EFTA Surveillance Authority Decision No 227/06/COL of 19 July 2006 with regard to State aid in favour of Farice hf. (Iceland)
Date: 2006-07-19
Institutions: EFTA Surveillance Authority
Subjects: EFTA, European Economic Area, Iceland, State aid, control of State aid, marine environment, submarine

5.2.2009

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Official Journal of the European Union

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EFTA SURVEILLANCE AUTHORITY DECISION

No 227/06/COL

of 19 July 2006

with regard to State aid in favour of Farice hf. (Iceland)

THE EFTA SURVEILLANCE AUTHORITY (1),

HAVING REGARD to the Agreement on the European Economic
Area (2),
in particular to Articles 61 to 63 and Protocol 26
thereof,

Finance dated 26 February 2004,
the Icelandic authorities
notified 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).

HAVING REGARD to the Agreement between the EFTA States on
the establishment of a Surveillance Authority and a Court of
Justice (3), in particular to Article 24 thereof,

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).

HAVING REGARD to Article 1(2) in Part I and Articles 4(4), 6,
7(3) and 10 in Part II of Protocol 3 to the Surveillance and
Court Agreement,

HAVING REGARD to the Authority’s Guidelines (4) on the appli­
cation and interpretation of Articles 61 and 62 of the EEA
Agreement, and in particular Chapter 17 on State guarantees
and Chapter 19 on public authorities’ holdings,

After various exchanges of correspondence (6), the Authority
informed the Icelandic authorities by letter dated 26 May
investigation
2006 that it had decided to initiate the formal
procedure laid down 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. (Event No 319257).

HAVING REGARD to the Authority’s Decision No 125/05/COL
to initiate the formal
investigation procedure with regard to
State aid in favour of Farice hf. calling on interested parties
to submit their comments thereon (5),

The Authority’s Decision No 125/05/COL to initiate the formal
investigation procedure was published in the Official Journal of
the European Union and the EEA Supplement thereto (7). The
called on interested parties
Authority
their
comments
thereon. The Authority received no comments
from interested parties.

to submit

Whereas:

I. FACTS

1. PROCEDURE

By letter dated 27 February 2004 of the Icelandic Mission to the
forwarding a letter from the Ministry of
European Union,

(1) Hereinafter referred to as the Authority.
(2) Hereinafter referred to as the EEA Agreement.
(3) Hereinafter referred to as the Surveillance and Court Agreement.
(4) 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 (OJ L 231,
3.9.1994, p. 1, and EEA Supplement No 32 of 3 September
1994). The Guidelines were last amended on 29 March 2006. Here­
inafter referred to as the State Aid Guidelines.

(5) Published in OJ C 277, 10.11.2005, and the EEA Supplement No 56

of 10 November 2005.

The Icelandic authorities submitted their comments to Decision
No 125/05/COL by letter dated 28 June 2005 (Event
No 324236).

under

separate

As mentioned in the decision to open the formal investigation
procedure,
the
Authority had expressed certain competition concerns by
letter to Farice hf. dated 31 January 2003. The Authority had
also requested information concerning the Farice project which
was relevant for the assessment of the project’s competitive

competition proceedings,

(6) For more detailed information on the various correspondence
between the Authority and the Authority, reference is made to the
Authority’s Decision to open the formal
investigation procedure,
Decision No 125/05/COL, published in OJ C 277, 10.11.2005,
p. 14.

(7) OJ C 277, 10.11.2005, p. 14, and EEA Supplement No 56 of

10.11.2005, p. 14.

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impact. By letter dated 6 May 2004 the Authority addressed a
formal request for information to Farice hf. (1). Farice hf.’s reply
was received by the Authority on 21 October 2004. The
separate competition proceedings have been closed by letter
of the Authority dated 2 June 2006 (Event No 1072261).

2. DESCRIPTION OF THE MEASURES

2.1. 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 have been interna­
tionally connected with the undersea telecommunication cable
CANTAT-3. CANTAT-3 was set up as a consortium cable.
Access to CANTAT-3 was secured via membership of
the
consortium (2), by indefeasible rights of use and by leasing
capacity from the consortium member Teleglobe. CANTAT-3
has connection points in Canada, Iceland, 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. This was one con­
sideration for these parties to take into account during the
development of a new connectivity. In addition, the CANTAT-
3 cable had certain technical
is an older
generation cable which has limited capacity and is not always
reliable. The Icelandic authorities submitted an overview of
several
the CANTAT-3 connection during 1995-
2003. No other single international fibre network project has
reached these two countries since 1994, despite a general
capacity growth of international and inter-regional telecommu­
nications routes. According to information by the Icelandic
authorities,
the two
the geographically isolated location of
countries and the limited market size prevented this.

limitations, as it

failures of

Costs of satellite connections, which serve as a second connec­
tivity, are expected to rise 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 (at the
time) almost 100 % state owned Icelandic telecom operator

(1) In accordance with the provisions of Protocol 21 to the EEA
II, Protocol 4 to the

Agreement and Article 11 of Chapter
Surveillance and Court Agreement.

(2) The consortium included inter alia the Icelandic telecom operator

Landssími Íslands hf., Teleglobe and Deutsche Telekom.

Landssími Íslands hf. (hereinafter Síminn (3)) 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 (4). A feasi­
bility 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
decisions:

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 (5). The
Icelandic State would therefore have
and
contribute actively in the project.

to participate

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 estab­
for the purpose of constructing and
lishment of Farice hf.,
operating the new transmission system, a holding company
Eignarhaldsfélagið Farice ehf. (hereinafter ‘E-Farice’) (6) should be
established. This 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 (7) submitted by the Icelandic authorities, resulted in E-
Farice handling all
international connectivity for Iceland. As
stated in the notification, CANTAT-3 capacity was consequently
supposed to be operated and sold by E-Farice (8).

(3) The Icelandic State’s stake in Síminn was sold to Skipti ehf. effective

August 2005.

(4) See Summary Report, provided as annex 1 to the notification.
(5) 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
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.’

that

(6) In 2003, E-Farice ehf. held 80 % of the shares in Farice hf., with the
20 % remaining shares held by Føroya Tele (19,93 %) and other
Faeroe parties (together 0,6 %).

(7) The IBM report is a report submitted by the Icelandic authorities,
which gives a summary on the background and current status of the
Farice project. It describes the project idea, the business plan and the
network structure as well as the need for a new cable.

(8) The IBM report stresses the business possibility that E-Farice’s
purchase of CANTAT-3 connectivity provides the possibility 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 lease additional
CANTAT-3 capacity. It has been discussed whether Farice hf. or E-
Farice should lease all available capacity to Iceland and the Faeroe
Islands.

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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 United Kingdom. According to the information provided by the
Icelandic authorities, 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 % (1). The new Farice cable
includes an Iceland backhaul (2)
to
Dunnet Bay), a Faeroese backhaul (from Funningsfjörður to Tórshavn) and a United Kingdom backhaul
(Dunnet Bay to Edinburgh). No public tender was carried out to decide on the management of the cable,
which was granted to Farice hf. According to the business plan, the estimated total investment costs of the
Farice project were EUR 48,9 million.

to Reykjavík), a submarine section (Seyðisfjörður

(Seyðisfjörður

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 (Section 7 of the Share­
holders Agreement).

The formal opening of the Farice submarine transmission cable was in February 2004.

2.2. DESCRIPTION OF THE ICELANDIC STATE SUPPORT

(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 as can be seen from the
Agreement of 27 February 2004 (hereinafter: the loan agreement) between Farice hf., Íslandsbanki hf., other
financial institutions and other guarantors, the signed loans for a maximum amount of EUR 34,5 million,
break down as follows:

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

Icelandic parties in Farice hf.

(2) The term backhaul often refers to transmitting from a remote site or network to a central or main site. The original
definition of backhaul was to transmit a telephone call or data beyond its normal destination point and then back
again in order to utilise available personnel (operators, agents, etc.) or network equipment that is not located at the
destination location. The term has evolved into a more generic meaning. It typically implies a high-capacity line.

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Loan

Million
EUR

Lender

Interest rate (1)

Interest
periods

Repayment

Guarantor

Number of instalments

Start of repayment

A

B

C

D

9,4

4,7

4,7

4,7

The Nordic
Investment Bank

Euribor + 0,18 %
p.a.

6 months

8 semi-annual
payments

September 2011

Government of
Iceland

The Nordic
Investment Bank

Euribor + 0,80 %
p.a.

6 months

5 semi-annual
payments

September 2009

Landssími Íslands hf.
(Síminn)

Íslandsbanki hf.

Føroya banki

Euribor + 1,00 %
p.a.

3 months

10 quarterly
payments

September 2009

Telefonverkið P/F

11,0

Íslandsbanki hf.

Euribor + 1,50 %
p.a.

1 month

48 monthly
payments

September 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.

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 charged with an annual premium of 0,5 %
(established by the Icelandic National Debt Management) which was paid upfront when the loan
i.e.
agreement and the State guarantee were issued. The upfront payment amounted to EUR 438 839,
4,7 % of the loan amount. In addition, a guarantee fee of ISK 120 000 was charged.

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 loans of EUR 34,5 million and the guarantee of collection for the bridge
loan ceased to exist the same day. Farice hf. paid a 0,50 % guarantee fee and a guarantee charge of ISK
120 000 for that guarantee.

(b) The Icelandic Government’s increase in share capital

At the beginning of January 2003, the state participation in Farice hf. increased from an initial share of
27,33 % to 46,5 %. Following the explanation given by the Icelandic authorities in their reply of June 2004,

‘[a]s 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 327 000
to more than EUR 14 million. Details on the share capital contribution of the different shareholders can be
seen in the table below (1):

(1) See letter of the Icelandic authorities dated 8 June 2004, page 7.

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Share capital of Farice hf. (amounts in thousands)

Preparation phase

Jan-03

Jun-03

ISK

EUR (1)

Share

ISK

EUR

Share

ISK

EUR

Share

Eignarhaldsfélagið
Farice ehf.

947 944

11 242

79,90 %

947 944

11 242

79,90 %

Government of Iceland

8 200

90

27,33 %

552 067

6 547

46,53 %

491 737

5 831

41,45 %

Síminn

14 200

155

47,33 %

395 477

4 690

33,33 %

352 259

4 177

29,69 %

Og Vodafone

Lína.Net

Fjarski ehf.

RH-net

400

400

400

400

4

4

4

4

1,33 %

1,33 %

1,33 %

1,33 %

400

400

400

400

5

5

5

5

0,03 %

103 949

1 232

8,76 %

0,03 %

0,03 %

0,03 %

400

400

400

5

5

5

0,03 %

0,03 %

0,03 %

Telefonverkið

5 200

57

17,33 %

236 486

2 804

19,93 %

236 486

2 804

19,93 %

Kall

SPF spf.

400

400

4

4

1,33 %

1,33 %

400

400

5

5

0,03 %

0,03 %

400

400

5

5

0,03 %

0,03 %

Total

30 000

327

100,00 %

1 186 430

14 070

100,00 %

1 186 430

14 070

100,00 %

(1) As the Icelandic authorities did not use the same conversion rate throughout the table, the Authority has modified the table submitted by the Icelandic authorities, as far
as the euro figures are concerned. It calculated the euro figures in the table according to its conversion rates published on its webpage http://www.eftasurv.int/
fieldsofwork/fieldstateaid/dbaFile791.html. For the preparation phase it used the 2002 conversion rate of 91,58. For the 2003 figures, it used the 2003 conversion rate
of 84,32.

3. OPENING OF THE FORMAL INVESTIGATION PROCEDURE

investi­
In its Decision No 125/05/COL to open the formal
the Authority came to the preliminary
gation procedure,
conclusion that
the State guarantee and the share capital
increase by the Icelandic State in Farice hf. constituted State
aid within the meaning of Article 61(1) of the EEA Agreement.

no State aid involved in the Farice project. According to the
Icelandic authorities, the loan guarantee and the increase of the
Government’s share capital are in line with the State aid
provisions. Furthermore,
the Farice project constitutes infra­
structure within the meaning of the State aid rules. However,
as stated in a previous letter dated 21 January 2005,
the
the opinion that any State aid
Icelandic authorities are of
would be compatible with Article 61(3)(b) and (c) of the EEA
Agreement.

The Authority had doubts whether the Icelandic State’s support
measures could be declared compatible with the functioning of
the EEA Agreement. In its Decision to open the formal inves­
tigation procedure the Authority raised doubts as to whether
the aid measures — in order to be compatible with the rules of
the EEA Agreement — were proportionate to their objectives
and did not distort competition to an extent contrary to the
common interest. These doubts concerned in particular the
question whether there would be non-discriminatory access to
the network. Further, as the original idea was to channel also
CANTAT-3 capacity via the E-Farice hf., there were concerns
that
the competition in connectivity to Iceland would be
eliminated, as only one supplier would remain in the market.

The Icelandic authorities justify the necessity of the measures in
question based on the consideration that telecom connectivity
and broadband access are a necessary step for the modernis­
ation of the EU society and economy and are a crucial aspect of
the Lisbon agenda as well as a prerequisite for the development
of the e-Europe Action Plan.

4. COMMENTS BY THE ICELANDIC AUTHORITIES

In their comments to Decision No 125/05/COL dated 28 June
2005, the Icelandic authorities restate their opinion that there is

Given its geographic location, Iceland is particularly dependent
on having access to economic and reliable telecom connectivity.
The connectivity currently in place is neither satisfactory nor
reliable or acceptable for the telecom-dependent Icelandic and
Faroese economies due to the technical limitations of CANTAT-
3.

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these circumstances,

the State
Under
resulted from the need to make the project viable. Without
the state participation the project would either have been
delayed or not undertaken at all.

the participation of

The Icelandic authorities are of the opinion that the advantages
in terms of guaranteeing a reliable provision of telecom services
in Iceland outweighs the disadvantages of a certain distortion of
competition for other competitors.

Prior to the establishment of Farice, introductory meetings were
held with Icelandic operators whereby only three of the ‘smaller’
operators agreed to buy shares in the company. In the opinion
of the Icelandic authorities, considerable effort was put into the
search for founding parties, setting no lower limit on share
capital contributions. Therefore, the Icelandic authorities argue
that
there was widespread participation given the specific
circumstances of the project.

The Icelandic authorities underline that Section 7 of the Share­
holders Agreement contains a pre-emptive right of the founding
companies of Farice hf. This right is equivalent to Article 34 of
the Icelandic Act No 2/1995 on Public Limited Companies,
according to which shareholders are entitled to subscribe to
new shares in direct proportion to their holdings. This right
is transferable and, furthermore, each shareholder can always
decide not to use this pre-emptive right. Furthermore, Section
7(2) of the Shareholders Agreement, provides that the share­
holders will endeavour to ensure that new parties can parti­
cipate in the increase of capital, notwithstanding the pre-
emptive rights.

The Shareholders Agreement provides for a non-discriminatory,
transparent pricing on market terms. The pricing policy of the
company shall be based on the principles of cost orientation,
transparency and non-discrimination. The Icelandic authorities
compare the Farice project with the situation addressed in
Commission Decision N 307/2004, concerning a broadband
infrastructure project in the United Kingdom to provide mass
market broadband services to businesses and citizens in remote
and rural Scotland. According to their information, the prices
for capacity on the Farice system are probably the highest ones
for similar services across the North Atlantic. This is one of the
reasons why the volume sold in 2005 corresponds to less than
5 % of the currently installed capacity on Farice.

Concerning the question of open access, the Icelandic auth­
orities stress that access to the infrastructure is open, trans­
parent and non-discriminatory.

Finally, the Icelandic authorities consider that if it were to be
established that State aid was involved, the total amount of aid
is limited. In particular regarding the loan guarantee, such a
limited amount
to the
common interest with regard to Article 61(3)(c) of the EEA

considered contrary

cannot be

the

construction and operation of
this point,

Agreement. As to the Icelandic State’s share increase,
the
‘the initial purpose for the
Icelandic authorities argued that
establishment of Farice hf. in September 2002 was solely the
the
preparation for
the
submarine communication cable system. At
financial need of
the whole project had not been finally
decided nor had the final shareholding […]. No company
would be in the position to undertake the actual construction
and operation of the cable […]. The first share increase in
January 2003 was therefore not a normal “share increase” of
a company but in fact similar to the establishment of a new
company with a new purpose.’ The fact that private operators
have been holding the majority of the shares at all stages and
contributing substantially to the company at the same time as
the Icelandic State, shows that any eventual State aid would be
very limited.

Regarding the competition concerns
(see Section II.3.2 of
Decision No 125/05/COL), the Icelandic authorities state that
presently neither Farice hf. nor E-Farice ehf. have any plans to
the
purchase or
led to any
discussions with Teleglobe at
agreements.
It has also been shown that due to the high
prices of Farice, customers have increasingly used CANTAT-3
capacity, which is able to compete with Farice hf.

lease more CANTAT-3 capacity and that

the time never

II. APPRECIATION

1. THE PRESENCE OF STATE AID WITHIN THE MEANING OF
ARTICLE 61(1) EEA AGREEMENT

Article 61(1) of the EEA Agreement reads as follows:

‘Save as otherwise provided in this Agreement, any aid granted
by EC Member States, EFTA States or through state resources in
any form whatsoever which distorts or threatens to distort
the
competition
production of certain goods shall, in so far as it affects trade
between Contracting Parties, be incompatible with the func­
tioning of this Agreement.’

undertakings

favouring

certain

by

or

1.1. 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.

the Guidelines),

in the provisions of Chapter 17.4(2) of

However,
the
Authority’s State Aid Guidelines on State Guarantees (here­
inafter:
laid down a
situation in which an individual State guarantee does not
constitute
EEA
Agreement. To this end, the State guarantee must fulfil all the
following conditions:

aid under Article 61(1) of

the Authority has

State

the

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(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;

(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;

loan amounts with different borrowing conditions,
different
different lenders and different guarantees. The Icelandic auth­
orities argue that there is only one loan at stake, at EUR 34,5
million and that for that reason the State guarantee relating to
the A Term loan does not cover more than 80 % of the loan.
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 give up its share of the
security (2) — in case of a failure of Farice hf. — in order to
cover any of the other loans. The different loans do not only
they also have different
carry different
rates but
repayment periods, different number of
and
different guarantors.

instalments

interest

(d)

the market price for the guarantee is paid (which reflects,
the
amongst other things,
guarantee,
the
borrower’s financial position, the sector of activity and the
economic
prospects,
conditions).

the amount and duration of
the borrower,

rates of default,

and other

given by

security

the

the

The Authority will, therefore, firstly assess whether the State
guarantee in favour of Farice hf. for the A Term Loan fulfils
the four conditions set out
in the Guidelines which would
exclude that State aid is involved. Only in the case of a
negative finding in that regard will the Authority assess the
individual conditions of Article 61(1) EEA Agreement.

1.1.1. Conditions, excluding the existence of aid — Chapter

17.4(2) of the State Aid Guidelines

According to the information provided by the Icelandic auth­
orities,
the project could not gain momentum as a purely
commercial business case and required the involvement of the
State. Although Farice hf. was not
technically in financial
it could only secure a EUR 11
difficulty (first condition),
million loan on market conditions (D loan). The fact that the
banks did not only require a guarantee from the State for the A
Term Loan but also from the two former state telecommuni­
cation monopolists (Síminn for the B Term Loan and Tele­
fonverkið P/F for the C Term Loan), which were still owned
by the respective States, shows that Farice was not
in the
position to obtain a loan on market conditions without any
intervention by the State. The second condition is therefore
not fulfilled.

As to the third condition, the Authority took the preliminary
view in the decision to open the formal investigation that the
State guarantee covers 100 % of the guaranteed A Term Loan.
four (or five (1))
The overall

loan package is made up of

(1) As the B Term Loan is provided by two different lenders.

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 establish the loan basis to which the 80 % rule applies —
that other loans are granted by Íslandsbanki and Føroya Banki.
The Nordic Investment Bank has not assumed any responsibility
for these loans.

For these reasons, the Authority considers that each part of the
overall loan amount constitutes an independent loan as such.
The combination of the loans in one joint document does not
the
appear to be of significant relevance. For this reason,
Authority considers that
the State covers
100 % of
the guaranteed A Term Loan for a maximum
amount of EUR 9,4 million. Therefore, the third condition is
not fulfilled.

the guarantee of

Regarding the fourth condition, the Authority notes that the
Icelandic State Guarantee Fund charged a guarantee premium
of 0,5 % p.a. in relation to the A Term Loan. The premium was
paid upfront at an amount of EUR 438 839.
In addition a
guarantee of ISK 120 000 was charged.

Only assuming that
the State Guarantee Fund took into
account, in the assessment of the premium, the concrete charac­
teristics of the guaranteed loan, in particular the conditions for
repayment (3) 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.
the guarantee
However, despite being invited to prove that
premium reflects the market
the Icelandic authorities
have not substantiated this point, but mainly limited themselves
to repeat the relevant provisions of the State Guarantee Fund

rate,

(2) According to the Security Document of the loan agreement a first
ranking security into land and assets is registered for the amount of
EUR 34,5 million.
(3) The provisions of

foresee the possibility of
prepaying the whole or part of the loan, except for the A term
Loan, without any prepayment fee.

the loan agreement

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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 such charges to be fixed by the National Debt
Management Agency (from 0,5 to 4 % (1)), which has not been
reasoned by the Icelandic authorities despite the comment of
the Authority in the Decision to open the formal investigation
procedure (2).

Further indication of the appropriate market rate can be derived
from Chapter 17.3(2) of the Guidelines which identifies the
amount of aid, i.e. the cash grant equivalent, for an individual
guarantee, as the difference 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 received 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
the State
premium does not
guarantee would still benefit the recipient and thus distort the
market. In such circumstances the advantage resulting from the
guarantee has not been removed by the premium and would
have to be classified as aid (3).

fully remove this advantage,

is the only one not backed up by the State or a state-owned
company. The difference between the interest rate for these two
loans
is 1,32 percentage points. Deducting a guarantee
premium of 0,50 %, the difference amounts to 0,82 percentage
points (5). That would result in an aid amount of some EUR
720 000 (6). However, it should be taken into account that the
D Term Loan has a shorter repayment period (maturity) than
the A Term Loan. Whereas the A Term Loan will only be paid
back in 2015,
i.e. 11 years after the conclusion of the loan
agreement, the D Term Loan will be paid back in 2009 (see
table in I.2.2(a) of this Decision). If the D Term Loan had the
same long maturity as the A Term Loan (i.e. until 2015), there
is reason to believe that Íslandsbanki hf. would have requested
an interest rate, higher than Euribor + 1,50 %. Using Eurobond
yield rate curves for 2004 (7) the difference between a bond
maturity of five years and of 11 years shows a difference in
the yield rate of some 0,8 percentage points. In order not to
understate the advantage of the guarantee and the respective aid
intensity, this difference must be taken into account, which
would for
rate of
Euribor + 2,3 % (1,5 % as the original rate plus the additional
thereby increasing the aid intensity to 1,62 % (8) or
0,8 %),
around EUR 1,4 million (9). This figure should be taken rather
as an illustration than as an exact calculation of what the aid
amounts to. It cannot be taken for granted that a commercial
lender for a non-guaranteed loan would have charged 2,12
percentage points (10) more than the rate for the A Term
Loan, even if
the maturity were the same. A required rate
would depend on the lender’s risk assessment, which not neces­
sarily leads to the mark-up as calculated above.

the D Term Loan lead to an interest

On the basis of the information available to it (the Authority
has no information on credit
the
Authority will try to establish an approximation of the value
of
respective aid intensity by a
comparison of the A Term Loan with the D Term Loan.

the guarantee and the

for Farice hf.),

ratings

In its Decision to open the formal investigation procedure, the
Authority expressed doubts as to whether the interest rate of
the A Term Loan should be compared with the B or D Term
Loans. The Authority considers that the interest rate of the A
Term Loan could be compared with the D Term Loan (4), which

(1) See the letter of the Icelandic authorities dated 21 January 2005,

page 9.

(2) See page 11 of the Authority’s Decision No 125/05/COL.
(3) The Icelandic authorities do not consider this 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 second condition (see
above) nor under the fourth condition.

(4) According to Clause 7.4 of the loan agreement, only the margin for
the A Term Loan can be modified after signature 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 any
possible 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.

Thus, three out of the four cumulative conditions laid down in
the Guidelines for assessing whether or not an individual State
guarantee constitutes State aid under Article 61(1) of the EEA
Agreement are not fulfilled. Although the borrower, Farice hf.,
was technically not in financial difficulty,
it was not able to
obtain a loan from the financial markets on market conditions
without any intervention by the State but needed the State
guarantee
the outstanding A Term Loan.
Furthermore, Farice hf. did not pay a market price for the
guarantee, which would reflect the amount and duration of
the guarantee and the security given by the borrower, as well
as, in particular, the sector of activity and the prospects.

for 100 % of

For these reasons, the Authority cannot conclude that the State
guarantee in favour of Farice hf. for the A Term Loan excludes
the involvement of State aid.

(5) Euribor + 1,50 % p.a.–(Euribor+0,18 % p.a.)–0,50 % = 0,82 %.
(6) Based on the following calculation: EUR 438 839/0,5 × 0,82 =

EUR 719 695.

(7) http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/EYC/EN/eyc-

EN.htm#historical

(8) Euribor + 2,30 % p.a.–(Euribor+0,18 % p.a.)–0,50 % = 1,62 %.
(9) EUR 438 839/0,5 × 1,62= EUR 1 421 838.
(10) 2,30 – 0,18 (the interest rate of the A Term Loan).

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1.1.2. The conditions of Article 61(1) of the EEA Agreement

In order for a measure to be considered State aid within the
meaning of Article 61(1) of the EEA Agreement, it must fulfil
the aid constitutes a
the following cumulative conditions:
is
selective
granted through state
to
distort competition and affects trade between the Contracting
Parties to the EEA Agreement.

certain undertakings,
threatens

resources, distorts or

in favour of

advantage

The measure constitutes a selective advantage in favour of
an undertaking

A measure which grants an advantage to certain specific bene­
ficiaries and which is not a general measure constitutes aid.

The Icelandic authorities have argued 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
therefore constitutes a ‘general’ and not a selective
favour
measure. As stated in the European Commission Communi­
‘Reinforcing quality service in sea
cation COM(2001) 35 final,
ports: a key for European transport’ (1), the criterion of selec­
tivity is an important benchmark for deciding whether a
concrete financing measure constitutes State aid.

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 (2).

As it pointed out in the decision to open the formal investi­
gation procedure, 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 telecommuni­
cation operators (3). Moreover,
regarding non-discriminatory

(1) Communication of 13.2.2001, COM(2001) 35 final.
(2) Commission Decision N 527/02 — Greece Financial support of a
private company for the design, construction, testing and commis­
sioning of the aviation fuel pipelines for supply of the new Athens
International Airport.

(3) 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 argument by the Icelandic
authorities that Directive 2002/20/EC only requires a general auth­
orisation (and not a tender) is valid, but not relevant for State aid
purposes. Under the State aid provisions, the carrying out of a
tender is one of the elements to assess whether a measure can be
classified as infrastructure.

access, while the participation in the company according to the
shareholders’ agreement is not restricted, the founding share­
holders keep certain pre-emptive rights, which seems to place
them in a better position than new shareholders.

Regardless of this, in line with Commission practice, a measure
does not constitute a general measure, if the body managing the
infrastructure is pursuing an economic activity, as this may
provide a potential advantage to the beneficiary (4) 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.
the European Court of First
According to the case law of
infrastructure constitutes an
the management of
Instance,
economic activity within the meaning of Article 61(1) of the
EEA Agreement (5). Farice hf.
is able to profit from an infra­
structure 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.

It was

In addition, 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
these business operators who took the
end-users.
initiative to which the State responded. The type of service is
the
therefore targeted at commercial operators and not at
general public. The Authority therefore considers that
the
project should be looked at as being a dedicated facility for
undertakings, which is within the scope of State aid control,
and not as a general infrastructure (6).

In order to determine whether a state measure constitutes aid, it
is necessary to establish whether the recipient undertaking
receives an economic advantage which it would not have
obtained under normal market conditions.

the aviation fuel pipelines for supply of

(4) See Commission Decision N 527/02 — Greece — Financial support
testing and
of a private company for the design, construction,
commissioning of
the
new Athens International Airport. 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 bene­
fiting the operator of the ski lift and therefore not constituting an
infrastructure measure. See Commission Decision C 67-69/2003,
paragraph 48.

(5) See Case T-128/98 Aéroports de Paris v European Commission [2000]

ECR II-3929.

(6) See Commission Decision N 213/2003 — Project Atlas, broadband

infrastructure for business parks.

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As stated in Chapter 17.2.1, paragraph 1, of the Guidelines, a
State guarantee enables the borrower to obtain better financial
terms for a loan than those normally available on the financial
markets. Typically, with the benefit of the State guarantee, the
borrower would not, without a State guarantee, find a financial
institution prepared to lend on any terms.

As stated above (in Section II.1.1.1 of this Decision), the fact
that the banks did not only require a guarantee from the State
for the A Term Loan but also from the two former state tele­
communication monopolists (Síminn for the B Term Loan and
Telefonverkið P/F for the C Term Loan), which were still owned
by the respective States, shows that Farice was not
in the
position to obtain a loan on market conditions without any
intervention by the State.

this Decision),

(in Section II.1.1.1 of

Furthermore, the carrying of a risk by the State should normally
be remunerated by an appropriate premium. As it has been
shown above
the
premium charged to Farice hf. is on the very low end of the
spectrum and might not represent an adequate remuneration.
The Icelandic authorities have not provided any information in
their comments to the concerns on that point raised in the
Decision to open the formal
investigation procedure, on
which basis the Authority could assess that the premium paid
was adequate. This has to be seen in particular with regard to
the fact that the premium did not fully removed the advantage
which Farice hf. obtained from gaining a lower interest rate for
the A Term Loan from the banks. As can be seen from Chapter
17.2.1, paragraph 2 of the Guidelines, where the State foregoes
an adequate premium, there is a benefit for the undertaking.

Thus, the Authority considers that Farice hf. has received an
economic advantage which it would not have obtained under
normal market conditions.

State resources

In order to be considered State aid within the meaning of
Article 61(1) of the EEA Agreement, the economic advantage
must be granted by the State or through state resources. The
Icelandic State provided a guarantee for a loan of EUR 9,4
million in favour of Farice,
i.e. the State guarantee involves
state resources.

Furthermore, as stated in Chapter 17.2.1, paragraph 2, of the
Guidelines, where the State foregoes an adequate premium, this
constitutes a drain on state resources. As it has been shown
above, the premium charged to Farice hf. is on the very low end
of the spectrum and might not represent an adequate remuner­
ation,
rate
obtained. Since the Icelandic State could have required a

in particular with regard to the lower

interest

higher premium to be paid, and consequently has forgone
higher revenues, state resources are involved.

The State also did not act as a private market investor, which
would exclude the application of Article 61(1) of
the EEA
Agreement. The discussion of the above two criteria shows
that the project did not gain any momentum on commercial
grounds. The State’s participation in the project,
inter alia by
guaranteeing the A Term Loan, became necessary in a situation
where private market
they had
granted the guarantee — asked for a higher premium. This
shows that the Icelandic State, when assuming the guarantee,
did not act according to the private market investor principle.

investors would have — if

Distortion of competition and effect on trade between the
Contracting Parties

the EEA Agreement

for Article 61(1) of
to be
In order
the measure must distort competition and affect
applicable,
trade between the Contracting Parties. Undertakings benefiting
from an economic advantage granted by the State which
reduces their normal burden of costs, are placed in a better
competitive position than those who cannot
enjoy this
advantage.

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
terms, as for example other
investment solely on market
Internet connectivity (such as the
providers of cables
CANTAT-3 network). The consortium which operates
the
inter alia, the Icelandic telecom
CANTAT-3 network includes,
and Deutsche
operator
Landssími
Telekom. CANTAT-3 has
in Canada,
the United Kingdom
Iceland,
and Germany.

the Faeroe Islands, Denmark,

Íslands hf., Teleglobe

connection points

for

Furthermore,
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.

the measure distorts competition and affects

Hence,
between the Contracting Parties.

trade

Conclusion

For the abovementioned reasons, the Authority concludes that
the State guarantee granted in favour of Farice hf. for the A
Term Loan constitutes State aid within the meaning of
Article 61(1) of the EEA Agreement.

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1.2. THE INCREASE IN THE PARTICIPATION OF THE STATE AS

SHAREHOLDER OF FARICE HF.

the establishment of

Between the time of
the company in
September 2002 and the time of
the
the state participation in Farice hf.
beginning of 2004,
increased from an initial share of 27,33 % 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 (1).

the notification at

increase,
the State Aid Guidelines consider the share capital
regardless of at what point in time it takes place, as a subca­
tegory 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 capital parti­
cipation of the Icelandic State subject to an analysis under the
State aid provisions. For that assessment it is therefore only
the
capital
relevant whether
rationale of a private market investor.

increase

reflects

share

the

it has to be established whether the
For State aid purposes,
increase at Farice hf. undertaken by the State is in
capital
conformity with the market
economy 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.

The Authority does not deny that in real terms the private
operators’ increased holdings occurred at the same time as the
in the Authority’s
capital
opinion, the share increase of the private operators was not
proportionate to the share capital increase by the State.

increase by the State. However,

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
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.

the capital

As can be seen from the table above (see Section I.2.2(b) of this
Decision) Farice hf.’s capital rose from EUR 327 000 to EUR
14 070 000 in January 2003. The share of the Icelandic State
grew from 27,33 % (EUR 90 000) to 46,53 % (EUR 6 547 000),
i.e. by almost 20 percentage points. While it is correctly stated
by the Icelandic authorities that the share of Síminn grew from
EUR 155 000 to EUR 4 690 000, in relative terms the share of
Síminn fell from 47,33 % to 33,33 % (14 percentage points).
Except for Telefonverkið, the shares of all other participants also
fell (from 1,33 % to 0,33 %), which shows that in relative terms
the commercial operators disengaged from the project.

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
the case where the injection of capital
is, amongst others,
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 disen­
gagement of private
to the
companies’ poor profit outlook.

shareholders

largely due

is

The Icelandic authorities argue that the Icelandic State’s 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
Icelandic authorities state that Farice hf., with the share capital
of ISK 30 million was not, in September 2002, in the position
to take on the project of construction or operation of a
submarine communication cable system.
Instead of creating
— as discussed — a new company, the first share increase in
January 2003 took place, which was in the view of the Icelandic
‘share increase’ of a
authorities,
company, but in fact similar to the establishment of a new
company with a new purpose. The Authority points out that

therefore not a normal

This is likely to result from the poor outlook of the company’s
profit. In their letter of September 2004, the Icelandic auth­
orities 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 priva­
tisation). In order to facilitate the necessary upgrade in capacity,
time frame available until
particularly in view of
capacity would be outstripped by the demand, the Government
stepped in.’

the short

state

Icelandic

authorities

the market’s
The
further
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 (2).

that

(1) See Section I.2.2(b) of this Decision.

(2) See letter by the Icelandic authorities dated 25 June 2004, page 3.

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5.2.2009

lack of engagement from
It seems from this that the initial
private investors was the reason for the subscription of the
necessary
in early
2003 (1), which raised the state participation in Farice hf.

the Government

increase by

capital

increase by the Icelandic State constitute State aid within the
meaning of Article 61(1) of the EEA Agreement.

The increase in the Icelandic 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, assessed above in this Decision.
According to Chapter 19.6(d) of
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
I of Protocol 3 to the
in Part
to Article 1(3)
Surveillance and Court Agreement.

the Guidelines,

2. PROCEDURAL REQUIREMENTS

in Part

I of Protocol 3 to the
Pursuant
to Article 1(3)
‘the EFTA Surveillance
Surveillance and Court Agreement,
Authority shall be informed, in sufficient time to enable it to
its comments, of any plans to grant or alter aid.’
submit
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.’

The increase in the share capital
private investor was increasing its share capital
proportion,
company, Farice hf. and a drain on state resources.

in a situation in which no
in the same
thus presented an advantage to an individual

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 (e.g. the CANTAT 3
in a situation in which private operators are not
network)
consortium which
funds. The
willing to raise additional
operates
the
inter alia,
Icelandic telecom operator Landssími
Íslands hf., Teleglobe
and Deutsche Telekom. CANTAT-3 has connection points in
Canada,
the United
Iceland,
Kingdom and Germany.

the CANTAT-3 network includes,

the Faeroe Islands, Denmark,

Farice hf. was established in 2002 and the construction work
started already in June 2003. The cable was officially opened in
February 2004 (2). The share capital
increase took place in
January 2003 and the guarantee 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. Thus, the Icelandic authorities
put the measures into effect before the Authority had taken a
final decision on it.

The Authority therefore notes that the Icelandic authorities did
not respect the stand-still obligation laid down in Article 3 in
Part II of Protocol 3 to the Surveillance and Court Agreement.

Furthermore, the share increase concerns a project which is
carried out by multinational business operators and constitutes
an activity which is subject to trade between the Contracting
Parties.

3. COMPATIBILITY

In the Authority’s view, the aid measures do not comply with
any of the exemptions provided for under Article 59(2) (3) and
Article 61(2) or (3)(a) and (d) of the EEA Agreement.

the measure distorts competition and affects

Hence,
between the Contracting Parties.

trade

1.3. CONCLUSION

For the abovementioned reasons, the Authority concludes that
the State guarantee for the A Term Loan and the capital share

(1) The Authority is aware of the reference of the Icelandic authorities
to the speech of the chairman of Farice hf. board on 24 January
2004. However, this speech only states that there is a ‘modestly
profitable business
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.

case’ and that

investigation
As stated in the decision to open the formal
in the Authority’s view, the state support cannot
procedure,
be justified under Article 61(3)(b) of
the EEA Agreement.
Admittedly, the existence of reliable international connectivity
could be considered of general
interest under certain circum­
stances. While the project is trans-national, that does not suffice
for accepting the project
the exemption of
Article 61(3)(b) of the EEA Agreement. The aid in question
presents itself in the form of sector aid, benefiting an individual
company (Farice hf.) and brought about as a result of a private
initiative of a group of business operators rather than achieving
wider positive results for the European economy or creating

to fall under

(2) Press release of 3 February 2004.
(3) The Icelandic authorities have not provided information which
enables the Authority to make an assessment under that provision.

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Official Journal of the European Union

L 36/81

important spill-overs for the general society. The project does
not profit the European Economic Area as a whole (1) and is
also outside any framework of any Community action in this
field (2).

which is by its nature capable of positively affecting the produc­
tivity and growth of a large number of sectors and activities.

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 activities or of certain economic areas, where
such aid does not adversely affect trading conditions to an
extent contrary to the common interest’.

The Authority considers that the compatibility assessment is to
be based directly on Article 61(3)(c) of the EEA Agreement. To
be considered compatible under this provision, the State aid
measure must be necessary and proportionate to the objective
it pursues.

3.1. THE NECESSITY OF THE AID MEASURES

in the form of

this Decision, alternatives

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
the existing
CANTAT-3 cable or satellites were no durable options, either
because of their technical limitations or dependencies on other
consortium shareholders (CANTAT-3 (3)) or their rising costs
(satellites). The new submarine cable, which is to become the
primary transmission connection to Iceland, has greater capa­
is more reliable and — together with the backup by
cities,
CANTAT-3 — is able to secure the provision of telecommuni­
cation services to Iceland. The availability of broadband (4) has
been acknowledged in Commission policy and State aid
decisions (5) as a legitimate objective and type of
service

(1) See e.g. State aid N 576/98 United Kingdom concerning the Channel
Tunnel Rail Link, where the high speed rail link was a link of EU
wide importance, rather than being relevant
for one or a few
Member States.
this

e.g. Commission Decision 96/369/EC
concerning fiscal aid given to German airlines in the form of a
depreciation facility (OJ L 146, 20.6.1996, p. 42).

criterion,

(2) For

see

(3) As stated in the summary report submitted by the Icelandic auth­
orities in the notification dated 27 February 2004, the consortium
member Teleglobe, in particular, was faced with business difficulties.
(4) Data transmission in which a single medium can carry several
channels at once. The term is also used to compare frequency
frequencies.
narrowband
3 MHz
bandwidth
Broadband can transmit more data at a higher speed.

greater

than

(5) See

e-Europe 2004 Action Plan, Communication from the
Commission, An information society for all, COM(2002) 263 final
of 28 May 2002, see Commission Decision N 213/2003 Project
Atlas — broadband
and
N 307/2004 Broadband in Scotland — remote and rural areas.

for business parks

infrastructure

As can be seen from its history (in particular the feasibility
the Farice project was not able to
study of March 2002),
the grant of a
emerge as a purely private initiative. Both,
State guarantee and the share capital
increase resulted from
the need of a greater state participation to make the project
economically viable. Without state participation,
the project
would either have been delayed or not undertaken at all. For
these reasons, the Authority considers that the state support was
necessary within the meaning of 61(3)(c) of the EEA Agreement.

3.2. THE PROPORTIONALITY OF THE AID MEASURES

for

the

to be

aid measures

compatible with
In order
Article 61(3)(c) of the EEA Agreement, it must also be propor­
tionate 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
to Iceland must be weighed
telecommunication services
against the disadvantages of the distortion of competition in
comparison to competitors, which do not have access to
public funding when realising similar projects.

in particular as

Neither the construction nor the management of the cable were
given to Farice hf. after an open tender. In the opinion of the
the widespread information on this project as
Authority,
claimed by the Icelandic authorities cannot replace a formal
tender procedure,
this participation was
limited to Icelandic and Faeroe parties (6). The open tender
has been considered a positive, although not necessarily
mandatory, element for the approval of broadband projects in
Commission practice (7).
in
particular, stressed that the tendering out of the management
the cable to an independent asset manager secured the
of
neutrality of
than in a
the infrastructure manager better
situation in which the service provider has control over the
infrastructure, as is the case here.

In these decisions it has been,

for a non-discriminatory,

The Authority notes positively that the Shareholders Agreement
transparent pricing on
provides
market
the
schedule is published on Farice hf.’s website and includes the
formula used to calculate prices.

terms. The pricing policy seems

transparent,

Furthermore, the Shareholders Agreement is in principle open
investi­
to new entrants. In the Decision to open the formal
gation procedure the Authority raised some doubts on the
position of new entrants in relation to the founding parties.
This doubts were mainly founded in Section 7 of the Share­
holders Agreement which protects the founders’ position by

(6) 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.’

(7) Commission Decisions N 307/2004, N 199/2004 and N 213/2003.

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Official Journal of the European Union

5.2.2009

dispelled the

authorities have

giving them the possibility to maintain their equity position. In
their comments to the Authority’s Decision (1), however, the
the
Icelandic
Authority and stressed the distinction between access
to
ownership of the company and access to the telecommuni­
cation cable. As stated in the previous paragraph, the Share­
holders Agreement provides for a non-discriminatory and trans­
parent pricing on market terms and therefore grants adequate
access to the telecommunication cable.

doubts of

The tentatively calculated aid with regard to the State guarantee
(1,62 % (2) or some EUR 1,4 million) is rather limited, when
compared to the total investment costs of EUR 48,9 million, as
it amounts to 2,9 %. As to the Icelandic State’s share increase, in
June 2003 the State’s share capital has already decreased to
41 %, whereas the equity share of other private operators
such as Og Vodafone had increased. The Icelandic authorities
have pointed out that despite the openness of the current share­
holders to newcomers no company has showed interest in the
project (3). A calculation of the amount of State aid involved as
a result of the increase in the Icelandic State’s share capital is
not straightforward. However, even if
in the extreme one
considered the whole capital increase as State aid and even if
one considered the whole A Term Loan as State aid (4), the
overall amount of
the Icelandic State
the involvement of
would be some EUR 15,5 million. This is about 32 % of the
investment costs for the Farice project (5).

The European Court of Justice has established that a compati­
bility assessment under the State aid provisions should not
produce a result which is contrary to other treaty provisions.
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
In this
of Article 53 and/or 54 of
regard, the Authority inter alia noted in the decision to open
the formal
investigation procedure that although the existing
infrastructure CANTAT-3 still remains in place (7), there was
— among other issues — a concern that in the future, all

the EEA Agreement (6).

(1) See letter of the Icelandic authorities dated 28 June 2006, page 5.
(2) Euribor + 2,30 % p.a.–(Euribor+0,18 % p.a.)–0,50 % = 1,62 %.
(3) See letter of the Icelandic authorities dated 28 June 2006, page 5.
the Authority’s State Aid
(4) See point 17.3 of Chapter 17 of
Guidelines, which states that in certain situations the value of the
guarantee might be as high as the amount effectively covered by that
guarantee.

(5) Aid intensities of 35 % of total

investment costs have e.g. been
authorised by the European Commission in State aid N 188/2006
— Latvia, for a broadband project in rural areas.

(6) Cf. Case C-225/91 Matra SA v Commission [1993] ECR-3203,
paragraph 41, EFTA Court judgment in Case E-09/04 The Bankers’
and Securities’ Dealers Association of Iceland v EFTA Surveillance
Authority, not yet published, paragraph 82.

(7) On the co-existence of existing infrastructure, see Commission
is positively
Decision N 307/2004, paragraph 45, where
outlined that
this minimises the risk of unnecessary duplication
and limits the economic impact for operators that already have
infrastructure
also Commission Decision N
199/2004, paragraph 41, N 213/2003, paragraph 47.

in place.

See

it

CANTAT-3 connectivity to Iceland will be channelled through
E-Farice hf., which holds the majority of shares in Farice hf. (8).
Hence,
the Authority was concerned that competition in
connectivity to Iceland would be eliminated, as only one
supplier would remain on the market. These concerns have
now been dispelled.

The Farice project is pro-competitive in creating a new channel
for international connectivity where previously there has only
been the CANTAT-3 offer.

Moreover, as a result of Farice hf.’s prices, which are high in
comparison to international prices, buyers of wholesale capacity
in Iceland, other than Farice’s founders, have tended to use
CANTAT-3 capacity, which Teleglobe offers at lower prices.
This shows that Farice does not appear to be able to control
prices or supply in the market for international connectivity
from/to Iceland under
the present market conditions. The
Icelandic authorities estimate that currently Teleglobe is selling
capacity to Icelandic customers that amounts to about 50 % of
the volume channelled through Farice. It does not appear that
Farice hf.’s pricing policy undercuts CANTAT-3 prices and is
able to drive that competitor out of the market. Wholesale
customers that are not affiliated with Farice hf.’s founders are
able to bypass the Farice cable and have in fact done so.

The Icelandic authorities also reacted to the concerns voiced in
investigation procedure that
the decision to open the formal
Farice hf. originally had plans
joint purchase/lease of
for
increased bandwidth in CANTAT-3 in order to ring-connect
the two systems. Such comprehensive purchases of available
capacity would effectively have
a
competitor
stated that
to Farice. The Icelandic authorities
Farice hf. or E-Farice ehf. do not currently have any plans to
purchase or
and that
discussions held with Teleglobe (9) years ago never led to any
today is that both Farice and
agreement. The situation of
CANTAT-3 capacity is available to and from Iceland.
In
addition,
such as TDC and T-
Systems which provide capacity on CANTAT-3 to Iceland,
although on a smaller scale.

lease more CANTAT-3 capacity

there are other operators,

removed Teleglobe

as

Therefore, in the current situation, there are no grounds for the
Authority to be concerned about the competition aspects and
the corresponding competition proceedings have been closed.

(8) In 2003, E-Farice ehf. held 80 % of the shares in Farice hf., with the
20 % remaining shares held by Føroya Tele (19,93 %) and other
Faeroe parties (together 0,6 %).

(9) Teleglobe has survived the earlier Chapter 11 proceedings and is

currently a Nasdaq trading company.

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L 36/83

4. CONCLUSION

Article 2

the foregoing assessment,

On the basis of
the Authority
considers that the support in favour of Farice hf. is compatible
with the EEA Agreement. Notwithstanding this, the Authority
regrets that the measures were implemented before Iceland had
notified the Authority of the State guarantee and before the
Authority had reached a final decision on the State aid
assessment of the measures,

This Decision is addressed to the Republic of Iceland.

Article 3

Only the English version is authentic.

HAS ADOPTED THIS DECISION:

Done at Brussels, 19 July 2006.

Article 1

The support in favour of Farice hf. in form of a State guarantee
for a loan and a capital increase constitute State aid which is
compatible with the functioning of the EEA Agreement within
the meaning of Article 61(3)(c) of the EEA Agreement.

For the EFTA Surveillance Authority

Bjørn T. GRYDELAND
President

Kristján A. STEFÁNSSON
College Member