney fleet was unable to borrow from commercial
sources, the Council was aware of commercial lending secured against track records for a commer-
cial return, a by-product of which is to assist in attracting and sustaining a fishing fleet in Orkney.
In the opinion of the OIC, since the leasing of track records and the granting of funds in security of
track records is more widely available, the undertakings involved in the OIC scheme have not bene-
fited commercially from it.

(30)

The OIC believes that the scheme falls outside Article 87 on the grounds that the aid is not selective
and does not affect the balance between the undertakings in receipt of aid and other undertakings.
Membership of OFA is not restricted to undertakings of a particular Member State; it is merely
subject to a residential and registration requirement within Orkney. This requirement can be
complied with by any undertaking or resident in the Community and therefore cannot be seen to
benefit one single Member State.

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(31)

The OIC is of the opinion that the catch of the Orkney fleet availing themselves of the scheme is
landed entirely within Scotland and is consumed almost entirely by the local market (Scotland). As
operated, that scheme does not therefore distort competition between Member States.

Comments from the United Kingdom

(32)

The United Kingdom highlights the fact that the amount used for the purchase of track records
(GBP 1,543 million) was provided by the Orkney Islands Council Oil Reserve Fund (ORF) which is
funded as a result of a voluntary agreement with the oil companies active in the Orkney area. As
these contributions to the ORF are not compulsory, the funds cannot be considered as a tax revenue
or a State resource; they are not used to meet the Council's statutory obligations, nor do they replace
public sector contributions. They are also accounted for separately. Referring to the judgements of
the Court of Justice of the European Communities in Case 82/77 (cited above, recital 28), Joined
Cases C-72/91 and C-73/91 (cited above, recital 28) and Case C-189/91 Kirsammer-Hack v Sidal
(1993) ECR I-6185, the United Kingdom maintains that the scheme fails to meet one of the key tests
for establishing the existence of aid.

(33) According to the United Kingdom, on the basis of a comparison between the actual rate of return
achieved and estimates made by a commercial quota letting agent (InterQuo Ltd), the differences
between the two are within the margins tolerated by acceptable commercial practice, as the rate of
return achieved under the scheme is 8 %, of which 1 % is paid to SFPO to cover its administration
costs, and estimates made by InterQuo Ltd suggest that the return on investment for leasing these
quotas commercially during 1999 and 2000 could have been 8,78 % and 8,27 %, respectively. The
quotas were therefore leased at market rates and aid to producers did not exist. Consequently, the
OIC scheme did not distort or threaten to distort competition. As for the cost of quota leasing
published in Fishing News, the United Kingdom contends that the rates were published so infre-
quently that they could not provide the basis for a true assessment of this volatile market.

(34)

(35)

(36)

The United Kingdom maintains that the involvement of OIC in the administration of ORF does not
constitute the direction or supervision by the State of the payments. Since the ORF is managed for
the benefit of the community, there are few alternatives to its administration by the Council; alterna-
tive arrangements, such as trusts, are difficult to apply in practice because of the small population of
the islands. The United Kingdom points out that the Commission has accepted that contributions
made from the ORF are considered to be private contributions in the context of expenditure from
the European Agriculture Guidance and Guarantee Fund (EAGGF). It follows that the payments
made in this case do not represent State expenditure; nor were they directed by a body acting as an
emanation of the State. The United Kingdom contends that OIC had reasonably assumed that the
payments would not be considered as State aid and that this was a legitimate expectation on the part
of the Council, given the status of the ORF and the fact that no similar scheme had been previously
established in the Community.

Even if the Commission considers that there is State aid, the United Kingdom contends that trade
between Member States is unaffected. Fishermen operate in an artificially constrained market, since
the supply of fish caught by Community vessels is regulated by Community legislation (quotas) and,
more importantly, quotas are allocated to Member States. Arrangements for the management of
quotas are matters for the Member State; trade in UK quotas is, by definition, not possible with
other Member States. Trade would have been affected only if fishing opportunities, rather than fish,
had constituted the traded commodity.

In the opinion of the United Kingdom, this aid should not be considered as operating aid, or as aid
implemented by the industry, as the Commission did in its preliminary examination. Track records
and quota entitlements should be considered as assets. Notwithstanding the UK policy position that
there was no intention of creating a ‘free trade’ situation in FQAs, there has always been scope for
permanent transfers of quotas, something which is being formally recognised through adjustment of
the Register of FQA holdings. Moreover, although security for the purchase of quotas was originally
provided by the vessel, commercial lenders changed their position and considered the track records
purchased as security (a letter from the Royal Bank of Scotland was attached as evidence). Track
records are included within the annual accounts of many vessels and permanent transfers of quotas

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are regarded by the UK Customs and Excise as a capital item for the purposes of Capital Gains Tax
and Related Rollover Relief. The United Kingdom challenges the Commission's view that FQA units
are ‘raw products’ which in theory no longer have any value at the end of the year. FQA units repre-
sent, year on year, a variable level of fish quotas and remain as a permanent share of available
fishing opportunities. Therefore, if aid exists, it should not be considered as operating aid but rather
as analogous with investment aid. As investment aid is not addressed in the 1997 Guidelines, it
should be considered on a case-by-case basis in line with section 1.2 and its compatibility assessed
with regard to the objectives of the Common Fisheries Policy.

(37)

The United Kingdom refers to the Guidelines, which state that aid must not be protective in its effect
and must promote the rationalisation and efficiency of production and marketing in a way which
encourages the adaptation of the industry. It also refers to the EC Treaty, which assigns to the
common fisheries policy, as to the common agricultural policy, the task of ensuring a fair standard
of living for the community, in particular by increasing individual earnings and assuring the avail-
ability of supplies (Article 33(1)(b) and (d)). The OIC scheme resulted in the buying and pooling of
track records at a time of decreasing stocks. Such pooling can be considered to be rationalisation
through the development of viable fishing enterprises in the context of decreasing fish stocks and
erosion of catch entitlement. The scheme, which resulted in some of those smaller fishermen conti-
nuing in business in heavily fisheries-dependent areas where little alternative economic activity
exists, could equally be consistent with the socioeconomic dimension of the common fisheries
policy as required by Article 159 of the EC Treaty.

(38)

Finally, should the Commission adopt a negative decision, the United Kingdom indicates its willing-
ness to amend the scheme as required to ensure future compliance with the rules. However, it urges
the Commission to refrain from attempting any recovery from fishermen whom it may consider to
have benefited from the scheme.

V. ASSESSMENT

A. Existence of State aid

(39) Under Article 87(1) of the EC Treaty, ‘[s]ave as otherwise provided in this Treaty, any aid granted by
a Member State or through State resources in any form whatsoever which distorts or threatens to
distort competition by favouring certain undertakings or the production of certain goods shall, in so
far as it affects trade between Member States, be incompatible with the common market’. Four
conditions must be satisfied in order to class a measure as a State aid: first, the measure must
provide some advantage to the undertakings which benefit from it; second, the aid must be granted
by the State or through State resources; third, it must distort or threaten to distort competition by
favouring certain undertakings; and, finally, it must affect trade between Member States.

Advantage to beneficiaries

(40)

The OIC scheme was set up because the Orkney vessel owners were unable to borrow money to
buy track records. The UK authorities clearly indicated this in their letter dated 9 August 1999.
Consequently, the scheme has resulted in providing quotas to SFPO, and these quotas are rented and
used by those vessel owners who would otherwise not have had them at their disposal. As aid exists
when an intervention results in favouring specified beneficiaries, whatever the form of intervention,
there is a presumption that the OIC scheme corresponds to an aid system to fishermen to whom
quotas were rented.

(41)

The present assessment is based on an analysis concerning the trade in track records and quota lease.
It cannot be done, as the OIC has argued, by comparison with other investments (5). The assessment
must be carried out with regard to the market concerned, with the data available for that market.

(5) See recital 27.

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(42)

(43)

(44)

(45)

(46)

(47)

The fishermen who benefit from the OIC scheme are fishermen who were not able to borrow
money to buy track records. It has enabled them to fish against quotas to which they would other-
wise not have been entitled. These acquired track records have therefore enabled them to increase
their production in conditions that could otherwise not have been possible. The scheme has there-
fore conferred an advantage on these fishermen.

The Commission has no knowledge of the price of the quotas leased by SFPO to the Orkney fish-
ermen. The UK authorities sent a summary sheet of the payments made to the OIC between April
1999 and January 2000; that summary shows that, as expected, the payments represented 8 % of
the investment in the acquired track records (GBP 1,543 million), but it does not indicate the
number of leased quotas to which the payments correspond. Although the Commission requested
copies of the rental agreements, it never received them. The UK authorities replied, first, before the
opening of the formal investigation procedure, that the rental agreements had been put on hold
and, second, in their comments on that investigation, that the agreements had not been finalised but
that their terms had been honoured. That was the justification put forward by the UK authorities for
sending the Commission copies of the agreements in which the details concerning the quantities of
quotas rented and the rental amounts had not yet been entered, even though the agreements had
been signed by the lessees.

The Commission considers that there is a lack of coherence in the information sent by the United
Kingdom. By nature, an agreement concluded by a party which commits itself to paying a certain
amount of money is signed only after an understanding is reached between the parties involved on
the amount in return for the quantity leased. As the agreements sent by the United Kingdom do not
contain these data, the Commission must assess the evolution of the prices of purchase of quotas, of
their lease and of the existence of State aid on the basis of the information available, that is to say,
on the information that it has obtained from other sources.

In their first letter to the Commission, dated 9 August 1999, the UK authorities said that the track
records had already been acquired. As the decision to set up the OIC scheme was taken in 1998, it
was intended to be implemented from the first year of application of the new system of allocation
of quotas (6). According to a House of Commons' report issued at that time on the subject (7), there
was a huge tension in that particular market at that time: ‘quota [more precisely “track record”] for
cod was priced at GBP 1 800-2 000 per tonne; finally, rental values for cod, haddock and saithe
quotas were around GBP 300 per tonne per year’.

In its observations, the Scottish Fishermen's Organisation assumed that the lease conditions to the
Orkney fleet were preferential, giving the example of cod, the track record for which was probably
acquired at a price of GBP 2 000 per tonne at the most and the quota for which was probably
leased at around half the price charged outside Orkney (GBP 160 instead of GBP 350 per tonne) (8).
The UK authorities did not make any comments about these figures.

From April to December 2000, the trade newspaper Fishing News regularly gave the prices for the
purchase of track records (FQA units) and for the rental of quotas, the source of those figures being
the Quota Trading Association of Fraserburgh. For example, the cost of track records was, per
tonne, for North Sea cod, from GBP 1 800 in April down to GBP 1 500 in December and, for West
Coast cod, at about GBP 1 450 all year round; for North Sea haddock, the cost of track records
varied from GBP 1 900 to GBP 2 400 in April to GBP 1 700 to GBP 1 800 in December and, for
West Coast haddock, from GBP 1 700 to GBP 1 900 in April to GBP 1 400 to GBP 1 500 in
December. For other species, the trend was broadly the same, that is to say, prices remained stable
or showed a slight decrease. As for quota rental prices, for North Sea cod, prices ranged from
GBP 250 per tonne from April to September to GBP 200 in October and GBP 100 in December
and, for West Coast cod, from GBP 300 in April and May, to GBP 230 from June to August, to
GBP 200 in December; for North Sea haddock, they ranged from GBP 350 in April to GBP 100 in
December and, for West Coast haddock, from GBP 280 to GBP 180; for other species, the prices
decreased in the same way throughout the year 2000.

(6) See recital 7.
(7) House of Commons, Agriculture Committee, Eighth Report (1999) ‘Sea Fishing’, Vol. I; see points 77 to 94, and in

particular, for the prices quoted, point 83.

(8) See recital 20.

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(48)

(49)

(50)

(51)

The OIC and the United Kingdom have pointed out that this quota market was very volatile and that
the rates published by Fishing News could not provide a true reflection of the situation (9). However,
these figures confirm the observations made in the House of Commons Report. The implementation
of the new system of quota allocation in the United Kingdom in 1999 led to great tension in the
track records market. It is natural that the purchase prices remained around the same level or
decreased a little in the following year. As for their renting, high levels of rental are observed at the
beginning of the year because it is at that time that the fishermen wish to secure the quotas they
want to fish against, which creates tension in the market in question.

The UK authorities have not provided the Commission with information showing that the setting
up of the OIC scheme did not lead to preferential rental conditions. If they had had such informa-
tion they could easily have sent it. Given that they have not provided such information and since
the Commission has information allowing it to assume that preferential rental conditions existed (10)
and the UK authorities have not shown that information to be unreliable, it can be assumed that
such preferential conditions did indeed exist and that the fishermen who benefited from the OIC
scheme enjoyed a specific advantage.

State aid exists when an intervention results in favouring specified beneficiaries, whatever the form
of intervention. As the intervention of the Orkney Council in the implementation of the OIC scheme
has resulted in the favouring of fishing enterprises established in the Orkney Islands, the OIC scheme
must have been selective in character and has thus clearly conferred an advantage upon those parti-
cular enterprises. The opinion of the OIC, as transmitted by the United Kingdom (11) and according
to which membership in OFA can be complied with by any undertaking in the Community, cannot
be accepted. In practice, membership would have entailed registration of the vessel in the UK fishing
vessel register, which is subject to specific obligations based on a national regime of entries and exits
of the fleet, as provided for in Article 6 of Council Regulation (EC) No 2792/1999 of 17 December
1999 laying down the detailed rules and arrangements regarding Community structural assistance in
the fisheries sector (12); in addition, the vessel owner would have had to be a member of OFA and
50 % of the crew would have had to reside in Orkney.

State resources

The ‘State’ is to be understood in the broadest possible sense, including all levels of regional and
local government. In the present case, it covers the OIC. It covers also the Oil Reserve Fund (ORF)
administered under the control of the Council and created under Section 69 of the Orkney County
Council Act of 1974 (13). As the ORF funds remain under the control of the OIC, they constantly
remain under public control and thus available to the competent public authority; they may there-
fore be considered as State resources. Paragraph 2 of Section 69 does indeed state that securities
acquired with the funds should be managed by trustees. But, as the United Kingdom pointed out in
its observations (14), no trust was instituted for that purpose because such an arrangement would
have been difficult to apply in practice. Anyway, if a trust had been instituted, it would certainly
have remained under the control of the OIC and decisions taken by the trustees would have been
considered as decisions taken by the OIC, that is to say, by the State for the purposes of Article 87
of the EC Treaty.

(9) See recitals 26 to 29 and 33.
(10) See recitals 40 and 46.
(11) See recital 30.
(12) OJ L 337, 30.12.1999, p. 10.
(13) Section 69:

‘1. If in respect of any financial year the monies received by the Council on account of the revenue of
the undertaking exceed the monies expended or applied by the Council in respect thereof, the Council may in
respect of that year apply out of the County fund and carry to the credit of a reserve fund in respect of the under-
taking such a sum as they consider reasonable not exceeding the amount of such excess.
2. Any monies for the time being standing to the credit of the reserve fund may be invested in securities in which
trustees are for the time being authorised to invest trust monies including any debenture stocks or other security
created by the Council.
3. Any reserve fund provided under this section may be applied: a) in making good to the County fund any defi-
ciency at any time arising in the income of the Council from the undertaking [harbour undertaking] or, b) in
meeting any extraordinary claim or demand at any time arising against the Council in respect of the undertaking,
or, c) for defraying any expenditure in connection with the undertaking for which capital is properly applicable, or
in providing money for repayment of loans (but not in making annual payment required to be made in respect of
loans), or, d) for defraying expenditure to be incurred from time to time in repairing, maintaining, replacing and
renewing any buildings, works, plant, vessel, equipment or article forming part of the undertakings, or, e) for any
other purpose which in the opinion of the Council is solely in the interests of the County or its inhabitants.’

(14) See recital 34.

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(52)

(53)

(54)

(55)

The United Kingdom contends that the resources from the ORF are private money, which must be
understood in the sense that they do not constitute State resources, because they come from a
voluntary agreement and are not used to fund the Council's compliance with its statutory obliga-
tions. In addition, the Commission had already recognised that feature.

The Commission observes that this agreement, concluded on 29 April 1975 between the OIC and
the Pipeline Group (Occidental of Britain, Getty Oil, Allied Chemical Ltd and Thomson Piper Petro-
leum Ltd), contains provisions relating to: a minimum quarterly payment with an exemption clause
in case of force majeure; the renegotiation of the agreement; arbitration in case of dispute (15). These
provisions show that the commitment to pay those sums in return for use of the islands' facilities
goes beyond what could be characterised as a voluntary contribution, as in the case, for instance, of
a charity organisation. If renegotiation is possible (it is stated in the related paragraph that ‘the
Parties recognise that the payments set out in this agreement have been agreed to as fair and equi-
table’), it follows that the agreement was the result of a negotiation in the course of which each
party upheld its own interests; the payment made under that agreement is not like a gift made to a
charitable organisation. The agreement cannot therefore be classed as a voluntary agreement, that is
to say, as resulting merely from the goodwill of the oil companies towards the County of Orkney
and its inhabitants.

In addition, the Commission observes that the content of the agreement did not primarily concern
private interest between two undertakings. Article 295 of the Treaty is without prejudice to the rules
in Member States governing the system of ownership and a public body may act as a private under-
taking. But that is not the position here. The agreement states in its preamble that payments there-
under are made: ‘a) in respect of any injurious affection, disturbance or depreciation of the commu-
nity arising or likely to arise from oil transportation and shipment as a result of the installation and
the operation of the terminal, b) towards facilitating the promotion of development in the Harbour
areas and c) as contribution towards the additional expenses and costs which the Council will incur
in providing increased public services as a consequence of the installation of the terminal.’ It is clear,
therefore, that payments made by the oil industry under this agreement do not correspond to the
acquisition of goods or payments of services. For the recipient (the OIC through the ORF), it cannot
be considered as money resulting from a commercial contract in which it would have been engaged.
Accordingly, the payments made by the Pipeline Group cannot be considered as private money, but
public money.

The United Kingdom pointed out that, in the context of the EAGGF, the Commission has previously
considered the ORF funds to be private. That was stated in a letter from the Directorate-General for
Agriculture, dated 28 January 2002, concerning the national financing of a project (‘the Orkney
Meat project’) cofinanced by the EAGGF. The Commission stresses that this reply was made in a very
specific context. The Scottish Executive wanted to implement this project. Before doing so, it asked
the Commission department concerned if it could do so by considering a contribution from ORF as
private money (a private contribution is required for implementation of that kind of EAGGF
project). The Scottish Executive forwarded some information to the Commission department
concerned, which replied that ‘on the basis of the information provided,… the money from the ORF
can be considered as being a private contribution …’. The Commission department gave its advice
on the basis of the information provided, without requesting further information and, therefore,
without going into a more in-depth analysis. In the present case, however, the Commission has
deepened its analysis and asked for specific information (which the United Kingdom sent). The
Commission now observes that the United Kingdom had previously provided only incomplete infor-
mation, which led to the reply given by the Commission department concerned by letter dated 28
January 2002. On the basis of the information now available, none of those documents indicate that
the ORF is managed with any measure of autonomy and there is therefore no doubt that the ORF
funds remain fully under public control.

(15) ‘2. Payments: 2.1.… the Pipeline Group shall … make payment to the Council of the following sums: …;

4. Force majeure: If due to any act of God, war, …the Pipeline Group are unable to ship from the Terminal a suffi-
cient quantity of crude oil during any quarter and thereby incur liability for the minimum payment under sub-clause
2.3 hereof, the payment … shall nevertheless be restricted to a sum calculated by reference..
5. Renegotiation: The parties recognise that the payments set out in this agreement have been agreed as fair and
equitable in the light of the circumstances as presently known or anticipated by the parties. If, in the future, there
should be any change in the circumstances.… they will meet and renegotiate the parts of this agreement so affected
in good faith, in order, so far as possible, to restore the parties affected to their original position and, in the event of
the parties thereafter failing to reach agreement, the matters in dispute between them shall be referred to arbitration
in accordance with Clause 6.
6. Arbitration: Any reference or dispute between the parties hereto which may arise.… shall be determined by an
arbiter appointed by the Sheriff of the Grampians, Highlands and Islands and the decision of such arbiter shall be
final and binding on the parties.
7. Applicable law: The construction, validity and performance shall be governed by Scots law.’

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(56)

Furthermore, as stated in Section 69 of the Orkney County Council Act, the way in which the funds
are to be used is clearly defined. They are to be used in the interests of the community of the
Orkney Islands, as defined by the Council, and not used as a private investor would do in a market
economy, with the sole aim of deriving profit from them. That is in line with the reasons given by
the United Kingdom for the setting up of the OIC scheme (16), according to which the scheme was
created because the Orkney fleet was unable to borrow from commercial resources. The ORF funds
are therefore attributable to the State for the purposes of Article 87 of the EC Treaty.

(57)

This finding is in line with the judgements in the cases referred to by the United Kingdom (Case 82/
77, Joined Cases C-72/91 and C-73/91, and Case C-189/91) (17), in which the Court of Justice of the
European Communities stated that only advantages granted from resources other than those of the
State do not fall within the scope of the rules concerning State aids.

Distortion or threat to distort competition

(58)

(59)

The quotas from which the fishing enterprises have benefited under the OIC scheme have reinforced
their position with regard to the other fishing enterprises, whether registered in the United Kingdom
or in the other Member States. They have been allowed to land and sell more fisheries products that
they would have done had they not benefited from those quotas.

The implementation of the OIC scheme has therefore affected competition conditions. It has given
rights to fish for products which are sold on the Community market. The track records acquired
concern fish species such as cod, haddock, saithe and whiting, which are species covered by the
common organisation of the markets in the fisheries and aquaculture sector (18). Thus, this scheme
has affected competition within the Community market.

(60)

In addition, the Scottish Fishermen's Organisation (19) claims that it was the setting up of the OIC
scheme that triggered the escalation of the cost of quotas. The UK authorities have not countered
this statement.

Impact on trade between Member States.

(61)

The question of whether trade has been affected must not be addressed with regard to the quota or
track record market only, as the UK contends (20). An aid scheme must be assessed in relation to all
the effects that it could have on trade within the Community. Consequently, the OIC scheme must
also be assessed with regard to its effect on trade in the products concerned, namely products of the
fisheries sector, and in the products which enter into competition with fisheries products.

(62) According to the official UK sea fisheries statistics for 1999 and 2000 (21), trade in fisheries products
between the United Kingdom and the other Member States was very significant. Landings in 2000
were just under 500 000 tonnes. During the same year, exports of fish and fish products amounted
to 365 000 tonnes including 233 000 tonnes to other Member States and imports of fish and fish
preparations were just under 550 000 tonnes including 133 000 tonnes from other Member States.

(63)

The OIC (22) has indicated that the Orkney catch is believed to be landed and consumed almost
entirely within the Scottish market, but has not provided any proof that this is the case. It is only an
assumption which does not tally with the significant nature of the trade exchanges just referred to.
However, even if it were the case, the possibilities for enterprises established in other Member States
to export their products into the United Kingdom would still be affected. The OIC scheme allows
the fishermen who benefit from it to maintain a share of the market that competitors could other-
wise have seized. Thus, trade between the Orkney fleet and producers from other Member States is
affected.

(16) See recital 10.
(17) See recitals 28 and 32.
(18) At the time of the setting up of the scheme, this common organisation of markets was regulated by Council Regula-
tion (EC) No 3759/92 of 17 December 1992 (OJ L 388, 31.12.1992, p. 1), which was replaced on 1 January 2001
by Council Regulation No 104/2000 of 17 December 1999 (OJ L 17, 21.1.2000, p. 22).

(19) See recital 19.
(20) See recital 35.
(21) Available on the website http://www.defra.gov.uk/
(22) See recital 31.

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Conclusion

(64)

The four criteria for classing these measures as State aid measures for the purposes of Article 87 of
the EC Treaty are met. Since these measures concern the fisheries sector, they must be examined
under the Guidelines for the examination of State aid to fisheries and aquaculture, hereinafter ‘the
Guidelines’. Under point 3.4 of the current Guidelines (23), they must be examined under the Guide-
lines in force at the time of the grant of the aid. Consequently, they are examined under the 1997
Guidelines (24).

B. Compatibility with the common market

(65)

(66)

The Commission's doubts as to the compatibility of the OIC scheme with the common market were
based on the assumption that quotas and track records are, by nature, not durable goods. The aid
system established by the OIC in favour of the Orkney fleet therefore appeared to the Commission
as aid related to operating costs. As aid of such a type is, in principle, not compatible with the
common market and as no acceptable justification was provided, the Commission raised doubts
about the scheme.

In its reply, the United Kingdom indicated that ‘permanent transfers of quota are regarded by
Customs and Excise as a capital item for the purposes of Capital Gains Tax and related Rollover
Relief’. Thus, although it was first officially declared that there would not be a free trade in track
records, it now appears that the UK authorities officially recognise that these track records have
acquired a value as an asset. Arguably, therefore, the Commission could itself perhaps adopt that
approach and consider the purchase of track records by SFPO on behalf of OIC as an investment.

(67) Whatever the correct classification may be, the Commission does not need to discuss it. With regard
to fishermen, since the period of rental of quotas is not longer than one year (25), the rental repre-
sents an operating cost. An aid, the effect of which is on the amount of the rental, is therefore an
operating aid.

(68) According to point 1.2, fourth indent, third subindent, of the Guidelines, aid related to operating
costs, which does not impose any obligation on the part of recipients is 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 the OIC scheme is in no way linked to a restructuring plan
as defined in the Community Guidelines on State aid for rescuing and restructuring firms in diffi-
culty (26), it cannot be considered compatible with the common market.

(69)

In addition, the UK authorities have indicated that, in so far as the OIC scheme pools track records,
it could be considered to be rationalisation through the development of viable fishing enterprises in
the context of decreasing fish stocks. But, as this pooling concerns SFPO, which has not been
considered as a beneficiary under the current analysis, that argument is not relevant to the assess-
ment of this aid scheme to fishermen.

C. Recovery of the aid

(70) Under Article 14(1) of Regulation (EC) No 659/1999, where negative decisions are taken in cases of
unlawful aid, the Commission is to decide that the Member State concerned must take all necessary
measures to recover the aid from the beneficiary. The Commission is not to require recovery of the
aid if that would be contrary to a general principle of Community law.

(23) OJ C 19, 20.1.2001, p. 1.
(24) See footnote 4.
(25) As specified in point 4.2 of the agreement between OIC and OFA. See recital 14.
(26) OJ C 288, 9.10.1999, p. 2.

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The principle of the protection of legitimate expectations is a general principle of Community law.
The Commission considers that in the present case, that principle precludes recovery, for the
following reasons.

While there is no necessary link between actions and decisions of the Commission in relation to the
use of Community Structural Funds in the context of Regulation (EC) No 1260/1999 (27) and
Commission decisions regarding State aid,
legitimate
expectations as to the private nature of the fund in question may have been created through the
combination of a number of events.

in the specific circumstances of this case,

In fact, both the United Kingdom Government and the Commission consistently acted in such a way
that it could reasonably be concluded that the fund is a private fund from the point of view of the
rules governing Community Structural funds. Even if, legally speaking, there is no automatic link
between the two issues, this may have led to a reasonable assumption on the part of the national
authorities and fishermen that grants from such a fund do not fall under the rules on State aid, thus
creating a legitimate expectation in this respect.

(71)

First, there is a close link between the Orkneys and the Shetlands. In fact, the fishermen of Orkney
and Shetland belong to the same producer organisation. The Orkney Islands authorities and benefici-
aries were therefore probably aware that an explanatory leaflet by the Scottish Executive for the
implementation of Council Regulation (EEC) No 4028/86 of 18 December 1986 on Community
measures to improve and adapt structures in the fisheries and aquaculture (28) clearly indicates that
grants and loans from the parallel Shetland Islands Council Charitable Trust (SICCT — see on this
State aid Case C-88/2001) will not be regarded as the grant of public money, which justified the
conclusion that they were to be regarded as a private contribution.

Second,
in the European Regional Development Fund (ERDF) under the Highlands and Islands
Objective 1 Programme 1994-1996, the funding from Shetland Leasing and Property Ltd (SLAP),
which is wholly owned by the SICCT, was regarded as a private contribution. Again, it is very likely
that the Orkney Islands Authorities were aware of this.

Third, the Orkney Reserve Fund itself has also been considered in practice by the UK authorities and
the Commission as being of a private nature, thus making it permissible to provide a private cofi-
nancing contribution in the context of financing from the European Agriculture Guidance and Guar-
antee Fund (EAGGF) (29).

(72)

The Commission considers that these elements taken together have created a legitimate expectation
on the part of the Orkney authorities and the bodies involved, as well as on the part of fishermen.
They could assume that only private funds were involved when the fund was providing cofinancing
to Community Structural Funds. In view of that, they may have wrongly assumed that the State aid
rules of the Treaty do not apply, even if, legally speaking, there is no automatic link between the
two issues.

On these grounds, and on the basis of Article 14(1) of Council Regulation (EC) No 659/1999, since
the principle of the protection of legitimate expectations is a general principle of Community law,
the recovery of the aid from which fishermen have already benefited will not be required.

(73)

But, as has been determined in this Decision, the funds involved must actually be considered State
resources under the State aid rules. Therefore, the scheme is an operating aid which exists year after
year for the benefit of the fishermen to whom annual quotas are rented. Since that aid is not compa-
tible with the common market, it must be brought to an end. With that aim, all the provisions in
the agreements made between OIC, OFA and SFPO which lead to preferential renting conditions
must be repealed and replaced by provisions which show that the renting is made under normal
market conditions. At the same time, it must be ensured that under any new arrangements thus
created, neither the SFPO nor the OFA benefit from State aid.

(27) Council Regulation (EC) No 1260/1999 of 21 June 1999 laying down general provisions on the Structural Funds,

OJ L 161, 26.6.1999, p. 1.

(28) OJ L 376, 31.12.1986, p. 7.
(29) See recitals 34 and 55.

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VI. CONCLUSION

(74)

(75)

The Commission finds that the United Kingdom has implemented, in breach of Article 88(3) of the
EC Treaty, the aid scheme entitled ‘Orkney Islands Council Track Record Scheme’.

In the light of the assessment made in Paragraph V, this aid scheme is not compatible with the
common market. However, the recovery of the aid is not required,

HAS ADOPTED THIS DECISION:

Article 1

The aid scheme entitled ‘Orkney Islands Council Track Record Scheme’,
Kingdom, is not compatible with the common market.

implemented by the United

The United Kingdom shall abolish the aid scheme referred to in the previous paragraph.

The United Kingdom shall inform the Commission, within a period of two months from the receipt of this
Decision, of the measures it has taken to comply with it.

Article 2

This Decision is addressed to the United Kingdom of Great Britain and Northern Ireland.

Article 3

Done at Brussels, 3 June 2003.

For the Commission

Franz FISCHLER

Member of the Commission