Invitation to submit comments pursuant to Article 1(2) in Part I of Protocol 3 to the Surveillance and Court Agreement on State aid with regard to the Icelandic Harbour Act
Date: 2008-04-17
Institutions: EFTA Surveillance Authority
Subjects: EFTA, Iceland, State aid, control of State aid, exchange of information, harbour installation

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Invitation to submit comments pursuant to Article 1(2) in Part I of Protocol 3 to the Surveillance
and Court Agreement on State aid with regard to the Icelandic Harbour Act

(2008/C 96/03)

By means of Decision No 658/07/COL of 12 December 2007, 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 Surveillance
Authority and a Court of Justice (Surveillance and Court Agreement). The Icelandic authorities have 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
Registry
Rue Belliard 35
B-1040 Brussels

The comments will be communicated to the Icelandic authorities. 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

By letter dated 7 May 2007 from the Icelandic Ministry of Finance, the Icelandic authorities notified,
pursuant to Article 1(3) of Part I of Protocol 3 to the Surveillance and Court Agreement, amendments to
the Icelandic Harbour Act, with a view to including damage compensation for ship lifts. They also notified
an envisaged application of that new provision in support of the repair of the Westman Islands Port ship lift
facility. That latter part of the notification was withdrawn by way of a letter from the Icelandic authorities
dated 11 December 2007.

The Confederation of Icelandic Employers (Samtök atvinnulífsins) filed a complaint with the Authority by way
of a letter dated 31 August 2007, claiming that the additional funding for the Harbour Improvement Fund
constitutes State aid. The complaint was forwarded to the Icelandic authorities for comment.

Following an exchange of correspondence with the Icelandic authorities, the Authority has decided to open
a formal investigation procedure with regard to the 2007 amendments to the Icelandic Harbour Act and
certain aspects of the 2003 Harbour Act, whose adoption was not notified to the Authority.

ASSESSMENT OF THE MEASURE

The 2007 amendments to the Harbour Act

The Icelandic Harbour Act is a general framework legislation containing inter alia provisions on the coordi-
nation of harbour affairs by central authorities, the definition of what constitutes a harbour, the management
and operation of harbours, State contributions to harbour constructions and the so-called Harbour Improve-
ment Fund.

By way of the present notification, the Icelandic authorities inform the Authority about Act No 28/2007
amending the 2003 Harbour Act. It follows from the amendment that ship lifts can now receive damage
compensation from the Harbour Improvement Fund under Article 26(3) subparagraph 3 of the Harbour
Act, which was previously limited to other harbour constructions. The provision only covers damage in
harbours owned by municipalities. Privately owned harbours or shipyards cannot receive damage compensa-
tion under the 2007 Harbour Act.

The Authority considers the aid to be granted through State resources channelled through the Harbour
Improvement Fund. The Harbour Improvement Fund is a public law body which is partly financed directly
from the State budget and which fulfils public tasks. The Authority considers the operation of a ship lift for
ship repairs as an economic activity. Hence the municipal owners act as undertakings within the meaning of

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Article 61(1) of the EEA Agreement. The measure is selective because it favours only undertakings in a
certain sector (harbours) and within that sector only certain harbours. The Authority considers ship lifts,
ship hoists and dry docks to be in international competition, and thus the aid distorts or threatens to distort
competition and affects trade between the Contracting Parties in the EEA.

As the Harbour Act entered into force in March 2007, i.e. before it was notified to the Authority, the stand-
still obligation in Article 1(2) in Part I of Protocol 3 to the Surveillance and Court Agreement has been brea-
ched and the measure to be regarded as unlawful aid within the meaning of Article 1(f) in Part II of
Protocol 3 to that Agreement. Any aid paid out under the provision under examination which is found to
be incompatible with EEA State aid provisions, will be subject to a recovery order by the Authority.

It is the preliminary view of the Authority that aid is not compatible with the functioning of the EEA
Agreement, since it does not qualify for a derogation under Article 61(2)(b) or (3) of the EEA Agreement.
The damage compensation clause is not limited to situations in which the damage results from natural
disasters or special occurrences and therefore cannot be justified under Article 61(2)(b) EEA Agreement.
Article 61(3)(c) in conjunction with the Shipbuilding Guidelines does not allow the granting of operating
aid, but only of investment aid, if it is linked to upgrading or modernising existing yards with the purpose
of improving productivity. This is not the case here, as the Icelandic authorities explicitly state that no
modernisation should be achieved with the given support. Damage compensation is, in any event, to be clas-
sified as operating aid.

The Authority also notes that damage compensation is only granted to publicly owned harbours. The
Authority does not currently see any justification for the apparent discrimination of privately owned
harbours.

The Authority consequently has doubts as to whether the 2007 amendments of the Harbour Act can be
regarded as compatible with the functioning of the EEA Agreement.

The 2003 Harbour Act

In 2003, a new Harbour Act changed the provisions for the State funding of harbour constructions. These
provisions provide for the possibility of payments by the Treasury for certain harbour constructions
(Article 24) as well as the possibility for the Harbour Improvement Fund to grant damage compensation in
respect of some of those (Article 26 of the Act).

The Authority considers that certain of the projects referred to in Article 24(2) might qualify — in line with
the European Commission's Communication on Quality Services in Sea Ports — as general infrastructure
measures and therefore not constitute State aid within the meaning of Article 61(1) of the EEA Agreement.
This concerns support for breakwater constructions, marking of approach channels, depth, protective instal-
lations and dredging. The Authority will however investigate further, whether this classification also applies
to the use of pilot vessels in harbours with difficult natural conditions and for the support for quay installa-
tions.

The support envisaged under the damage compensation clause contained in Article 26(3) subparagraph 3 of
the 2003 Harbour Act involves State aid as far as it concerns projects, which do not constitute general infra-
structure.

The Authority considers the 2003 Harbour Act, which was not notified to it, as unlawful aid within the
meaning of Article 1(f) in Part II of Protocol 3 to the Surveillance and Court Agreement. Any aid paid out
under that provision, which is not compatible with EEA State aid provisions, is subject to a recovery order
by the Authority.

The Authority will investigate, whether the aid measures can be justified by Article 61(3)(c) of the EEA
Agreement, either in conjunction with the Shipbuilding or Regional Aid Guidelines, or in direct application.
It should be noted that all of the above measures are only granted to publicly owned harbours. The
Authority does not see any justification for such a differentiation. Based on the above, the Authority is in
doubt about whether aid is compatible with the EEA State aid provisions.

CONCLUSION

In light of the foregoing considerations, the Authority decided to open the formal investigation procedure in
accordance with Article 1(2) of the EEA Agreement with regard to the 2007 amendments to the Harbour
Act and the 2003 amendments to the Harbour Act.

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EFTA SURVEILLANCE AUTHORITY DECISION

No 658/07/COL

of 12 December 2007

to initiate the procedure provided for in Article 1(2) of Part I of Protocol 3 to the Surveillance and
Court Agreement with regard to the Icelandic Harbour Act

(Iceland)

THE EFTA SURVEILLANCE AUTHORITY (1),

Having regard to the Agreement on the European Economic
Area (2), in particular 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 (3), in particular Article 24 thereof,

Having regard to Article 1(2) of Part I and Articles 4(4) and 6
of Part II of Protocol 3 to the Surveillance and Court Agree-
ment,

Having regard to the Authority's Guidelines (4) on the applica-
tion and interpretation of Articles 61 and 62 of the EEA Agree-
ment, in particular the Chapter on State aid to Shipbuilding and
the Chapter on National Regional Aid,

Having regard to the Authority's Decision of 14 July 2004 on
the implementing provisions referred to under Article 27 of
Part II of Protocol 3 to the Surveillance and Court Agreement,

Whereas:

I. FACTS

1. Procedure

the Icelandic authorities notified, pursuant

By letter dated 7 May 2007 from the Icelandic Ministry of
Finance, forwarded by the Icelandic Mission to the EU, received
and registered by the Authority on the same date (Event
to
No 420581),
Article 1(3) of Part I of Protocol 3 to the Surveillance and Court
Agreement, amendments to the Icelandic Harbour Act, with a
view to including damage compensation for ship lifts. They also
that new provision in
notified an envisaged application of
support of the repair of the Westman Islands Port ship lift
facility.

By letter dated 14 May 2007 (Event No 421158), the Authority
informed the Icelandic authorities that it considered the notifica-
tion to be incomplete as, in particular, the notification form had
not been submitted.

On 19 June 2007, the Icelandic Mission to the EU forwarded a
letter from the Icelandic Ministry of Finance, received and regis-
tered by the Authority on the same date (Event No 425880), by
which the Icelandic authorities submitted the notification form
and provided further information on the notified measures.

By letter dated 4 July 2007 (Event No 427442), the Authority
requested additional information, which the Icelandic authorities
provided on 10 August 2007 (Event No 433162).

The Confederation of Icelandic Employers (Samtök atvinnulífsins)
filed a complaint with the Authority by way of a letter dated
31 August 2007, claiming that the additional funding for the
Harbour Improvement Fund constitutes State aid which cannot
be justified under the EEA State aid provisions. The Association
refers, in particular, to the fact that aid under the Harbour Act is
only available to publicly owned, but not to privately owned,
harbours.

By letter dated 19 September 2007 (Event No 441678), the
Authority forwarded the above complaint
to the Icelandic
authorities for comment and requested further information,
which was provided by the Icelandic authorities in a letter from
the Icelandic Ministry of Finance dated 16 October 2007 (Event
No 447362). The case was discussed with the Icelandic authori-
ties during the package meeting between the Icelandic authori-
ties and the Authority of 29 October 2007.

By letter dated 11 December 2007 (Event No 456952), the
Icelandic authorities withdrew the notification relating to the
proposed application of the Harbour Act in support of the
repair of the Westman Islands Port ship lift facility.

2. Description of the proposed measures

In order to deal with the amendments to the Harbour Act as
notified in 2007, which provide, for the first time, for damage
compensation in favour of ship lifts, the Authority finds it
appropriate to set the Harbour Act in its historical context.

2.1. History of the Icelandic Harbour Act

The Icelandic Harbour Act is a general framework legislation
containing inter alia provisions on the coordination of harbour
affairs by central authorities, the definition of what constitutes a
the management and operation of harbours, State
harbour,
contributions
so-called
to harbour
Harbour Improvement Fund.

constructions and the

The 1984 Harbour Act

(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, published in OJ L 231, 3.9.1994, EEA
Supplement No 32, 3 September 1994. The Guidelines were last
amended on 31 May 2007. Hereinafter referred to as ‘the State Aid
Guidelines’.

The Harbour Act No 69/1984 contained a provision authorising
damage compensation for harbour facilities in Article 32(2).
That provision stipulated that a so-called Harbour Improvement
Fund was authorised to indemnify loss to harbour constructions
which had sustained damage caused by ‘acts of God or natural
catastrophes or force majeure, including loss which is not fully indem-
nified on account of provisions of Section IX of the Maritime Act on
limited liability of operators of vessels’.

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According to its Article 8,
the Act only covered municipal
harbours, so public aid in the form of damage compensation
under Article 32(2) was only given to harbours owned by muni-
cipalities.

In other words, the Harbour Act now applied to harbours other
than those owned by the municipalities and specifically envi-
saged the existence of privately owned harbours, although a
the latter would not be
distinction was maintained in that
considered as a ‘public operation’ under the Act.

The 1994 Harbour Act

In 1994, a new Harbour Act No 23/1994 was adopted, which
was subsequently amended by Act No 7/1996. Article 19 of the
1994 Harbour Act listed seven categories of harbour construc-
tion project which could receive State support (e.g. construc-
tions at wharfs, piers, berths, traffic lanes within the limits of
harbour constructions, etc.). That support would come directly
from the State Treasury. The State would pay up to 100 % for
the costs of primary research, up to 90 % of investment costs
for
the constructions of quays, dredging of harbours and
entrance, navigation signals and special outfits for ro-ro vessels
and ferries, and up to 60 % in relation to the remaining cate-
gories.

In addition, Article 28(2) of the 1994 Harbour Act contained
the same damage compensation for harbour constructions,
granted by the Harbour
Improvement Fund, as had been
included in the 1984 Act. As before, the 1994 Harbour Act
only covered municipal harbours, cf. Article 3 of the Act, and
therefore State support was still limited to harbours owned by
municipalities.

the 1994 Harbour Act, namely the
Some provisions of
provisions on State grants
the financing of harbour
for
constructions for ships (1), were the subject of a decision of the
EFTA Surveillance Authority dated 19 March 1997 (Decision
No 51/97/COL). In line with that Decision, the Icelandic autho-
rities had agreed not
to apply the provisions in question
without prior notification to and approval by the EFTA Surveil-
lance Authority.

The 2003 Harbour Act

In 2003, a new Harbour Act No 61/2003 was adopted. This
Harbour Act, which was not notified to the Authority, contained
changes in particular with regard to the permissible operating
forms of harbours and, hence, which harbours come within the
Act. Article 8 provided that:

‘A harbour may be operated as:

1. A harbour that is owned by a municipality without any special

board of directors.

2. A harbour owned by a municipality and governed by a special

board of directors.

3. A public limited liability company, irrespective of whether or
not it is owned by a public body, a private limited liability
company, a partnership or as a private party operating inde-
pendently. Harbours operated under this paragraph are not
regarded being a public operation.’

According to Article 24(1) of the Harbour Act, contributions
from the Treasury could be granted to projects relating to
harbour constructions carried out by harbours which are oper-
ated under subparagraph 1 or 2 of Article 8. In other words,
privately owned harbours could not receive any State support
under the Harbour Act. Public entities (including municipalities)
would also not be entitled to any support if they organised their
harbour as a limited liability company or any other form of
organisation listed in subparagraph 3 of Article 8.

Article 24(2) now contained only three (instead of the former
seven) categories of project for which direct aid can be given:

(a) For

the

improvement

reconstruction,

and repair of
breakwaters in harbours where difficult natural conditions
mean that there is little protection from ocean waves, for
dredging in harbour approaches where regular dredging is
needed (i.e. at least every five years), and for initial costs for
pilot vessels in places where conditions in and near the
harbour require such safety equipment. The level of State
funding is determined in the National Transport Plan and
may not exceed 75 %.

(b) Projects undertaken by small harbour funds within a region
defined pursuant to the regional aid map for Iceland (2),
with an income under ISK 20 million and where the value
of
the average catch over the past three years is under
ISK 600 million. The projects to be supported should be
limited to the marking of approach channels, depth, protec-
tive installations and quays. The level of State funding is
determined in the National Transport Plan and may not
exceed 90 %.

catch over

(c) Projects undertaken by a harbour fund within a region
defined pursuant to the regional aid map for Iceland, with
an income under ISK 40 million and where the value of the
average
is under
ISK 1 500 million and goods transportation through the
harbour is less than 50 000 tonnes per year. State contribu-
tions pursuant to this subparagraph may never exceed 60 %
for dredging and 40 % for quay installations on which work
is performed in 2007 or later.

the past

three

years

Article 26(3), subparagraph 3, of the Harbour Act contained a
damage compensation clause which stipulated that the Harbour
Improvement Fund is authorised to indemnify loss to harbour
constructions which qualify for support under subparagraphs (a)
or (b) of Article 24(2) or loss to dry harbour constructions,
including loss which will not be fully indemnified from the
Emergency Fund (Viðlagasjóði) (3) or due to the provisions of
Section IX of the Maritime Act on limited liability of operators
of vessels.

(2) EFTA Surveillance Authority Decision of 8 August 2001 on the map of

assisted areas and levels of aid in Iceland (Aid No 00-002).

(1) The investments concerned in particular docking facilities for ship

(3) A fund different from the Icelandic Harbour Improvement Fund and

repair contained in Article 24(6) of the 1994 Act.

responsible for covering damage from natural catastrophes.

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to

the

1994 Harbour Act,

Compared
provision
limits the number of aid beneficiaries by linking the support to
categories (a) and (b) in Article 24(2). On the other hand, while
still referring to the Emergency Fund, the text no longer refers
to compensation limited to damage caused by natural disasters
or acts of God.

the

According to information provided by the Icelandic authorities,
no State support has been paid out under this measure so far.
This would appear to be as a result of interim provision II of
the 2003 Harbour Act, as amended by Act No 11/2006, under
which State aid might still be provided, until the end of 2008,
in accordance with the rules in the 1994 Harbour Act.

The 2007 amendment Act

By the present notification, the Icelandic authorities inform the
Authority of Act No 28/2007, amending the 2003 Harbour
Act, and in particular Article 26(3), subparagraph 3 thereof.
According to that Article, as now amended, ship lifts can now
also receive damage compensation from the Harbour Improve-
ment Fund. The wording ‘eða tjón á upptökumannvirkjum’
is
added after the reference to Article 24. As explained by the
Icelandic authorities, ‘upptökumannvirki’ includes dry docks, ship
lifts and ship hoists.

According to information provided by the Icelandic authorities,
the ship lifts are to be used mainly for ship repair and conver-
sion works, not for the construction of ships.

There are currently 15 ship lifts spread around the country,
12 of which are owned by municipalities. The ship lift owner-
ship does not imply that the concrete repair works are also
carried out by the harbours. Normally, the repair works on the
ships are carried out by a company which pays the harbour for
the use of the ship lift.

2.3. National
support

legal basis for the measure/recipients of the

The national legal basis for the measure is Article 26(3), sub-
paragraph 3, of the Harbour Act, as amended by Article 7 of
Act No 28/2007, which entered into force on 29 March 2007.
That provision covers damage compensation for ship lifts, dry
docks and ship hoists in addition to what was already covered.
Iceland has not indicated how many ship lifts, etc. could poten-
tially receive support under that provision. But as can be seen
from above, currently there are 15 ship lifts in the country,
12 of which are owned by municipalities.

2.4. Budget and duration

The Icelandic authorities stated that Parliament decided to
increase the funding of the Harbour Improvement Fund for the
year 2008 by ISK 200 million.

3. Comments by the Icelandic authorities

The Icelandic authorities only notify the amendment for legal
certainty as they consider the measure not to constitute State
aid within the meaning of Article 61(1) of the EEA Agreement.
According to the notification form, the Icelandic authorities do
not consider that the measure confers any advantages on the aid
recipient(s) or distorts competition or affects trade between the
Contracting Parties.

II. ASSESSMENT

1. The presence of State aid

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

the

2.2. The objective of the measures

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

The above-mentioned amendment to Article 26 of the Harbour
Act was not in the bill as originally submitted to Alþingi but
was added by the Transport Committee. In the opinion of the
Committee, it was considered logical that damage to ship lifts
could be compensated on the same basis as other harbour
constructions that had benefited from State contributions by
stated in a translation
way of damage compensation. As
submitted by the Icelandic authorities on the Committee bill,
‘the authorisation only applies to damage compensation to ship-
yard facilities (1) which were constructed with State aid’. The
Committee further emphasised that the provision only covered
damage to facilities owned by public bodies. The amount of the
compensation was to be limited to the reconstruction value.
Consequently, it would not be permissible to grant compensa-
tion to build a lift with more capacity than that of the damaged
facility (2).

As indicated by the complainant and confirmed by the Icelandic
authorities, the clause is no longer limited to compensation for
damage caused by natural disasters or other special occurrences.

(1) To be understood as ship lifts and hoists.
(2) Item 3 of the opinion of the Committee (Nefndarálit um frv. til l. um

breyt. á hafnalögum, nr. 61/2003, þskj. 997-366. mál).

‘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 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 criteria will be assessed below, first in relation to the noti-
fied amendments to the Harbour Act and second in relation to
the 2003 Harbour Act, which was never notified to the
Authority.

1.1. The notified amendments made to the Harbour Act in

2007

1.1.1. Presence of State resources

compensation for

The aid measure must be granted by the State or through State
resources. The damage
in
Article 26(3) subparagraph 3 of the Harbour Act, as amended
by Act No 28/2007, is granted by the Harbour Improvement
Fund, which for that purpose received a budgetary allocation of
ISK 200 million from the Treasury. The budgetary allocation
constitutes State resources.

ship lifts

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This classification as State resources is not altered by the fact
that the money is channelled through the Harbour Improvement
Fund.

the Harbour Act states that

Article 26(1) of
the Harbour
Improvement Fund is owned by the State and that the Harbour
Council (hafnaráð) acts as its board of directors on behalf of the
Minister of Transport. The Harbour Council is appointed by the
Minister of Transport pursuant to Article 4 of Act No 7/1996
on the Maritime Agency (lög um Siglingastofnun Íslands). Accord-
ingly, the Harbour Improvement Fund is a public law body. Part
of the financing of the Fund comes directly from the State
budget as decided by Parliament. According to Article 26(3) the
Harbour Council disposes of the income of the Fund, following
recommendations from the Maritime Agency and subject to the
approval of the Minister of Transport, as further laid down in
subparagraphs 1 to 3. The Maritime Agency is responsible for
the administration of the Fund according to paragraph 4 of that
Article. The Harbour Improvement Fund carries out public tasks
as laid down in the Harbour Act. The Authority therefore takes
the preliminary view that support granted by the Harbour
Improvement Fund is imputable to the State (1) and constitutes
State resources within the meaning of Article 61(1) of the EEA
Agreement.

Secondly, an advantage also exists with regard to undertakings
in other sectors which have to cover damages to their produc-
tion facilities from their own budget. In this regard it is irrele-
vant that the support is only granted to compensate for the
damage caused, without
leading to a modernisation or an
increase in capacity. Since owners of harbour facilities not
having received State support before or in other sectors would
not receive any damage compensation, the recipients of the
support measure are in a better position with regard to repair
than those undertakings having to finance the repair work from
their own budget.

The Authority takes the preliminary view that support for ship
lifts does not qualify as general infrastructure, the financing of
which would not constitute State aid within the meaning of
Article 61(1) of the EEA Agreement. As stated in the Commis-
sion's Communication on Reinforcing the Quality in Sea
Ports (2), shipyards are considered as user-specific infrastructure
and not as a general infrastructure measure. In the Authority's
view the same applies to ship lifts used by or rented out by
shipyards and harbours for repair work, which is normally a
commercial activity and therefore benefits specific undertakings.

1.1.2. Favouring certain undertakings or the production of certain

Contracting Parties

goods

1.1.3. Distortion of

competition and effect

on trade between

The Authority considers the ownership of a ship lift which is
rented out for ship repairs by a publicly owned harbour to
constitute an economic activity and therefore that the municipal
owners act as undertakings within the meaning of Article 61(1)
of the EEA Agreement.

Further, the aid measure must confer on the recipients advan-
tages that relieve them of charges that are normally borne from
their budget. Such advantages exist as the owners of ship lifts,
etc. can receive State support for repair of damage to facilities.
Normally such costs would have to be borne by the ship lift
owners from their own budget. The aid measure must be selec-
tive in that it favours ‘certain undertakings or the production of
certain goods’. The measure is selective as it applies only to
undertakings owning ship lifts, etc. falling within the definition
of Article 26(3) subparagraph 3 of the Act. In this regard it
cannot be argued that no selectivity exists because the owners
of other harbour constructions are likewise entitled to receive
State support under Article 26(3) subparagraph 3 of the Act.
Even if the circle of beneficiaries is wider than owners of ship
limited,
lifts, the advantages are only conferred to a certain,
group of undertakings, as will be demonstrated below.

the damage

compensation in Article 26(3)

sub-
Firstly,
paragraph 3 is limited to those projects which were constructed
with State aid as outlined in the opinion of the Committee as
referred to above (Section I-2.2). Hence, the provision on the
damage compensation does not apply to all undertakings
owning harbour constructions.

(1) See Case C-482/99, French Republic v Commission of
Communities, paragraphs 50 et seq., [2002] ECR I-4397.

the European

For a measure to qualify as aid it must distort competition and
affect trade between the Contracting Parties. Ship lifts, ship
hoists and dry docks as ship repair facilities are in international
competition. In addition, the market for port services has been
gradually opened to competition (3). The Commission pointed
out in its LeaderSHIP 2015 programme that commercial ship-
building and ship repair operate in a truly global market with
exposure to world-wide competition (4). As the measure will
strengthen the recipients' position in relation to other competi-
tors within the area of
the EEA, the damage compensation
distorts or threatens to distort competition and affects trade
between the Contracting Parties.

1.2. The 2003 Harbour Act

In 2003, Act No 61/2003 replaced Act No 23/1994. In the
new Harbour Act, the provisions on State funding of harbour
constructions were changed. As outlined above,
the current
provisions provide for two distinct measures, namely payments
by the Treasury in relation to certain harbour constructions
(Article 24) and damage compensation granted by the Harbour
Improvement Fund (Article 26 of the Act) for facilities covered
by Article 24(2)(a) and (b) of the Act.

(2) Communication from the Commission to the European Parliament and
the Council, Reinforcing Quality Service in Sea Ports; A Key for
European Transport, COM(2001) 35 final, Section 3.3. Hereinafter
referred to as ‘the Port Communication’.

(3) Port Communication, cited in fn. 12, Section 2.
(4) Communication from the Commission to the Council, the European
Parliament, the European Economic and Social Committee and the
Committee of the Regions, LeaderSHIP 2015, Defining the Future of
the European Shipbuilding and Repair Industry, Competitiveness
through Excellence, COM(2003) 717 final, Section 2.1.

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1.2.1. Presence of State resources

Support directly from the Treasury, as referred to in Article 24
of
the 2003 Harbour Act, constitutes budgetary allocations
which qualify as State resources within the meaning of
Article 61(1) of the EEA Agreement.

As outlined above, the support by the Harbour Improvement
Fund for damage compensation to harbour constructions consti-
tutes State resources (see above, Section II-1.1.1 of this Deci-
sion).

1.2.2. Favouring certain undertakings or the production of certain

goods

While an advantage is conferred on the recipients by relieving
them of costs which they would otherwise have to bear, it needs
to be examined whether all the support measures under the Act
are selective.

This would not be the case, if certain of the support measures
can be classified as financing general infrastructure. Investments
in such infrastructure are normally general measures, being
its
expenditure incurred by the State in the framework of
responsibilities for planning and developing a transport system
in the interest of the general public, provided the infrastructure
is de jure and de facto open to all users. According to the Port
Communication, public (general) infrastructure is characterised
as being open to all users on a non-discriminatory basis.
General
infrastructure includes maritime access and mainte-
nance, covering dikes, breakwater, locks and other high water
protection measures, navigable channels, dredging and ice
breaking navigation aid,
floating
it includes public
pontoon ramps in tidal areas, etc. Further,
land transport facilities within the port area, short connecting
links to the national transport networks or TENs and infrastruc-
ture up to the terminal site (1).

lights, buoys, beacons,

Article 24(2)(a), (b) and (c) of the 2003 Harbour Act are limited
to the
support of breakwater constructions, marking of
approach channels, depth, protective installations and dredging.
In line with the above examples given in the Communication,
the Authority considers these measures to be general infrastruc-
ture which do not confer an advantage on the harbours, but are
open to all users.

The use of pilot vessels in Ar ticle 24(2)(a) of
2003 Harbour Act

the

The Authority, however, questions whether the use of pilot
vessels in places where conditions require safety equipment, see
Article 24(2)(a) of the Harbour Act, can be considered as infra-
investigate that further during the formal
structure and will
the Port Communication cited
investigation procedure. As
to investments in mobile assets and
above states ‘public support
operational services, e.g.
individual port service providers,
generally favour certain undertakings and it is difficult to foresee a
situation where this is not the case’ (2). On the basis of the informa-
tion available to it, the Authority cannot exclude that pilot
vessels do not qualify as general infrastructure.

those of

(1) See Communication.
(2) See Communication, Section 3.3 at the end.

Suppor t
for quay installations
and (c) of the 2003 Harbour Act

in Ar ticle 24(2)(b)

On the basis of the information available to it, the Authority
cannot judge whether support to quay installations qualifies as
State aid or concerns a general infrastructure measure. In this
regard, reference is made to Section 3.3 of the Port Communica-
tion which states that no general conclusions can be drawn for
quay walls. The Icelandic authorities are requested to provide
more information in this regard.

The damage compensation clause in Ar ticle 26(3)
subparagraph 3 of the 2003 Harbour Act

The Authority considers
compensation
that
provided for in Article 26(3) subparagraph 3 of the Harbour
Act is a measure conferring an advantage on the recipient, as
normally such damage would have to be made good using
funds from the undertaking's own budget.

the damage

However, as far as the damage compensation clause, which
refers to Article 24(2)(a) and (b) of the Act, concerns infrastruc-
ture projects, it does not constitute State aid within the meaning
of Article 61(1) of
the EEA Agreement. Where projects
mentioned in Article 24(2)(a) and (b) might be considered as
selective measures, the damage compensation clause would also
be judged as selective in this regard. Based on the above consid-
erations,
it would appear that only damage compensation in
respect of pilot vessels and quay installations may be caught.

1.2.3. Distortion of

competition and effect

on trade between

Contracting Parties

The support strengthens the position of the recipients in rela-
tion to other EEA competitors, who compete with them on an
international market. The support under the 2003 Harbour Act
therefore distorts or threatens to distort competition and affects
trade between the Contracting Parties.

1.3. Conclusion

the notified
The Authority takes the preliminary view that
amendments made to the Harbour Act in 2007 to include ship
lifts in the damage compensation clause in Article 26(3) sub-
paragraph 3 of the Act constitutes State aid within the meaning
of Article 61(1) of the EEA Agreement.

the 2003 Harbour Act,

for breakwater
Under
constructions, dredging,
the marking of approach channels,
depth, and protective installations do not constitute State aid
within the meaning of Article 61(1) of the EEA Agreement.

the support

On the basis of the information available to it, support for the
use of pilot vessels referred to in Article 24(2)(a) and support
for quay installations provided for in Article 24(2)(b) and (c)
would appear not to fall clearly into the category of general
infrastructure and must therefore be regarded as State aid within
the meaning of Article 61(1) of the EEA Agreement.

compensation clause

sub-
The damage
paragraph 3 constitute State aid within the meaning of
Article 61(1) of the EEA Agreement, in so far as it applies to
projects which do not qualify as general infrastructure.

in Article 26(3)

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2. Procedural requirements

The use of pilot vessels referred to in Article 24(2)(a) of the 2003
Harbour Act

Pursuant to Article 1(3) of Part I of Protocol 3 to the Surveil-
lance and Court Agreement, ‘the EFTA Surveillance Authority shall
be informed, in sufficient time to enable it to submit its comments, of
any plans to grant or alter aid. […]. The State concerned shall not
put its proposed measures into effect until the procedure has resulted in
a final decision’.

Where the final decision of the Authority is negative, i.e. the aid
is found to be incompatible with the functioning of the EEA
Agreement, any aid paid out in breach of the standstill obliga-
tion in Article 1(3) of Part I of Protocol 3 to the Surveillance
and Court Agreement will be subject to a recovery order by the
Authority.

2.1. Act No 28/2007 amending the Harbour Act

to the Harbour Act

The amendment
is already law as Act
No 28/2007 entered into force on 29 March 2007, thereby
enabling the Harbour Improvement Fund to use State funds for
damage compensation in favour of ship lifts. The Authority
therefore concludes that in relation to this measure the standstill
obligation has not been respected. The measure is consequently
to be regarded as unlawful aid within the meaning of Article 1(f)
of Part I of Protocol 3 to the Surveillance and Court Agreement
and any aid paid out under that provision could be subject to
recovery.

2.2. The 2003 Harbour Act

The 2003 Harbour Act has not been notified to the Authority.
The 1994 Harbour Act, which that Act replaced, was the
subject of an appropriate measures proposal by the Authority in
its Decision No 51/97/COL and was authorised on the condi-
tion that individual projects would be notified. It will now have
to be assessed whether the amendments in the 2003 Harbour
Act, in so far as they constitute State aid within the meaning of
Article 61(1) of the EEA Agreement, must be treated as new aid
within the meaning of Article 1(c) of Part II of Protocol 3 to the
Surveillance and Court Agreement.

In this respect, the support for the use of pilot vessels and for
quay installations, together with the damage compensation for
those facilities, must be examined.

4

to Article

According
the Authority's Decision
of
No 195/04/COL, a purely formal or administrative change does
not affect the status of existing aid. However, a tightening of the
criteria for the application of an authorised aid scheme, a reduc-
tion in aid intensity or a reduction of eligible expenses, qualify
as new aid (Article 4(2)(c)). In its ruling in Namur-Les Assurances,
the Court of Justice held that ‘[…] the emergence of new aid or the
alteration of existing aid cannot be assessed according to the scale of
the aid or, in particular, its amount in financial terms at any moment
in the life of the undertaking if the aid is provided under earlier statu-
tory provisions which remain unaltered. Whether aid may be classified
as new aid or as alteration of existing aid must be determined by refer-
ence to the provisions providing for it’ (1).

(1) Case C-44/93, Namur-Les Assurances du Crédit SA, [1994] ECR I-3829,

paragraph 28.

Article 24(2)(a) of the 2003 Harbour Act introduces a new
support category, namely support for pilot vessels in places
where conditions in and near the harbour require such safety
equipment. The introduction of a new aid category constitutes
II of
new aid within the meaning of Article 1(c) of Part
Protocol 3 to the Surveillance and Court Agreement. The
Authority therefore concludes that in relation to this measure
the standstill obligation has not been respected. The measure is
consequently to be regarded as unlawful aid within the meaning
of Article 1(f) of Part I of Protocol 3 to the Surveillance and
Court Agreement and any aid paid out under that provision
would be subject to recovery.

Quay installations referred to in Article 24(2)(b) and (c) of the 2003
Harbour Act

The support for quay installations was already contained in the
1994 Harbour Act (Article 19(1), number 2, provided for the
support of wharfs, piers and berths. The support for quays and
quay installations in Article 24(2)(b) and (c) of
the 2003
Harbour Act is now limited to projects of a certain dimension
and within certain defined regions. This indicates that
the
possibilities for granting aid have been reduced. However, as can
be
the Authority's Decision
No 195/04/COL, a tightening of aid criteria is to be considered
as new aid. The Authority therefore concludes that in relation to
this measure the standstill obligation has not been respected.
The measure is consequently to be regarded as unlawful aid
within the meaning of Article 1(f) of Part I of Protocol 3 to the
Surveillance and Court Agreement and any aid paid out under
that provision would be subject to recovery.

seen from Article 4 of

Damage compensation under Article 26(3), subparagraph 3, of the
2003 Harbour Act

The Authority notes that the damage compensation in the 2003
Harbour Act differs from the damage clauses in the 1984 and
1994 Acts in so far as it is no longer limited to support for
damages caused by acts of God or natural catastrophes. With
respect to this change, the Icelandic authorities have confirmed
that, indeed, it was not the intention of the legislator to limit
damage compensation to natural disasters or exceptional occur-
rences. The Authority finds that the extension of the damage
compensation clause to cover a broader range of circumstances
constitutes new aid within the meaning of Article 1(c) of Part II
of Protocol 3 to the Surveillance and Court Agreement. The
Authority therefore concludes that in relation to this measure
the standstill obligation has not been respected. The measure is
consequently to be regarded as unlawful aid within the meaning
of Article 1(f) of Part I of Protocol 3 to the Surveillance and
Court Agreement and any aid paid out under that provision
would be subject to recovery.

3. Compatibility of the aid

3.1. Act No 28/2007 amending the Harbour Act

Support measures caught by Article 61(1) of the EEA Agree-
ment are generally incompatible with the functioning of the
EEA Agreement, unless they qualify for a derogation under
Article 61(2) or (3) of the EEA Agreement.

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The derogation in Article 61(2) of the EEA Agreement is not
applicable to the aid in question, which is not designed to
achieve any of the aims listed in this provision. The Authority
notes, in particular, that the damage compensation to ship lifts
provided for in Article 26(3), subparagraph 3, of the 2007
limited to natural disaster or
Harbour Act
exceptional occurrence.
therefore cannot be based on
Article 61(2)(b) of the EEA Agreement.

is no longer

It

The aid is not given to promote the execution of an important
project of common European interest or to remedy a serious
disturbance in the economy of Iceland, therefore Article 61(3)(b)
of the EEA Agreement does not apply.

linked to any investment, but
The aid in question is not
compensates recipients for a given damage. It reduces the costs
which companies would normally have to bear in the course of
pursuing their day-to-day business activities and is consequently
to be classified as operating aid. Operating aid is normally not
considered suitable to facilitate the development of certain
economic activities or of certain regions as provided for in
Article 61(3)(c) of the EEA Agreement, unless it is specifically
envisaged by the Authority's Guidelines, which is not the case
here.

An application of the Regional Aid Guidelines in this regard
does not appear possible.
It would appear that the notified
measure falls to be assessed under the Authority's Guidelines on
Shipbuilding which, as a lex specialis, preclude the application of
the regional aid chapter of the Guidelines (1). The Shipbuilding
Guidelines cover aid to ‘any shipyard, related entity, ship owner and
third party, which is granted, whether directly or indirectly, for building,
repair or conversion of ships’. As can be seen from the Commis-
sion's case practice, aid for the construction or extension of ship
lifts is considered to be a measure falling under the Shipbuilding
Guidelines (2). According to point 26 of the Guidelines invest-
ment aid — not operating aid — can only be granted if it is
linked to upgrading or modernising existing yards with a view
to improving productivity and is limited to 22,5 % or 12,5 %
aid intensity thresholds. The Icelandic authorities explicitly state,
in any event, that no modernisation is allowed. They also aim
for higher aid intensities than the specified thresholds.

support under

the Shipbuilding Guidelines do not apply, can the
Only if
possibility of
the Authority's Regional Aid
Guidelines be assessed. The aid qualifies as operating aid (3),
which would have to be assessed under Section 5 of
the
Guidelines. Such aid must normally be temporary and reduced
over time (Section 5(68) of the Regional Aid Guidelines), or
granted for
the
Regional Aid Guidelines) or granted for offsetting additional

least populated regions

(Section 5(69) of

transport costs (Section 5(70) of the Regional Aid Guidelines).
On the basis of the information available, the Authority cannot
see that envisaged support for damage compensation for ship
lifts is limited in that respect.

Given that on the basis of the available information, one or the
other of these chapters applies to the measures under examina-
tion, a direct application of Article 61(3)(c) of the EEA Agree-
ment is precluded.

The Icelandic authorities do not argue that the harbour services
constitute a public service under Article 59(2) of the EEA Agree-
ment.

Even if the aid could be authorised under the EEA State aid
provisions, the Authority still is in doubt of the compatibility of
the measures with the functioning of the EEA Agreement. The
damage compensation is only granted to publicly owned
harbours. The Icelandic authorities state that the Harbour Act
allows for different operating forms of harbours and therefore
different rules apply to the different harbour types. This was
one of the primary purposes of the 2003 Harbour Act and the
Icelandic authorities do not consider this distinction to be
incompatible with the State aid provisions. The Authority has
doubts as to how such a difference in treatment between
publicly and privately owned harbours can be justified.

On the basis of the foregoing considerations, the Authority has
doubts as to whether the amendments to the Harbour Act made
in 2007 can be regarded as compatible with the functioning of
the EEA Agreement.

3.2. The 2003 Harbour Act

investigation procedure, the Authority will
During the formal
for pilot
investigate whether
vessels and for quay installations can, to the extent that it is
found to constitute aid, be justified under Article 61(3)(c) of the
EEA Agreement.

the newly introduced support

Pilot vessels

(1) See the Authority's State Aid Guidelines on national regional aid

2007-2013, point 2(8), fn. 8.

(2) State aid N 554/06 — Germany, Rolandswerft which concerned the
adaptation of a ship lift to lift heavier ships and State aid C-6/06 —
Germany, Volkswerft Stralsund (OJ L 151, 13.6.2007, p. 33) also for
the extension of a ship lift.

(3) See the definition of investment aid in Section 4.1.1 of the Regional
Aid Guidelines which limit investment aid to initial investment projects,
i.e. the setting up or extension of a new establishment, diversification of
output of the establishment into new, additional products and a funda-
mental change in the overall production process. Replacement invest-
ment is excluded from that concept, but might qualify as operating aid,
see Section 4.1.1(26), last paragraph of the Regional Aid Guidelines.

The support for pilot vessels would qualify as operating aid, falls
to be assessed under Section 5 of the Authority's Regional Aid
Guidelines. As noted above, such aid would normally be
temporary and reduced over time (Section 5(68) of the Regional
Aid Guidelines), or granted for
least populated regions
(Section 5(69) of the Regional Aid Guidelines) or granted for
offsetting additional
the
Regional Aid Guidelines). On the basis of the information avail-
able, the support for pilot vessels provided for Article 26(3),
subparagraph 3, of the Harbour Act would not appear to be
limited in this way.

(Section 5(70) of

transport costs

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The Authority will also examine any possibilities to justify this
aid granted for safety purposes by virtue of a direct application
of Article 61(3)(c) of the EEA Agreement. In this respect, the
Icelandic authorities are invited to provide information as to the
incentive effect, necessity and proportionality of the support.

Quay installations

The Authority does not exclude that these support measures are
not related to ship building, repair and conversion and therefore
fall under the Shipbuilding Guidelines. However,
might not
more information is required in this respect. Again, the aid
intensity thresholds laid down in those Guidelines would have
to be observed and aid would only be allowed if it can be quali-
fied as investment upgrading or modernisation of existing yards
with a view of improving the productivity of existing facilities.

In the event that the Shipbuilding Guidelines do not apply, the
measures will be examined under other Guidelines, in particular
the Authority's Regional Aid Guidelines in the version applicable
at each point in time (1).

The Authority doubts whether the support for quay installations
can be justified under the Regional Aid Guidelines 1999 or
2007-2013 which in both cases provide for lower aid intensities
than those foreseen in the Harbour Act.

Damage compensation

The damage compensation provided for in Article 26(3) sub-
paragraph 3 of the 2003 Harbour Act would not be able to be
justified under Article 61(2) as it is no longer limited to natural
disaster compensation.

It would therefore have to be assessed under Article 61(3)(c) of
in conjunction with the Shipbuilding
the EEA Agreement,
Guidelines, as far as it concerns measures which fall under the
scope of these Guidelines. Again, only if the Shipbuilding Guide-
lines do not apply, can the support be assessed under the
Regional Aid Guidelines. As stated before,
the criteria for
granting operating aid, as set out in Section 5 thereof (see argu-
mentation above), need to be fulfilled.

Finally, it should be noted that all of the above measures are
only granted to publicly owned harbours. The Authority does
not see any justification for such a differentiation (see above,
Section II-3.1 of this Decision).

With reference to the above assessment, the Authority conse-
quently has doubts as to whether the 2003 Harbour Act can be
regarded as compatible with the functioning of the EEA Agree-
ment.

these
The Authority is therefore in doubt as to whether
measures are compatible with the functioning of the EEA Agree-
ment.

(1) Section 8(90) of the National Regional Aid Guidelines 2007-2013,
published on the Authority's webpage, state that regional aid awarded
or to be granted before 2007 will be assessed in accordance with the
1999 Guidelines on national regional aid. The 1999 Guidelines on
Regional Aid can be found in OJ L 111, 29.4.1999, p. 46.

4. Conclusion

Based on the information submitted by the Icelandic authorities,
the Authority cannot exclude the possibility that
the 2007
amendments to the Harbour Act and certain aspects of the
2003 Harbour Act constitute aid within the meaning of
Article 61(1) of the EEA Agreement.

Furthermore, the Authority has doubts that these measures can
be regarded as complying with Article 61(2)(b) or 61(3)(c) of
the EEA Agreement, possibly in combination with the require-
ments laid down in the Shipbuilding Guidelines or the Regional
Aid Guidelines or by way of direct application. The Authority
thus doubts that the above measures are compatible with the
functioning of the EEA Agreement.

II of
Consequently, and in accordance Article 4(4) of Part
Protocol 3 to the Surveillance and Court Agreement,
the
Authority is obliged to open the procedure provided for in
Article 1(2) of Part I of Protocol 3 of the Surveillance and Court
Agreement. The decision to open proceedings is without preju-
dice to the final decision of the Authority, which may conclude
that the measures in question do not constitute aid or are
compatible with the functioning of the EEA Agreement.

The Authority notes that were the measures to be identified as
new aid within the meaning of Article 1(c)
to
Protocol 3 of the Surveillance and Court Agreement, any breach
of the standstill operation leads to the classification of the aid as
II of
unlawful within the meaning of Article 1(f) of Part
Protocol 3 to the Surveillance and Court Agreement. Unlawful
aid which is not compatible with the EEA State aid provisions is
subject to recovery.

in Part

II

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

In light of the foregoing considerations, the Authority invites
the Icelandic authorities within one month of receipt of this
decision, to provide all documents, information and data needed
for assessment of the compatibility of the above measures,

HAS ADOPTED THIS DECISION:

Article 1

as

far

that

finds

as
The EFTA Surveillance Authority
breakwater constructions, marking of approach channels, depth,
protective installations and dredging are concerned, no State aid
these projects under
is
support
involved as
Article 24(2)(a),
the 2003 Harbour Act. The
damage compensation clause in 26(3), subparagraph 3, of the
2003 Harbour Act therefore does not involve any State aid
within the meaning of Article 61(1) of the EEA Agreement, in
so far as it relates to these projects.

regards
(b) and (c) of

for

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Article 2

The EFTA Surveillance Authority has decided to open the
formal investigation procedure provided for in Article 1(2) of
Part I of Protocol 3 to the Surveillance and Court Agreement
against Iceland regarding the 2007 amendments to the Harbour
Act and certain aspects of the 2003 Harbour Act, namely in
relation to support for pilot vessels and quay installations.

Article 3

The Icelandic authorities are invited, pursuant to Article 6(1) of
Part II of Protocol 3 to the Surveillance and Court Agreement,
to submit their comments on the opening of the formal investi-
gation procedure within one month from the notification of
this Decision.

Article 4

The Icelandic authorities are invited to provide within one
month from notification of this Decision, all documents, infor-

mation and data needed for assessment of the compatibility of
the aid measure.

Article 5

This Decision is addressed to the Republic of Iceland.

Article 6

Only the English version is authentic.

Done at Brussels, 12 December 2007.

For the EFTA Surveillance Authority

Per SANDERUD

Kristján Andri STEFÁNSSON

President

College Member