Invitation to submit comments pursuant to Article 1(2) in Part I of Protocol 3 to the Surveillance and Court Agreement on State aid regarding the Icelandic submarine cable project (Farice)
Date: 2005-11-10
Institutions: EFTA Surveillance Authority
Subjects: EFTA, Faroes, Iceland, Scotland, State aid, control of State aid, exchange of information, marine environment, telecommunications equipment

C 277/14

EN

Official Journal of the European Union

10.11.2005

EUROPEAN ECONOMIC AREA

EFTA SURVEILLANCE AUTHORITY

Invitation to submit comments pursuant to Article 1(2) in Part I of Protocol 3 to the Surveillance
and Court Agreement on State aid regarding the Icelandic submarine cable project (Farice)

(2005/C 277/08)

By means of Decision No 125/05/COL of 26 May 2005, reproduced in the authentic language on the
pages following this summary, the EFTA Surveillance Authority initiated proceedings pursuant to Article
1(2) in Part I of Protocol 3 of the Agreement between the EFTA States on the establishment of a Surveil-
lance Authority and a Court of Justice (Surveillance and Court Agreement). The Icelandic Government has
been informed by means of a copy of the decision.

The EFTA Surveillance Authority hereby gives the EFTA States, EU Member States and interested parties
notice to submit their comments on the measure in question within one month from the publication of
this notice to:

EFTA Surveillance Authority
35, Rue Belliard
BE-1040 Brussels

The comments will be communicated to the Government of Iceland. Confidential treatment of the identity
of the interested party submitting the comments may be requested in writing, stating the reasons for the
request.

SUMMARY

Procedure

the

(hereinafter

in Iceland. However,

EFTA Surveillance Authority

By letter dated 27 February 2004, the Icelandic authorities noti-
fied
‘the
Authority’) of a State guarantee in favour of a submarine cable
the project was implemented
project
before the Authority had a chance to give its comments. The
Authority had also, under separate proceedings in the field of
competition, requested information from Farice hf., to enable it
to carry out an analysis according to Article 53 and/or 54 of
the EEA Agreement.

The Farice project came about by an initiative by the almost
100 % State owned Icelandic telecom operator Síminn and the
incumbent telecom operator in the Faeroe Islands, Føroya Tele.
In 2002 it became clear that the Farice project would not gain
momentum as a purely commercial business case. Therefore, it
was decided that the Icelandic State would have to contribute
actively to the project. Secondly, the participation of Og Voda-
fone in the project was sought. A holding company E-Farice,
which holds all the Icelandic shares in Farice hf (E-Farice holds
80 % in Farice hf), bought Og Vodafone's and Síminn's shares
in CANTAT-3. Further negotiations were envisaged to lease
additional CANTAT-3 capacity from the CANTAT-3 consor-
tium member Teleglobe. According to the notification, E-Farice
should handle all international connectivity for Iceland.

Description of the aid measure

The Farice project concerned the construction and management
of an undersea telecommunications cable connecting Iceland
and the Faeroe Islands with Scotland.

telecommunications

Since 1994, Iceland and the Faeroe Islands were internationally
connected with the undersea
cable
CANTAT-3. CANTAT-3 was set up as a consortium cable with
international and Icelandic parties (Og Vodafone and Landssími
Islands hf — hereinafter Síminn). No other fibre cable system
has ever reached Iceland. As CANTAT-3 had technical limita-
tions and satellites were not economically viable, other trans-
mission alternatives ensuring reliable connectivity were sought.

The notification concerns a State guarantee for a loan of EUR
9,4 million in favour of Farice hf. This loan forms part of a
broader long-term loan package (comprising three other loans,
granted by different banks) for a maximum amount of EUR
34,5 million. Farice hf. has paid an annually calculated market
premium in advance. Two of the other loans were guaranteed
by Síminn and Føroya Tele; the fourth loan did not have a
guarantee. The loan secured by the guarantee from the
Icelandic State had the best market conditions,
i.e. Euribor
[…] (*) p.a. (compared to Euribor […] p.a. for the non-secured
loan).

(*) Brackets indicate figures which have been deleted because they are

covered by the obligation of professional secrecy.

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Official Journal of the European Union

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In January 2003, the Icelandic State increased — during an
increase of Farice hf.'s total share capital — its shares from
initially 27 % to 46,5 %. As stated by the Icelandic authorities,
private operators did not want to provide more share capital.
Síminn, which formerly held 47 % of the shares, decreased its
share capital to 33,33 %.

State aid within the meaning of Article 61(1) of the EEA
Agreement

particular when compared to the loan not secured by a guar-
antee, Farice hf. profits from better financing conditions, which
it does not adequately remunerate.

The Authority assessed the share capital
increase by the
Icelandic State according to Chapter 19 of the Authority's State
Aid Guidelines. It notes that while the total share capital of
Farice hf. was substantially increased and also comprised share
capital increases by private operators, the Icelandic State's parti-
cipation rose disproportionately compared to those of
the
private shareholders, by 20 percentage points. As the Icelandic
authorities have stated that Síminn regarded the project as a
financially risky undertaking,
the Authority takes the preli-
minary view that private operators disengaged in relative terms
from the project because of its poor profit outlook.

The Authority notes that by notifying the Authority belatedly
of the two support measures, the Icelandic authorities have not
respected the stand-still obligation, with the consequence that if
the measures were found to be State aid within the meaning of
Article 61(1) of the EEA Agreement, they would constitute
‘new aid’ within the meaning of Article 1(f)
II of
Protocol 3 to the Surveillance and Court Agreement.

in Part

In the Authority's preliminary view, the measures strengthen
Farice hf. in relation to competitors who cannot rely on State
participation or loan guarantees and thereby distort or threaten
to distort competition. As the provision of telecom services is a
tradable activity, this also affects trade between the Contracting
Parties.

The Authority does not consider the loan guarantee and the
share capital
increase of the Icelandic State in favour of the
Farice project to be given to a general infrastructure project,
which might not classify as State aid. Rather than an infrastruc-
ture project open on a non-discriminatory basis to all users, the
Authority considers that the project benefits certain targeted
business operators, i.e. telecom services providers. These opera-
tors formed a private initiative to which the State responded.
Further, Farice hf., as the body managing the infrastructure,
provides a service against remuneration. According to the
Commission's case practice, in such a situation an advantage to
an individual company cannot be denied.

fall under Article 61(1) of

The Authority bases its State aid assessment of the loan guar-
antee on Chapter 17.4(2) of the Authority's State Aid Guide-
lines, which lists the conditions under which a guarantee might
not
the EEA Agreement. The
Authority notes that the State intervention has led to better
interest rates. The Icelandic authorities do not deny that, but
argue that a State guarantee always results in better market
conditions and that the only relevant consideration is whether
an adequate premium is paid. The Authority has doubts,
whether — without the State guarantee — Farice hf. would
have been able to negotiate a loan of EUR 9,4 million at all,
given that it had already taken up other loans to finance the
project. The Authority considers that the four loans must be
considered separately, as they are granted by different banks,
have different repayment mechanisms and interest rates and are
guaranteed by different guarantors.
the
Authority also considers that the Icelandic State guarantees
100 % of the EUR 9,4 million loan. The Authority further
considers that
take away any
the premium paid does not
advantage resulting from the State intervention. In the Authori-
ty's initial view, Farice hf. should not profit from financial
conditions, which it — without State intervention — would
not have been able to obtain in the market. It considers that, in

In this

respect,

Compatibility under Article 61(3)(c) of the EEA Agree-
ment

The Authority assessed the measures directly under Article
61(3)(c) of the EEA Agreement, as no Guidelines or block
exemptions exist under which the measures could be justified.

As to the necessity of the aid measures, the Authority acknowl-
edges that the new submarine cable, which is to become the
primary transmission connection to Iceland, has greater capaci-
ties,
is more reliable and — together with the backup by
CANTAT-3 — is able to secure the provision of telecommuni-
cation services to Iceland. The availability of broadband is a
legitimate objective and is the type of service which is, by its
nature, capable of positively affecting the productivity and
growth of a large number of sectors and activities. Without the
State participation, the project would either have been delayed
or not undertaken at all, as the project was not commercially
viable as such.

Under the proportionality assessment, the Authority has to
weigh the advantages in terms of guaranteeing a reliable provi-
sion of telecommunication services to Iceland and the disadvan-
tages of the distortion of competition in comparison to compe-
titors, which do not have access to public funding when
realizing similar projects. In this respect, the Authority will
investigate inter alia the following points in the formal investi-
gation procedure:

— The Authority first notes that neither the construction nor
the management of the cable were given to Farice hf. after
an open tender.

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Official Journal of the European Union

10.11.2005

— The Authority notes

that

the shareholders' agreement
provides for a non-discriminatory, transparent pricing on
market
in
terms. While the shareholder agreement
general open to new entrants, the Authority will consider
that
the
founding parties always have the possibility to maintain
their equity position, which puts them in a better position
than new entrants.

shareholders'

agreement

stipulates

that

the

is

— The Authority will consider the total amount of aid which
is limited as far as the guarantee is concerned. As to the
State's share increase, the Authority notes that in June 2003
the State's share capital already decreased to 41 %, whereas
Síminn's participation rose to 29 %.

— The Authority has certain competition concerns. The Euro-
pean Court of Justice has established that a compatibility
assessment under
the State aid provisions should not
produce a result which is contrary to other treaty provi-
sions, which also includes Article 53 and/or 54 of the EEA
Agreement. In this regard, the Authority inter alia notes that
although the existing infrastructure CANTAT-3 still remains
in place there is a concern that in the future, all CANTAT-3
connectivity to Iceland will be channeled through E-Farice
hf, which holds the majority of shares in Farice hf. Hence,
there is a risk that competition in connectivity to Iceland
would be eliminated, as only one supplier would remain on
the market.

10.11.2005

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Official Journal of the European Union

C 277/17

EFTA SURVEILLANCE AUTHORITY DECISION

No 125/05/COL

of 26 May 2005

to initiate the procedure provided for in Article 1(2) in Part I of Protocol 3 to the Surveillance and
Court Agreement with regard to State aid in favour of Farice hf.

THE EFTA SURVEILLANCE AUTHORITY,

Having regard to the Agreement on the European Economic Area (1), in particular to Articles 61 to 63 and
Protocol 26 thereof,

Having regard to the Agreement between the EFTA States on the establishment of a Surveillance Authority
and a Court of Justice (2), in particular to Article 24 as well as Article 1(2) in Part I and Articles 4(4) and
10 in Part II of Protocol 3 thereof,

Having regard to the Authority's Guidelines (3) on the application and interpretation of Articles 61 and 62
of the EEA Agreement, and in particular Chapter 17 on State guarantees and Chapter 19 on public authori-
ties' holdings,

Whereas:

1. Procedure

I. FACTS

By letter dated 27 February 2004 of the Icelandic Mission to the European Union, forwarding a letter from
the Ministry of Finance dated 26 February 2004, the Icelandic authorities notified the EFTA Surveillance
Authority (hereinafter ‘the Authority’) of a State guarantee in favour of a submarine cable project in
Iceland,
i.e. the Farice project. The letter was received and registered on 1 March 2004 (Event No:
257593).

Supplementary information was submitted by letter from the Icelandic Mission dated 14 May 2004,
forwarding a letter by the Icelandic Ministry of Finance dated 13 May 2004. The letter was received and
registered by the Authority on 14 May 2004 (Event No: 281472).

The Authority requested further information on the notification by letter dated 22 April 2004 (Event No:
261084). The Icelandic authorities responded by letter dated 25 June from the Icelandic Mission,
forwarding a letter from the Ministry of Finance. The letter was received and registered by the Authority
on 28 June 2004 (Event No: 285971).

The Authority requested further information by letter dated 10 August (Event No: 286427), to which the
Icelandic Mission responded by letter dated 8 September 2004, forwarding a letter from the Ministry of
Finance dated 7 September 2004 (Event No: 291944).

By letter dated 16 December 2004, the Authority informed the Icelandic authorities about its doubts
concerning the compatibility with the EEA Agreement of the notified guarantee and of the increase of the
Icelandic State's share capital in Farice hf. (Event No: 299813). The Icelandic authorities reacted to that by
letter dated 21 January 2005 from the Icelandic Mission, forwarding a letter from the Ministry of Finance
dated 21 January 2005. The letter was received and registered by the Authority on 24 January 2004 (Event
No: 306 312).

(1) Hereinafter referred to as the EEA Agreement.
(2) Hereinafter referred to as the Surveillance and Court Agreement.
(3) Guidelines on the application and interpretation of Articles 61 and 62 of the EEA Agreement and Article 1 of
Protocol 3 to the Surveillance and Court Agreement, adopted and issued by the EFTA Surveillance Authority on 19
January 1994, published in OJ 1994 L 231, EEA Supplement 3.9.1994 No 32. The Guidelines were last amended on
15.12.2004.

C 277/18

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10.11.2005

In addition, under separate competition proceedings, the Authority had, by letter to Farice hf. dated 31
January 2003, expressed certain competition concerns and requested information concerning the FARICE
project in order to enable the Authority to facilitate the assessment of the project's competitive impact. By
letter dated 6 May 2004 the Authority addressed a formal request for information to Farice hf. (4). Farice
hf.'s reply was received by the Authority on 21 October 2004.

2. Description of the Farice project

The Farice project concerns the construction and management of an undersea telecommunications cable
connecting Iceland and the Faeroe Islands with Scotland.

Since 1994, Iceland and the Faeroe Islands were internationally connected with the undersea telecommuni-
cation cable CANTAT-3. CANTAT-3 was set up as a consortium cable. Access to CANTAT-3 was secured
via membership of the consortium (5), by defeasible rights of use and by leasing capacity from the consor-
tium member Teleglobe. CANTAT-3 has connection points in Canada,
the Faeroe Islands,
Denmark, the United Kingdom and Germany. With the build-up of trans-Atlantic cable systems competing
with CANTAT-3, the founders of CANTAT-3 had access to other, more economical connections. The
Icelandic and the Faeroe parties, however, still had to rely on the CANTAT-3 connection. That was one
consideration for these parties to consider the development of a new connectivity. Besides, the CANTAT-3
cable had certain technical limitations, as it was an older generation cable which is not always reliable and
has limited capacity. No other single international fibre network project has reached these two countries
since 1994, despite a general capacity growth of international and interregional telecommunications
routes. According to information by the Icelandic authorities, the geographically isolated location of the
two countries and the limited market size prevented this.

Iceland,

Satellite connections which serve as a second connectivity are expected to rise in costs and are, in any
event, not considered appropriate for transmitting delay sensitive internet traffic. In order to handle the
increased telecommunication traffic, an alternative had to be developed.

The Farice project came about from an initiative by the almost 100 % State owned Icelandic telecom
operator Landssími Íslands hf (hereinafter Síminn) and the incumbent telecom operator in the Faeroe
Islands, Føroya Tele, which were considering the development of a submarine cable linking Reykjavík,
Tórshavn and Edinburgh. However, in 2002 it became clear that the FARICE project seemed unable to
gain momentum as a purely commercial business case (6). A feasibility study conducted in March 2002
concluded that it would not be possible to fund the project through conventional project financing. A
broad alliance behind the project was sought in order to secure its realisation. This resulted in two deci-
sions:

Firstly, the communication authorities of Iceland and the Faeroe Islands became involved in the preparation
of the project. In particular the largest sponsors, Síminn and Føroya Tele, made it clear that they were not
interested in providing the necessary loan guarantees on behalf of the whole telecom market (7). The State
would therefore have to participate and contribute actively in the project.

Secondly, it was considered important that Og Vodafone, a major player in the Icelandic telecom market,
should participate actively in the project. It was decided that besides the establishment of Farice hf, a
‘E-Farice’) (8) should be established. This
holding company Eignarhaldsfélagið Farice ehf.
company, while holding all the Icelandic shares in Farice, should buy Og Vodafone's capacity in CANTAT-
3. A similar offer was made to Síminn which, according to the IBM report submitted by the Icelandic
authorities, resulted in E-Farice handling all international connectivity for Iceland. As stated in the notifica-
tion, CANTAT-3 capacity will consequently be operated and sold by E-Farice (9).

(hereinafter

(4) In accordance with the provisions of Protocol 21 to the EEA Agreement and Article 11 of Chapter II, Protocol 4 to

the Surveillance and Court Agreement.

(5) The consortium included inter alia the Icelandic telecom operator Landssími Íslands hf., Teleglobe and Deutsche

Telekom.

(6) See Summary Report, provided as Annex 1 to the notification.
(7) See also the following comment by the Icelandic authorities: ‘Although the designated universal service provider, and as
such required to provide secure long-distance communication, Síminn felt that increasing the capacity to meet demand, as well as
providing an alternative route for emergencies, was a financially risky undertaking, providing little return on investment. In order
to facilitate the necessary upgrade in capacity, particularly in view of the short time frame available until capacity would be
outstripped by demand, the government stepped in.’

(8) In 2003, E-Farice ehf held 80 % of the shares in Farice hf, with the 20 % remaining shares held by Føroya Tele

(17,3 %) and other Faeroe parties (together 2,7 %).

(9) The IBM report stresses the business possibility that E-Farice's purchase of CANTAT-3 connectivity gives the possibi-
lity to ring-connect the two cable systems in such a way that Farice hf. can offer its customers secured connectivity.
The report further describes negotiations of E-Farice with Teleglobe to further lease CANTAT-3. It has been discussed
whether Farice hf. or E-Farice should lease all available capacity to Iceland and the Faeroe Islands.

10.11.2005

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Official Journal of the European Union

C 277/19

In 2002 the new limited company, Farice hf, was established with the purpose of preparing, constructing
and operating a submarine communication cable system to transfer telecommunications and internet
traffic between Iceland, the Faeroe Islands and the UK. The shareholders of this company were Síminn
(47,33 %), Og Vodafone (1,33 %), the Government of Iceland (27,33 %), three other Icelandic operators
which held together 3,99 %, Føroya Tele (17,33 %), and two other Faeroe telecom operators, which each
held 1,33 % (10). The new Farice cable includes an Iceland backhaul
(Reykjavík to Seyðisfjörður), a
submarine section (Seyðisfjörður to Dunnet Bay), a Faeroese backhaul (from Funningsfjörður to Tórshavn)
and a UK backhaul (Dunnet Bay to Edinburgh). No public tender was carried out to entrust the manage-
ment of the cable, which was granted to Farice hf.

A shareholders' agreement dated 12 September 2002 provided that the pricing policy of Farice should be
based on the principles of cost orientation, transparency and non-discrimination.

The Icelandic authorities have further pointed out that the use of the Farice cable is open to foreign and
domestic operators alike, on equal terms and prices. The shareholders' agreement is also open to new
shareholders. It stipulates, however, that the existing shareholders will always be offered the possibility of
maintaining their equity position in the company if the share capital is increased.

The formal opening of the Farice submarine transmission cable was in February 2004. While it will consti-
tute the primary transmission line for Iceland's telecommunications, the CANTAT-3 capacities will be used
as a back-up.

3. Description of the aid measure

a. The loan guarantee

The object of the notification concerns the grant by the State of a guarantee for a loan of EUR 9,4 million
in favour of Farice (hereinafter: the A Term Loan). This loan forms part of a broader long-term loan
package for a maximum amount of EUR 34,5 million.

According to the information provided by the Icelandic authorities, in particular the Agreement between
Farice hf, Íslandsbanki hf, other financial institutions and other guarantors, on 27 February 2004 signed
loans (hereinafter: the loan agreement) for a maximum amount of EUR 34,5 million, break down as
follows:

Loan

Million
EUR

Lender

Interest
rate (1)

Interest
periods

Repayment

Number of
instalments

Start of repayment

Guarantor

9,4

4,7

4,7

4,7

A

B

C

D

The Nordic
Investment Bank

The Nordic
Investment Bank

Íslandsbanki hf

[…] (*)

6 months

[…]

6 months

8 semi-annual
payments

5 semi-annual
payments

Sept. 2011

Sept. 2009

Government of
Iceland

Landssími Íslands
hf (Síminn)

Føroya banki

[…]

3 months

11

Íslandsbanki hf

[…]

1 month

10 quarterly
payments

48 monthly
payments

Sept. 2009

Telefon verkið P/F

Sept. 2005

None

(1) Although in the letter accompanying the notification reference is made to Libor as the basis for establishing the rate of interest to the
Loan for each tranche, clause 7.1 of the Loan Agreement refers to Euribor. For this reason, the Authority considers the Euribor rate
to be the valid reference for the determination of the rate of interest applicable to the Loan for each interest period.

(*) Brackets throughout the text indicate figures which have been deleted because they are covered by the obligation of professional

secrecy.

The State guarantee for the A term loan is a guarantee of collection, i.e. Farice hf.will be fully liable for
payment of the loan and the creditor will need to exhaust the recourses for collection from the company
before the State guarantee can take effect. Farice hf. was obliged to pay an annual market premium of […]
(established by the Icelandic National Debt Management) and a fee of […] ISK. The payment was done in
advance […].

(10) Initial capital contributions, which were later changed. The holding company E-Farice holds all the shares of the

Icelandic parties in Farice hf.

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An earlier guarantee of collection was signed in July 2003 in relation to a bridge loan of EUR 16 million.
The guarantee of collection covered EUR 6,4 million, i.e. 40 % of that loan. The bridge loan was paid up
upon the release of the long-term loan of EUR 34,5 million and the guarantee of collection for the bridge
loan ceased to exist the same day. Farice hf. paid a […] guarantee fee and a guarantee charge of […] ISK
for that guarantee.

b. The Icelandic government's increase in share capital

In the beginning of January 2003, the State participation in Farice hf increased from an initial share of
27 % up to 46,5 %. Following the explanation given by the Icelandic authorities in their reply of June
2004,

‘As the business plan evolved, the funding needs of the company became clearer and it was decided to
increase the company's share capital. All operators in Iceland and Faeroe Islands were invited to buy
shares in the share capital increase. As Síminn made it clear that the company would not want to
provide more than 33,33 % of the share capital, Telefonverkið would provide necessary share capital
from the Faroese site (19,93 %), the Icelandic government had to provide 46,53 % of the necessary
share capital as other operators in Iceland did not have the financial capacity to buy more than 1,2 %
of the share capital.’

As stated by the Icelandic authorities, the total share capital of Farice hf was increased from EUR 337 000
to EUR 14 million. Details on the share capital contribution of the different shareholders can be seen from
the table below:

Share capital of Farice hf.

(amounts in '000s)

Preparation phase

January 2003

June 2003

ISK

EUR

Share

ISK

EUR

Share

ISK

EUR

Share

947 944

11 965

79,90 %

947 944

10 657

79,90 %

8 200

14 200

92

160

27,33 %

552 067

6 206

46,53 %

491 737

5 528

41,45 %

47,33 %

395 477

4 446

33,33 %

352 259

3 960

29,69 %

400

400

400

400

4

4

4

4

1,33 %

1,33 %

1,33 %

1,33 %

400

400

400

400

1 312

0,03 %

103 949

1 169

8,76 %

4

4

4

0,03 %

0,03 %

0,03 %

400

400

400

4

4

4

0,03 %

0,03 %

0,03 %

Eignarhaldsfélagið Farice ehf.

Government of Iceland

Síminn

Og Vodafone

Lína.Net

Fjarski ehf.

RH-net

Telefonverkið

5 200

58

17,33 %

236 486

2 659

19,93 %

236 486

2 659

19,93 %

Kall

SPF spf.

Total

400

400

4

4

1,33 %

1,33 %

400

400

4

4

0,03 %

0,03 %

400

400

4

4

0,03 %

0,03 %

30 000

337

100,00 % 1 186 430

14 646

100,00 % 1 186 430

13 338

100,00 %

4. Comments by the Icelandic authorities

The Icelandic government first states that the measures cannot constitute State aid within the meaning of
Article 61(1) of the EEA Agreement, as the Farice project constitutes infrastructure, which is open to all
potential users on a non-discriminatory basis.

Further, the Icelandic authorities argue that the State guarantee fulfils all the conditions set out in Chapter
17.4 of the Authority's State Aid Guidelines. The Icelandic authorities point out that — as can be seen
from the three other tranches of the loan — Farice would have been able to secure a loan on market condi-
tions. It is, however, clear that interest rates will always be more favourable in the case of a State guaran-
teed loan and that, therefore, these conditions should not be expected to be the same as normal conditions
on the financial market. As long as the market price paid for the guarantee is correct, there is no room for
State aid. The banks were asked to provide a non indicative bid for a loan up to EUR 32 million. Four
offers varying in form and cost offered interest rates ranging from […].

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Official Journal of the European Union

C 277/21

The authorities further point out that the EUR 34,5 million loan should be seen as one loan subdivided
into four tranches. In that respect, the Farice project is financed to a large extent independently of the State
guarantee, which only covers 27,25 % of the full loan.

As to the share capital increase, the Icelandic authorities point out that the increase in share capital took
place in January 2003, i.e. only four months after the establishment of Farice hf. The Icelandic State's share
increase should therefore not be seen as an injection of fresh capital, but rather as the initial setting up of a
company. In this respect it should be noted that the private investors provided for almost 60 % of the total
increase or EUR 8,1 million compared to the government share of EUR 5,5 million (11).
share capital
According to the Icelandic authorities, this does not only show that the private share holders were willing
to participate in the company, but also that they were willing to participate to a significant degree.

In any event, given the size of the Farice project, the project would qualify as aid to small and medium
sized undertakings.

In any event, given its significant importance for securing the necessary connectivity of Iceland to the
world, the support should be allowed under Article 61(3)(b) or (c) of the EEA Agreement.

1. Obligation to notify

II. APPRECIATION

According to Article 2(1) read together with Article 3 in Part II of Protocol 3 to the Surveillance and Court
Agreement,
‘any plans to grant new aid shall be notified to the Authority in sufficient time by the EFTA State
concerned and shall not be put into effect before the Authority has taken, or is deemed to have taken, a decision
authorising such aid.’

Farice hf. was established in 2002 and the construction work started already in June 2003. The cable was
officially opened in February 2004 (12). The share capital increase took place in January 2003 and the guar-
antee of collection by the Icelandic authorities dates to 27 February 2004, i.e. before the Authority had a
chance to express a view on the notification of the measures on 27 February 2004.

The Authority therefore notes that the Icelandic government has not respected the stand-still obligation,
with the consequence that if the measures were found to be State aid within the meaning of Article 61(1)
of the EEA Agreement, they would constitute ‘new aid’ within the meaning of Article 1(f) in Part II of
Protocol 3 to the Surveillance and Court Agreement, subject to potential recovery, if declared incompatible
with the EEA Agreement.

2. State aid within the meaning of Article 61(1) of the EEA Agreement

Article 61(1) of the EEA Agreement reads as follows: ‘…any aid granted by EC Member States, EFTA States 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 Contracting Parties, be
incompatible with the functioning of this Agreement.’

The Authority will therefore assess whether:

— there is an intervention by the State or through State resources;

— which confers an advantage on the recipient;

— distorts or threatens to distort competition; and

— which is liable to affect trade between the Contracting Parties.

2.1 The Farice project as an infrastructure project

The Icelandic authorities argue that the support to the Farice project does not comprise any State aid,
given that the submarine cable qualifies as infrastructure and support in its favour therefore constitutes a
‘general’ and not a selective measure. As stated in the European Commission Communication COM (2001)
35 final, ‘Reinforcing quality service in sea ports: a key for European transport’ (13), the criterion of selec-
tivity is an important benchmark for deciding whether a concrete financing measure constitutes State aid.

(11) It seems however, that this statement by the Icelandic authorities rather refers to the share capital split between the

capital holder in June 2003. In January 2003, the Icelandic government had a share of EUR 6,2 million.

(12) Press release of 3 February 2004.
(13) Communication of 13.2.2001, COM (2001) 35 final.

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In Commission practice State funding for the construction or management of infrastructure is not to be
regarded as aid, if the infrastructure is directly managed by the State (which is not the case in the present
project) or if there is a public tender for the selection of the manager and if access to the infrastructure is
open to all potential users on a non-discriminatory basis (14).

The Authority notes that while wide participation might have been sought within the project, neither the
construction nor the management of the company was organised by a public tender. The government
participation rather responded to a private initiative, started by the two incumbent telecommunication
operators (15).

The Authority also has doubts concerning the non-discriminatory access. While the participation in the
company according to the shareholders' agreement is not restricted, the Authority notes that the founding
shareholders keep certain pre-emptive rights (see section I.2 of this Decision), which seems to place them
in a better position than new shareholders.

Regardless of this, in line with Commission practice, a measure in any event constitutes aid and not a
general measure, if the body managing the infrastructure is pursuing an economic activity, as this may
provide a potential advantage to the beneficiary (16) in relation to competing operators. In this respect it
suffices to note that the State support benefits Farice hf. which manages the cable and sells users' rights to
interested parties against remuneration. According to the case law of the European Court of First Instance,
the management of infrastructure constitutes an economic activity within the meaning of Article 61(1) of
the EEA Agreement (17). Farice hf. is able to profit from an infrastructure construction secured with a State
guarantee and with government participation in a situation in which private parties were not willing to
ensure the full financing of the project, whereas other operators might have to finance 100 % of it on their
own.

In addition, for State aid purposes, it should be noted that the participation in the company is mainly
geared towards telecommunication operators. Connectivity via the Farice cable is currently only sold in
large units to business operators who resell the service on the downstream market to end users. It was
these business operators who took the initiative to which the State responded. The type of service is there-
fore targeted at commercial operators and not at the general public. The Authority therefore, at this stage
of the proceedings, considers that the project should be looked at rather as being a dedicated facility for
undertakings, which is within the scope of State aid control, rather than a general infrastructure (18).

2.2. The loan guarantee by the Icelandic State

In general, a State guarantee enables its beneficiary to obtain better financial terms for a loan than those
normally available on the financial markets. Therefore, guarantees given by the State may fall within the
scope of Article 61(1) of the EEA Agreement.

However, on the basis of the provisions of Chapter 17.4 (2) of the Authority's State Aid Guidelines on
State Guarantees (hereinafter: the Guidelines), the Authority considers that an individual State guarantee
does not constitute State aid under Article 61(1) of the EEA Agreement if it fulfils all the following condi-
tions:

(a) The borrower is not in financial difficulty;

(b) The borrower would, in principle, be able to obtain a loan on market conditions from the financial

markets without any intervention by the State;

(14) Commission decision N 527/02 — Greece Financial support of a private company for the design, construction,

testing and commissioning of the aviation fuel pipelines for supply of the new Athens International Airport.

(15) See Commission decision C 67-69/2003 concerning aid for the construction of a propylene pipeline between
Rotterdam, Antwerp and the Ruhr-area, paragraph 48. The Authority will further look at the argument of the
Icelandic authorities that according to Directive 2002/20/EC the license can only be granted by way of authorisation
and that therefore the requirement of a public tender cannot be relevant. The Authority takes the preliminary view
that, given all the other circumstances in this case, even if the argument was found valid, it is not likely to make a
difference for the assessment.

(16) See Commission decision N 527/02 with further references in footnote 8. Also Commission decision N 860/01 —
Austria on the ski resort Mutterer Alm where the running of ski lifts was considered to be an economic activity
benefiting the operator of the ski lift and therefore not constituting an infrastructure measure. See Commission deci-
sion C 67-69/2003, paragraph 48.

(17) See Case T-128/98, Aéroports de Paris v. European Commission, [2000] ECR II-3929.
(18) See Commission decision N 213/2003 — Project Atlas, broadband infrastructure for business parks.

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(c) The guarantee is linked to a specific financial transaction, is for a fixed maximum amount, does not

cover more than 80 % of the outstanding loan and is not open-ended;

(d) The market price for the guarantee is paid (which reflects, amongst other things, the amount and dura-
tion of the guarantee, the security given by the borrower, the borrower's financial position, the sector
of activity and the prospects, the rates of default, and other economic conditions).

First/second condition

According to the information provided by the Icelandic authorities, the project could not gain momentum
as a purely commercial business case and required the involvement of the State. Although the borrower
was not technically in financial difficulty, the fact that the banks did not only require a guarantee of the
State for the A Term Loan but also of the two former State telecommunication monopolists (Síminn for
the B Term Loan and Telefonverkið P/F for the C Term Loan), which are still owned by the respective
States, shows that Farice was not in the position to obtain a loan on market conditions without any inter-
vention by the State. For this reason, it is questionable whether the second condition is fulfilled.

The Icelandic authorities however argue that the second condition should be understood to be that the
borrower was able to obtain ‘a’ loan, not necessarily ‘the loan on the same conditions’. In particular the D
tranche loan shows that it was possible for Farice hf. to obtain a loan ‘as such’. Furthermore, the Icelandic
authorities argue that it is evident that, backed up with the State guarantee, the loan would be granted at
more favourable conditions. The decisive factor therefore is only whether the price for the guarantee is a
market price.

The Authority agrees that the first condition only states that the borrower would ‘in principle’ be able to
obtain a loan on market conditions. However, it still needs to be considered that point 17.1(1) of the
Guidelines describes State guarantees as normally enabling the borrower to obtain better financial terms
than those normally available on the financial markets, which leads to distortions of competition and the
potential classification as ‘aid’. It is exactly that advantage resulting from the State intervention which raises
a State aid concern. Against this background, there would be no aid element involved if the State backed-
up loan did not lead to any advantages in the interest rate. However, if the State intervention leads to
‘better’ market conditions, this must be taken into account for the assessment under the State aid provi-
sions. The Authority does not exclude, at this stage of the proceedings, that the distortive effect resulting
from better market conditions can be adequately — but then also would have to be — considered in the
assessment of the adequacy of the market premium (fourth condition), and will investigate that further in
the formal investigation procedure.

However, the Authority notes, that while Farice hf. was able to secure an EUR 11 million loan on market
conditions (D loan), it is not clear whether the banks would have granted any further loans to the project
without any intervention from the State. This aspect would have to be assessed under the first condition.
The Authority is therefore not entirely certain about the relevance of the argument that Farice hf. was able
to negotiate the EUR 11 million loan.

Third condition

The overall loan package is made up of four (or five) different loan amounts with different borrowing
conditions, different lenders and different guarantees. Therefore, the Authority is of the preliminary
opinion that each part of the overall loan amount constitutes an independent loan as such. For this reason,
the Authority initially considers that the guarantee of the State covers 100 % of the guaranteed A Term
Loan for a maximum amount of EUR 9,4 million. Hence, the third condition laid down in Chapter 17.4(2)
of the Guidelines to exclude the existence of State aid does not seem to be fulfilled.

The Icelandic authorities argue that there is only one loan at stake, at EUR 34,5 million. However, as can
be seen from the loan agreement, while granted for the same collateral, the four loans are granted by
different banks which assume the responsibility for their loan amount only. None of the banks would take
over — in case of a failure of Farice hf. — the liability for any of the other loans. The different loans do
not only have different repayment periods and a different number of instalments, but also different guaran-
tors. Against this background, the combination of the loans in one joint document does not appear to be
of significant relevance.

It should further be noted that the 80 % rule should ensure that the creditor still has an incentive to reflect
on the risk which he is willing to assume. Against this background, it does not seem correct to take into
account — in relation to the business decision made by the Nordic Investment bank and in order to estab-
lish the loan basis to which the 80 % rule applies — that other loans are granted by Íslandsbanki. The
Nordic investment bank has not assumed any responsibility for these loans and would not consider them
in its decision to support Farice.

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If anything, the A loan could be considered together with the second loan granted by the Nordic Invest-
ment bank, i.e. the first part of the B loan. However, the Authority still has doubts on this perspective, as
the B loan is secured by the 100 % State owned company Síminn. The incentive for Nordic investment
bank to assume an ordinary risk assessment, the same as it would undertake for a borrower who cannot
rely on the State or State owned companies, is therefore considerably reduced.

Fourth condition

Regarding the fourth condition, the Authority notes that the Icelandic State Guarantee Fund assessed the
appropriate guarantee fee and guarantee charge for a State guarantee in relation to the A Term Loan. It
charged a fee of ISK […] plus a proportional fee of […] p.a. on the balance of the loan at the beginning of
each period. The total charge amounted to […] and was already paid in advance.

Assuming only that the State Guarantee Fund took into account, in the assessment of the premium, the
concrete characteristics of the guaranteed loan, in particular the conditions for repayment (19) and that it
followed for its assessment the so-called market investor principle, would the fourth condition laid down
in Chapter 17.4(2) of the Guidelines be fulfilled. However, despite being invited to prove that this is a
market rate, the Icelandic authorities have not substantiated this point, but mainly limited themselves to
repeat the relevant provisions of the State Guarantee Fund Act. The Authority notes that while taking into
account that the guarantee in question is a guarantee of collection with a lesser risk, the premium charged
to Farice is at the very low end of the spectrum of interest rates to be fixed by the National Debt Manage-
ment Agency […], which has not been reasoned by the Icelandic authorities.

Further indication of the appropriate market rate can be derived from point 17.1(2) of the Guidelines
which identifies the amount of aid, i.e. the cash grant equivalent, for an individual guarantee, as the differ-
ence between the market rate and the rate obtained thanks to the State guarantee after any premiums have
been deducted. This is based on the understanding that if the borrower profits from a favourable interest
rate, which he would not have gotten without State intervention, the aid element is the amount which
remains in comparison to the market rate and after the premium has been deducted. If the premium does
not fully remove this advantage, the State guarantee would still benefit the recipient and thus distort the
market. In such circumstances the advantage resulting from the guarantee has not been clawed away by
the premium and would have to be classified as aid (20).

The Authority notes that the difference between the A tranche loan of […] points compared to […] of the
B loan, is […], which is not fully compensated by the […] premium paid by the State. However, the
Authority still considers comparing the interest rate of the A tranche with the D tranche of the loan,
which is the only tranche not backed up by the State or a State owned company, which results in a
remaining aid element of […]. Firstly, the Authority assumes that the guarantee given by the 100 % owned
telecom operators Síminn is also imputable to the State, but will investigate that point further during the
investigation. In any event, operators in similar projects might not be able to secure such guarantees —
and the favourable market conditions resulting therefrom — so that in the Authority's preliminary view
the comparison with the D loan seems to be the valid comparison (21).

The intervention of the State strengthens the position of Farice hf. in securing the project financing versus
competitors who do not profit from such a guarantee and would have to make the investment solely on
market terms. The guarantee is given for a project which is carried out by multinational business operators
and constitutes an activity which is subject to trade between the Contracting Parties.

2.3 The increase in the participation of the State as shareholder of Farice hf.

Between the time of the establishment of the company in September 2002 and the time of the notification
at the beginning of 2004, the State participation in Farice hf increased from an initial share of 27 % up to
46,5 %. Following the explanation given by the Icelandic authorities in their reply of June 2004, Síminn
made it clear that it did not intend to provide more than 33,33 % of the share capital (22).

(19) The provisions of the loan agreement foresee the possibility of prepaying the whole or part of the loan, except for

the A term loan, without any prepayment fee.

(20) The Icelandic authorities do not consider that aspect, but look at the adequacy of the market price as such. The
result is that the fact that the State guarantee has led to better loan conditions than market conditions, is neither
considered under the first condition (see above) nor under the fourth condition.

(21) According to Clause 7.4 of the Loan Agreement, solely the margin for the A Term Loan can be modified after signa-
ture of the agreement. Such an amendment may take place on 18 March 2011 and will be effective until the loan
maturity. As this is depending on the future negotiations, the Authority is not in a position to assess whether such a
modified margin would constitute State aid within the meaning of Article 61(1) of the EEA Agreement or whether
such aid could be authorised. However, the Icelandic authorities would be able to identify the existence of an aid
element for any future modification by applying the calculation parameters laid down in the previous paragraph
and, in case of the existence of an aid element, would have to notify the aid measure to the Authority.

(22) See section I 3.b of this Decision.

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For State aid purposes, it has to be established whether the capital increase at Farice engaged by the State
is directly in conformity with the market investor principle. Chapter 19 of the Guidelines establishes the
general approach of the Authority with regard to the acquisition of share holdings by public authorities.

According to Chapter 19.6.(b) of the Guidelines, no State aid is involved where fresh capital is contributed
to an undertaking in circumstances that would be acceptable to a private investor operating under normal
market economy conditions. This can apply when public holdings in a company are to be increased,
provided that the capital injected is proportionate to the number of shares held by the authorities and goes
together with the injection of capital by a private shareholder. The private investor's holding must have
real economic significance.

On the other hand, there is State aid where fresh capital is contributed in circumstances that would not be
acceptable to a private investor operating under normal market economy conditions. Following Chapter
19.6.(c) of the Guidelines, this is, amongst others, the case where the injection of capital into companies
whose capital is divided between private and public shareholders makes the public holding reach a signifi-
cantly higher level than it was originally and the relative disengagement of private shareholders is largely
due to the companies' poor profit outlook.

The Icelandic authorities point out that the Icelandic's State share capital increase should not be looked at
as an injection of fresh capital, but rather as the initial setting up of the company. The Authority points
out that the State Aid Guidelines consider the share capital increase, regardless of at what point in time it
takes place, as a subcategory of the injection of fresh capital. As the Guidelines reflect the general principle
of private market investor behaviour, the share capital increase must be analysed on its merits. Even if the
Government had assumed the higher share already during the preparation phase, this still would have
made the increase subject to an analysis under the State aid provisions. For that assessment it is therefore
only relevant whether the share capital increase reflects the rationale of a private market investor.

The Authority does not deny that in real terms the private operators' holdings occurred at the same time
of the capital increase by the State. However, the Authority takes the (preliminary view) that the share
increase of the private operators was not proportionate to the share capital increase by the State.

As can be seen from the table above (see section I.3.b. of this Decision) Farice hf.'s capital rose from
EUR 337 000 to EUR 14 646 000 in January 2003. The share of the Icelandic State grew from 27,33 %
(EUR 92 000) to 46,5 % (EUR 6 206 000), i.e. by almost 20 percentage points. While it is correctly stated
by the Icelandic authorities that the share of Síminn grew from EUR 160 000 to EUR 4 446 000, in rela-
tive terms the share of Síminn fell from 47,33 % to 33,33 % (14 percentage points). Except for Telefon-
verkið, the shares of all other participants also fell (from 1,33 % to 0,33 %), which shows that in relative
terms the private operators disengaged from the project.

This is likely to result from the poor outlook of the company's profit. In their letter of September 2004,
the Icelandic authorities have submitted that:

‘Síminn felt that increasing the capacity to meet foreseeable demand, as well as providing an alternate route for
emergencies, was a financially risky undertaking, providing little return on investment (especially for a limited
company in line for privatisation). In order to facilitate the necessary upgrade in capacity, particularly in view of
the short time frame available until capacity would be outstripped by the demand, the Government stepped in.’

The Icelandic authorities further state that the market's reluctance towards the project was indicated in the
preparatory phase when Síminn and Telefonverkið engaged IBM Consulting to advise them on the
economic viability of the project and its financing possibilities. The findings strongly suggested that the
funding could not be done via traditional means (23).

It seems from this that the initial
lack of engagement from private investors was the reason for the
subscription of the necessary capital increase by the Government in early 2003 (24), which raised the State
participation in Farice hf.

The increase in the State's share of Farice was further accompanied by the grant of a State guarantee to
cover the A Term Loan of EUR 9,4 million. It is thus the preliminary opinion of the Authority that State
aid can be presumed in the capital injection subscribed by the Icelandic authorities in Farice which led to
an increase in the State share in the company from 27 % to up to 46,5 %. Additionally, according to
Chapter 19.6(d) of the Guidelines, there is a presumption that there is State aid where the authorities' inter-
vention takes the form of acquisition of a holding combined with other types of interventions which need
to be notified pursuant to Article 1(3) in Part I of Protocol 3 to the Surveillance and Court Agreement.

(23) See letter by the Icelandic authorities dated 25 June 2004, page 3.
(24) The Authority is aware of the reference of the Icelandic authorities to the speech of the chairman on 24 January
2004. However, this speech only states that there is a ‘modestly profitable business case’ and that the private operators
also provided securities. The latter point has never been denied by the Authority; the question whether the share
increase by the State is proportionate is, however, not answered.

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The intervention of the State strengthens the position of Farice hf. in securing the project financing versus
competitors who do not profit from such a State participation in a situation in which private operators are
not willing to raise additional funds. The share increase concerns a project which is carried out by multina-
tional business operators and constitutes an activity which is subject to trade between the Contracting
Parties.

a. Conclusion

In the Authority's preliminary view, the State guarantee and the capital share increase by the Icelandic
State constitute State aid within the meaning of Article 61(1) of the EEA Agreement.

3. Compatibility

In the Authority's view, the aid measures do not comply with any of the exemptions provided for under
Article 59(2) (25) and Article 61(2) or (3)(a) and (d) of the EEA Agreement. In the Authority's preliminary
view, the State support also cannot be justified under Article 61(3)(b) of the EEA Agreement. Despite the
fact that the project is transnational, the aid in question presents itself in the form of sector aid, benefiting
an individual company (Farice hf) and brought about by a private initiative of a group of business opera-
tors. It is therefore questionable that this can be regarded as a project which is of common European
interest.

It needs to be assessed whether the aid could be justified under Article 61(3)(c) of the EEA Agreement.
Under this provision aid may be declared compatible if ‘it facilitates the development of certain economic activ-
ities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to
the common interest’.

However, the Authority finds that none of the Authority's State Aid Guidelines can be applied to assess aid
measures that target this objective. The Authority in particular does not share the Icelandic authorities'
view that the measure falls under the Act mentioned in point 1 f) of the EEA Agreement concerning aid to
small and medium sized undertakings (26). In order to fall under the block exemption, Farice would have to
be an independent enterprise in the meaning of Article 1(3) in conjunction with Article 1(1) in Annex I of
the Act. However, more than 25 % of the capital is owned by operators which fall outside the SME defini-
tion (this goes both for the State owned Síminn and the share ownership of the Icelandic State).

The Authority therefore considers that the compatibility assessment is to be based directly on Article
61(3)(c) of the EEA Agreement.

In this respect, the Authority will have to investigate the necessity and the proportionality of the measure.
The Authority, however, notes that the Icelandic authorities have not yet provided sufficient information to
enable the Authority to carry out a full analysis of this issue. On the basis of the information available, the
Authority has come to the preliminary conclusions below.

3.1 The necessity of the aid measures

The Authority notes that the project intends to secure internet connectivity to Iceland by having a reliable
transmission method to which the former CANTAT-3 connection will serve as a back-up. Because of its
geographic location, Iceland is particularly dependent on having access to economic and reliable telecom
connectivity. As can be seen from section I.2 of this Decision, alternatives in the form of the existing
limitations or
CANTAT-3 cable or satellites were no longer options, either because of their technical
dependencies on other consortium shareholders (CANTAT-3 (27)) or their rising costs (satellites). The new
submarine cable, which is to become the primary transmission connection to Iceland, has greater capaci-
ties, is more reliable and — together with the backup by CANTAT-3 — is able to secure the provision of
telecommunication services to Iceland. The availability of broadband (28) has been acknowledged in
Commission policy and State aid decisions (29) as a legitimate objective and type of service which is by its
nature capable of positively affecting the productivity and growth of a large number of sectors and activ-
ities.

(25) The Icelandic authorities have not provided information which enables the Authority to make an assessment under

that provision.

(26) Commission Regulation (EC) No 70/2001 of 12 January 2001 on the application of Articles 87 and 88 of the EC
Treaty to State aid to small and medium-sized enterprises (OJ L 10, 13.1.2001, p. 33), as amended by Commission
Regulation (EC) No 364/2004 of 25 February 2004 (OJ L 63, 28.2.2004, p. 22). The point ‘Aid to small and
medium enterprises’ was inserted by Joint Committee Decision No 88/2002 (OJ L 266, 3.10.2002, p. 56 and EEA
Supplement No 49, 3.10.2002, p. 42), e.i.f. 1.2.2003. The amendment was inserted by Decision No 131/2004 (OJ
No L 64, 10.3.2005, p. 67 and EEA Supplement No 12, 10.3.2005, p. 49), e.i.f. 25.9.2004.

(27) As stated in the summary report submitted by the Icelandic authorities in the notification dated 27 February 2004,

the consortium member Teleglobe, in particular, was faced with business difficulties.

(28) Data transmission in which a single medium can carry several channels at once. The term is also used to compare
frequency bandwidth greater than 3 MHz narrowband frequencies. Broadband can transmit more data at a higher
speed.

(29) See e-Europe 2004 Action Plan, Communication from the Commission, An information society for all, 28.5.2002,
COM (2002) 263 final, see Commission Decision N 231/2003 Project Atlas — broadband infrastructure for busi-
ness parks and N 307/2004 Broadband in Scotland — remote and rural areas.

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As can be seem from its history (in particular the feasibility study of March 2002), the Farice project was
not able to emerge as a purely private initiative. Both, State guarantees and share capital increases resulted
from the need of a greater State participation to make the project economically viable. Without State parti-
cipation, the project would either have been delayed or not undertaken at all, so that the Authority takes
the preliminary view that the State support was necessary.

3.2 The proportionality of the aid measures

In order for the aid measures to be compatible with Article 61(3)(c) of the EEA Agreement, it must be
proportionate to the objective and not distort competition to an extent contrary to the common interest.
The trade-off between the advantages in terms of guaranteeing a reliable provision of telecommunication
services to Iceland must be weighed against the disadvantages of the distortion of competition in compar-
ison to competitors, which do not have access to public funding when realising similar projects.

The Authority cannot yet make a final assessment of that question on the basis of the available informa-
tion. However, it will — in the formal investigation procedure — consider the following aspects:

— The Authority first notes that neither the construction nor the management of the cable were given to
Farice hf. after an open tender. The Authority is not yet convinced that the widespread information on
this project as claimed by the Icelandic authorities can replace a formal tender procedure, in particular
as the desirable widespread participation was limited to Icelandic and Faeroe parties (30). The Authority
points out that the open tender was considered a positive, although not necessarily mandatory, element
for the approval of broadband projects in Commission practice (31). In these decisions it was, in particu-
lar, stressed that the tendering out of the management of the cable to an independent asset manager
secured the neutrality of the infrastructure manager better than in a situation in which the service
provider has control over the infrastructure, as is the case here.

— The Authority notes that the shareholders' agreement provides for a non-discriminatory, transparent

pricing on market terms.

— The Authority will also consider that the shareholders' agreement is in principle open to new entrants.
The Authority has however doubts on the position of new entrants in relation to the founding parties,
as section 7 of the Shareholders agreements protects the founders' position by giving them the possibi-
lity to maintain their equity position.

— The total amount of aid is, with regard to the State guarantee, rather limited. As to the State's share
increase, the Authority notes that in June 2003 the State's share capital has already decreased to 41 %,
whereas Síminn's participation rose to 29 %. The Authority also notes that while the State disproportio-
nately increased its share capital in January 2003, the private operators showed willingness to multiply
their support.

— The Authority has, in its correspondence with Farice hf. under the competition proceedings, raised
certain competition concerns. The European Court of Justice has established that a compatibility assess-
ment under the State aid provisions should not produce a result which is contrary to other treaty provi-
sions. Consequently, for the assessment under the State aid provisions, it is also relevant whether State
support is given to a project which might raise competition concerns under the application of Article
53 and/or 54 of the EEA Agreement (32). In this regard, the Authority inter alia notes that although the
existing infrastructure CANTAT-3 still remains in place (33), there is a concern that in the future, all
CANTAT-3 connectivity to Iceland will be channelled through E-Farice hf, which holds the majority of
shares in Farice hf. (34). Hence, there is a risk that competition in connectivity to Iceland would be
eliminated, as only one supplier would remain on the market.

4. Conclusion

The Authority therefore concludes that it has doubts as to whether the support in favour of Farice hf. is
compatible with the functioning of the EEA Agreement, in particular with Article 61(3)(c) of the EEA
Agreement.

(30) The Icelandic authorities state: ‘Widespread participation was sought in Iceland and the Faeroe Islands for shareholders in the

Farice project and all telecoms operators were invited to participate in the foundation of the company.’

(31) Commission Decision N 307/2004, N 199/2004 and N 213/2003.
(32) Cf. Case C-225/91, Matra SA v Commission, [1993] ECR-3203, paragraph 41.
(33) On the co-existence of existing infrastructure, see Commission Decision N 307/2004, paragraph 45, where it is
positively outlined that this minimises the risk of unnecessary duplication and limits the economic impact for opera-
tors that already have infrastructure in place. See also Commission Decision N 199/2004, paragraph 41, N 213/
2003, paragraph 47.

(34) See footnote 8 of this Decision.

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Consequently, and in accordance Article 4(4) in Part II of Protocol 3 to the Surveillance and Court Agree-
ment, the Authority is obliged to open the procedure provided for in Article 1(2) in Part I of Protocol 3 of
the Surveillance and Court Agreement. The decision to open proceedings is without prejudice to the final
decision of the Authority. The Authority may conclude that the measures in question would be compatible
with the functioning of the EEA Agreement, if they were necessary and proportionate and thus would fulfil
the requirements for being exempted from the prohibition against State aid as laid down in Article 61(1)
of the EEA Agreement.

In light of the foregoing considerations, the Authority, acting under the procedure laid down in Article
1(2) in Part I of Protocol 3 to the Surveillance and Court Agreement, requests the Icelandic authorities to
submit its comments within one month of the date of receipt of this Decision.

In light of the foregoing considerations, the Authority requires the Icelandic government, within one
month of receipt of this Decision, to provide all documents, information and data needed for the assess-
ment of the compatibility of the support measures in favour of Farice hf.,

HAS ADOPTED THIS DECISION:

1. The Authority has decided to open the formal investigation procedure provided for in Article 1(2) in
Part I of Protocol 3 to the Surveillance and Court Agreement with regard to the support measures in
favour of Farice hf.

2. The Icelandic government is requested, pursuant to Article 6(1) in Part II of Protocol 3 to the Surveil-
lance and Court Agreement, to submit its comments on the opening of the formal investigation proce-
dure within one month from the notification of this Decision and to provide all such information as
may help to assess the aid measure.

3. The Icelandic government shall be informed by means of a letter containing a copy of this Decision.

4. The Icelandic Government is invited to notify without delay the potential aid beneficiary of the initia-

tion of the proceedings.

5. The EC Commission shall be informed, in accordance with Protocol 27(d) of the EEA Agreement, by

means of a copy of this Decision.

6. Other EFTA States, EU Member States, and interested parties shall be informed by the publishing of this
Decision in its authentic language version, accompanied by a meaningful summary in languages other
than the authentic language version, in the EEA Section of the Official Journal of the European Union and
the EEA Supplement thereto, inviting them to submit comments within one month from the date of
publication.

7. This Decision is authentic in the English language.

Done at Brussels, 26 May 2005.

For the EFTA Surveillance Authority

Einar M. BULL

Acting President

Bernd HAMMERMANN

College Member