State aid — United Kingdom — State aid C 16/08 (ex NN 35/07 and NN 105/05) — Subsidies to CalMac and NorthLink for maritime transport services in Scotland — Invitation to submit comments pursuant to Article 88(2) of the EC Treaty (Text with EEA relevance)
Date: 2008-05-23
Institutions: European Commission
Subjects: Scotland, State aid, control of State aid, maritime transport, restriction on competition

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EN

Official Journal of the European Union

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V

(Announcements)

PROCEDURES RELATING TO THE IMPLEMENTATION OF THE COMPETITION
POLICY

COMMISSION

STATE AID — UNITED KINGDOM

State aid C 16/08 (ex NN 35/07 and NN 105/05) — Subsidies to CalMac and NorthLink for maritime
transport services in Scotland

Invitation to submit comments pursuant to Article 88(2) of the EC Treaty

(Text with EEA relevance)

(2008/C 126/07)

By means of the letter dated 16 April 2008 reproduced in the authentic language on the pages following
this summary, the Commission notified the United Kingdom its decision to initiate the procedure laid down
in Article 88(2) of the EC Treaty concerning the above-mentioned aid.

Interested parties may submit their comments within one month of the date of publication of this summary
and the following letter, to:

European Commission
Directorate-General for Energy and Transport
Directorate A — Unit 2
B-1049 Brussels
Fax (32-2) 296 41 04

These comments will be communicated to the United Kingdom. Confidential treatment of the identity of
the interested party submitting the comments may be requested in writing, stating the reasons for the
request.

TEXT OF SUMMARY

1. The Scottish Office and after devolution in 1999, the Scottish Executivehas granted over a number of
years significant grants and favourable financial conditions to its maritime companies CalMac and
NorthLink for the operation of ferry services on routes between the Scottish mainland and respectively
the Hebrides and the Northern Isles, counting together around 85 000 inhabitants. NorthLink 1 was a
daughter company of CalMac until 2006 and NorthLink 2, which took over NorthLink 1's assets, is directly
owned by the Scottish Executive.

2. The Commission has received several complaints and interventions of stakeholders about illegal and
unfair State aid to these two publicly-owned companies, damaging the competitive positions of private
companies operating on part or all routes concerned.

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3. Both companies are receiving an increasing amount of public subsidies from the Scottish Executive in
relation to the operation of ferry services on the aforementioned routes. Based on the available date, the
amount of public money granted to both companies is at present more than GBP 75 million a year.

4. With respect to the grants awarded to CalMac, NorthLink 1 and NorthLink 2 the Commission questions
whether these grants correspond to properly defined public service obligations within the meaning of
EC law, and has doubts as to whether the related compensation is compatible with the common market.

5. In conclusion, the Commission has thus doubts about the compatibility with the common market of the
payments granted by the Scottish Executive to the maritime companies, as summarised in Tables 1 and 3
of the Decision.

TEXT OF LETTER

‘1. PROCEDURE

1. By letter of 19 December 2003 (1), the UK authorities informed the Commission of the steps that the
Scottish Executive intended to take in order to bring Scottish ferry services “into line with [their]
understanding of the European rules in relation to maritime State aids”.

2. By letters of 19 April and 30 June 2004 (2), the UK authorities informed the Commission of the inten-
tion of the Scottish Executive to put to tender a contract aiming at supporting respectively car and
passenger traffic on routes to the Northern Isles and passenger traffic between Gourock and Dunoon.

3. Since then the ferry companies NorthLink and CalMac were the subject of several letters from Members
of the European Parliament and third parties raising questions about possible illegal and incompatible
State aid which would have been granted to these two companies. Following these letters, and several
complaints by third parties on the same topic, the Commission sent requests of information to the
UK authorities to which answers were provided.

2. DETAILED DESCRIPTION OF THE FACTS

4. The CalMac and NorthLink cases are related. NorthLink was a subsidiary of CalMac until 2006. Both

cases are therefore being examined together in the present Commission Decision.

5. Based on the information given by the UK authorities and by plaintiffs, the Commission is able to

establish the following facts.

(1) Registered under Reference TREN(2003) A/38572.
(2) Registered under References TREN(2004) A/18803 and 26209.

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2.1.1. Maritime routes

6. The existing routes in Western Scotland are set out below in Map 1:

2.1. Western Scotland

Maritime routes operated by CalMac in Western Scotland

Map 1

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2.1.2. The operators

2.1.2.1. CalMac: histor ical background

7. Between 1990 and 2006 Caledonian MacBrayne Ltd had been a ferry company wholly owned by the
State under the responsibility of the Secretary of State for Scotland, and, after devolution in 1999, by
the Scottish Executive.

Chart 1

Pre-2006 structure of ownership (based on the information at

the disposal of

the

Commission)

Source: European Commission based on information granted by the UK authorities

8. In October 2006 Caledonian MacBrayne Ltd was restructured to separate the vessel and shore asset

ownership role from the ferry operating role. The new structure is shown in Chart 2 below.

9. The ferry service operations were transferred to two new companies, CalMac Ferries Ltd and Cowal
Ferries Ltd, which were created as two wholly-owned subsidiaries of David MacBrayne Ltd. The latter
was previously a dormant company 100 %-owned by the Scottish Executive.

10. CalMac Ferries Ltd took over the services to the Hebrides, along with two wholly-owned subsidiaries,
Caledonian MacBrayne Crewing (Guernsey) Ltd and Caledonian MacBrayne HR (UK) Ltd, which employ
respectively embarked and shore-based personnel.

11. Cowal Ferries Ltd took over the services on the Clyde. Cowal Ferries Ltd was intended to participate in an

upcoming tender on a future public service contract for the route concerned.

12. In parallel, Caledonian Maritime Assets Ltd (hereinafter CMAL), retained ownership of the vessels and

piers that are used for the operation of the Clyde and Hebrides ferry services.

13. Under the new arrangements, CMAL leases the vessels and piers to the CalMac Ferries Ltd and Cowal
Ferries Ltd. It also owns and operates the port facilities in nearly half of 50 destinations that the latter
serve. CMAL is wholly and directly owned by the Scottish Executive.

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Chart 2

Current structure of ownership (based on the information at the disposal of the Commission)

Source: European Commission based on information provided by the UK authorities

14. CalMac Ferries Ltd at present charters a fleet of 29 vessels from CMAL to provide passenger, vehicle
and shipping services to the islands off the West Coast of Scotland and in the Clyde estuary. Two
other vessels are retained on separate charters. The restructuring did not lead to any alteration in
ships' livery or branding.

15. The Commission understands that Cowal Ferries Ltd also charters its three vessels from CMAL.

16. Furthermore, the Commission understands that, whether for CalMac Ferries Ltd or for Cowal Ferries Ltd,

the restructuring did not lead to any alteration in ships' livery or branding.

17. At this stage of the investigation, the Commission is not in a position to exclude that there may be

continuity between Caledonian MacBrayne Ltd and the various above-described companies.

18. Therefore, in the following, the term “CalMac” is used to cover, for the period prior to the restruc-
turing, Caledonian MacBrayne Ltd and, for the period posterior to the restructuring CalMac Ferries Ltd,
Cowal Ferries Ltd, CMAL, Caledonian MacBrayne Crewing (Guernsey) Ltd and Caledonian MacBrayne HR
(UK) Ltd. This is however without prejudice to the conclusion the Commission may reach on the basis
of further information acquired in the course of the present procedure. The Commission notes in par-
ticular that CMAL is a separate company from CalMac Ferries Ltd and Cowal Ferries Limited, with whom
it merely shares a common shareholder and has a trading relationship.

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19. There are currently 26 routes within the network served by CalMac. As regards only CalMac Ferries Ltd,
it transported 5,3 million passengers, 1,1 million cars,

in the year ended on 31 March 2006,
94 000 commercial vehicles and 14 000 coaches on these routes.

20. CalMac has virtually no competition on the routes it serves. Its sole competitor, Western Ferries, oper-
ates only on the Clyde estuary between Gourock, situated on the Upper Firth of Clyde, and Dunoon,
located on the Cowal peninsula of Scotland as illustrated on Map 2.

Map 2

Maritime routes on the Clyde estuary

2.1.2.2. Wester n Fer r ies

21. Western Ferries only operates the route between Gourock and Dunoon.

2.1.3. Public Service

2.1.3.1. Histori cal background

22. The general framework for financial support for the Clyde and Hebrides ferry services until September
2007 was provided by contracts named “undertakings” and signed between the Scottish Office/Execu-
tive and CalMac, under the Highlands and Islands Shipping Services Act 1960, as modified by the
Transport (Scotland) Act 2001 and the Transport (Scotland) Act 2005.

23. The most recent undertaking (3) between the Scottish Office and CalMac (hereinafter “the Under-
taking”) was approved by the United Kingdom Parliament in 1995 and signed shortly thereafter.
Pursuant to the Undertaking, the Scottish Office/Executive committed to grant subsidies to CalMac by
way of revenue and/or capital grants for maintaining or improving sea transport services to the
Highlands and Islands. This was done to support the so called “approved services” that, in the opinion
of the Scottish Office/Executive, were necessary to maintain or improve the economic or social condi-
tions in the Highlands and Islands.

(3) This text of this Undertaking is publicly available at the following Internet address:

www.calmac.co.uk/undertakingbysecretaryofstate.pdf

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24. As mentioned above, in October 2006, Caledonian MacBrayne Ltd was restructured. As a result, the
1995 Undertaking lapsed after 30 September 2006, as the company to which it related (Caledonian
MacBrayne Ltd) was by then no longer involved in the delivery of ferry services.

25. From then until the start in October 2007 of the new contract for Western Scotland, the UK authori-
ties have indicated to the Commission that there was no material change to the approach taken on the
issues of regularity, frequencies, capacities and rates since 1 October 2006. The Commission under-
stands that subsidies continued to be provided to CalMac based on the provisions of the Highland and
Islands Shipping Services Act 1960 relating to the system of Parliamentary undertakings for ferry
subsidies as amended Section 70 the Transport (Scotland) Act 2001 and by Section 45 (4) the
Transport (Scotland) Act 2005 (5).

26. Further to a failed tender on the Clyde route (Gourock-Dunoon) and after various contacts with the
Commission, the Scottish Executive published on 14 December 2006 a new invitation to tender (6) for
a public service contract, which, unlike the preceding one, provided for financial compensation, and
covered all routes operated until then by CalMac, with the exception of the Gourock-Dunoon route (7).

27. V-Ships, who was with CalMac one of the two bidders, withdrew from the tender process on 2 February
2007, stating publicly that “with no direct control over the assets themselves, there would be little opportunity
for added value via creative management and innovation” (8).

28. The Commission understands that the contract (9) was eventually granted to CalMac on 20 September

2007 (hereinafter “the 2007 contract”).

2.1.3.2. Routes

29. Prior to the 2007 contract the Undertaking did not specify the routes to be served. The UK authorities
indicated that the routes qualifying for financial support were, instead, specified in an annual letter
sent to CalMac by the Scottish Office/Executive.

30. Based on research into publicly available data on origin and destination of passengers (10) as regards
the Gourock-Dunoon route on which there is competition between CalMac and Western Ferries, 9 % of
Western Ferries' passengers use bus connections before and/or after the maritime crossing. As regards
CalMac, whose piers are located near train stations, the ratio is 13,5 % for bus connections and 15,5 %
for train connections.

(4) “45. Modification of Highlands and Islands Shipping Services Act 1960 and loans for transport-related purposes:

1. The Highlands and Islands Shipping Services Act 1960 (c. 31) (financial and other assistance to those concerned with
providing sea transport services for the Highlands and Islands), so far as relating to the provision of that assistance by the
Scottish Ministers, ceases to have effect.

2. Nothing in subsection (1) above affects any undertaking given, advance made, contract or other obligation or transaction

entered into or action entered upon before that subsection comes into force.

3. Section 70 of the Transport (Scotland) Act 2001 (asp 2) (grants for transport-related purposes) is amended in accord-

ance with subsections (4) to (6) below.

4. In subsection (1), after “grants” there is inserted “or loans”.
5. In subsection (2):

(a) after “Grants” there is inserted “and loans”;
(b) for “amount” there is substituted “amounts”;
(c) after “including” there is inserted “, in the case of grants,”.

6. In subsection (4):

(a) after “grants” insert “and loans”;
(b) after “grant”, in both places where it occurs, there is inserted “or loan””.

(5) The text of this Act is publicly available at the following Internet address:
http://www.opsi.gov.uk/legislation/scotland/acts2005/20050012.htm

(6) The text of this invitation to tender is publicly available at the following Internet address:

http://www.scotland.gov.uk/Resource/Doc/161181/0043718.pdf

(7) The specifications required that the successful tenderer had to charter the CMAL vessels, formerly owned by Caledonian

MacBrayne Ltd.

(8) Press cutting attached to NorthLink's submission of 14 February 2007.
(9) The text of this invitation to tender of the 2007 contract is publicly available at the following Internet address:

http://www.scotland.gov.uk/Publications/2006/12/18100005/0

(10) Hitrans report, entitled “Origin and destination of passengers and freight on Strategic Sea Crossings” and available at

the following Internet address:
http://www.hitrans.org.uk/Documents/documents/FinalReport.pdf

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2.1.3.3. Regular ity and frequencies

31. According to the information submitted by the UK authorities, service frequencies and timetables
reflected, prior to the 2007 contract, the series of approvals, given over the years, by the Scottish
Office/Executive. However, the UK authorities have indicated that CalMac had some freedom to vary
frequencies and timetables where these were requested by users or were otherwise deemed to be
appropriate and where the financial implications were minimal. More substantial changes and those
the Scottish
with significant financial
Office/Executive on an ad hoc basis.
In recent years such approvals have included in 2001 the
Ullapool-Stornoway route, in 2003 the Kennacraig-Islay route and in 2005 the Ardrossan-Brodick
route.

implications have always been subject to the approval of

2.1.3.4. Capacities

32. Annual route capacities are a function of vessel characteristics and frequency of service. Prior to the
restructuring of Caledonian MacBrayne Ltd in October 2006, from the information provided by the
UK authorities, new vessels, generally offering larger capacity than the vessel being replaced, had been
approved,
largely on an ad hoc basis, by the Scottish Office/Executive on proposals made by
CalMac (11).

2.1.3.5. Fares

33. According to the UK authorities, until the signature of the September 2007 contract the annual fares
increases for all categories of traffic have been proposed by CalMac and approved by the Scottish
Office/Scottish Executive. In the earlier years of the period of the Undertaking, this approval seems to
have been implicit, as fares were increased to bridge the gap between the level of deficit funding set by
the Scottish Office and the company's costs. In more recent years, the increases have been explicitly
approved by Ministers on an annual basis.

34. In recent years, the pattern of annual increases has largely been to approve general increases, in line
with inflation, which apply to all — or virtually all — of the routes. In the earlier years of the period
since 1995, there was some restructuring of the fares system and this involved differential annual
increases being applied across the network of routes.

2.1.4. Grant of public money to CalMac

35. The Commission understands that CalMac has received the following payments from the Scottish

Office/Executive in relation with the above-mentioned public service obligations.

Public money granted by the Scottish Office/Executive to CalMac (GBP million) since 1995

Table 1

Type of funding

1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07

Deficit grant

8,282 11,674 10,500 14,436 15,000 19,000 20,404 18,900 25,919 25,100 31,400 34,200

Capital grant — Piers and Harbours

0,906

0,344

0,203

0,806

0,902

0,770

0,300

1,189

0,814

2,545

1,113

2,208

Capital grant — Vessels

3,588

1,460

9,900

7,669

9,269

2,397

0,000

0,000

0,000

0,000

0,000

0,000

Capital loans — Vessels (net of loan
re-payments)

3,988

0,511 – 0,222

3,449 – 0,429

3,366

1,490

6,554

1,964

6,259

5,073

7,660

Total

15,858 13,134 20,400 25,554 24,269 24,763 21,894 26,643 27,883 33,904 37,586 44,068

36. The UK authorities indicated that new vessels were funded until 2002 by Scottish Office/Executive
grants (75 %) and loans (25 %). Since 2002, all vessels have been funded on a 100 % loans basis.

(11) Eleven vessels have been added to the fleet since 1995.

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37. Prior to the 2007 contact the loans advanced to CalMac by the Scottish Office/Executive had been set
at UK Public Works Loans Board (PWLB) rates. The role of the latter is to provide loan finance to local
authorities rather than to publicly-owned companies. The PWLB rates are considered to be determined
on market conditions.

38. As regards specifically Gourock-Dunoon, the Commission notes that CalMac's revenue per passenger
including subsidies on this route is high compared to the non-subsidised fee charged by CalMac's
competitor, Western Ferries. Based on the latest figures available, (subsidies on the Gourock-Dunoon
route amounting in 2005 to GBP 2,451 million (12) for an annual passenger traffic of 624 000 (13)),
the average aid per passenger amounted to GBP 4, whereas the current passenger rates for a single
ticket stand at GBP 3,40 (subsidised CalMac) and at GBP 3,25 (non-subsidised Western Ferries). In their
letter of 30 July 2007, the UK authorities accepted this point, acknowledging that without aid, the
CalMac fare for an adult single would reach GBP 7,40 for an adult single but underlined that the route
operated by CalMac is significantly longer than the route operated by Western Ferries and that Western
Ferries could better fill the decks of its ferries with individual cars.

2.1.5. Northern Isles Maritime routes

39. The Northern Isles comprise two archipelagos: Orkney and Shetland. The total annual maritime
passenger traffic amounts to circa 300 000. The Commission does not have exact figures concerning
the freight traffic to the Northern Isles.

40. Two maritime networks have to be distinguished: The first one is a short route serving Orkney
between Scrabster (Scottish mainland) and Stromness (Orkney), upon the Pentland Firth. The second
one is the triangular route between Aberdeen (Scottish mainland), Lerwick (Shetland) and Kirkwall
(Orkney).

41. The present Decision does not concern maritime links within Orkney or Shetland, given that the
traffic on these routes is less important and that neither NorthLink, nor CalMac serve the routes within
these two archipelagos.

Table 2

Maritime traffic between the Scottish mainland and the Shetland

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Cars (k)

Commercial vehicles (k)

50

12

53

14

58

15

60

16

60

17

61

17

62

20

51

22

40

16

59

64

1

1

67

1

Passengers (k)

214

220

236

245

239

242

239

208

166

241

289

301

Loose freight (kT)

43,0

52,0

62,0

60,0

52,0

—

47,3

49,9

—

—

—

—

Revenue k GBP

16,17

14,95

15,8

14,48

15

—

15,28

16,66

12,2

28,92

33,44

42,51

Subsidy k GBP

6,519

8,1

8,1

9,412

14,3

11,4

11,5

11,6

11,21

18,52

28,12

22,45

(12) Source: 2005-2006 annual report of CalMac publicly available at the following Internet address:

http://www.calmac.co.uk/annual-report-2005-2006.pdf

(13) Source: website of Western Ferries.

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42. The situation on the two routes is illustrated by Map 3 below:

The different maritime routes and operators between Scotland, Orkney and Shetland

Map 3

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2.1.6. The operators

43. On the maritime route between Aberdeen, Kirkwall and Lerwick, there are currently two competitors:

— NorthLink operates two combined passenger car and freight vessels and two freight and livestock

vessels,

— Streamline Shipping Group Ltd operates a containerised freight vessel.

44. Norse Islands Ferries is not anymore present on the route but operated one, and at times two,

freight-only vessels between September 2002 and June 2003.

45. On the maritime route between North Scotland and Orkney, there are at present three competitors:

— NorthLink also operates a combined passenger, car and freight vessel on the shorter Pentland Firth

crossing,

— Pentland Ferries began providing a combined passenger, car and freight service across the Pentland

Firth in spring 2001,

— John O'Groats Ferries operates a small passenger-only ferry on the Pentland Firth route but in

summer only.

2.1.6.1. Nor thLink

46. Originally, NorthLink Orkney and Shetland Ferries Ltd (hereinafter NorthLink 1) was a 50 %-50 % joint
venture, established in 2000 in Edinburgh between the Royal Bank of Scotland (hereafter RBS), one of
the leading banks in the UK, and CalMac. NorthLink is now a new legal entity, fully-owned by the
Scottish Executive (hereinafter NorthLink 2), which has taken over from NorthLink 1 all the personnel
and assets. Further details on NorthLink, notably on the distinction between NorthLink 1 and
NorthLink 2, are provided below in Section 2.2.3.4 at paragraph 83.

2.1.6.2. Streamline

47. Streamline Shipping Group Ltd, referred to hereafter as Streamline, is a family-owned business specialised
in logistics in Scotland and also in the rest of the UK. With a workforce of 160 employees, it is active
in road haulage, maritime transport, storage and distribution, including a new “home delivery” service.

48. This company started to operate in 1984 a biweekly freight services between Aberdeen, Lerwick and
Kirkwall, using chartered freight lift-on lift-off vessels or its owned container ship (MV Navigia)
capable of transporting 205 EU Treaty (14). In 1987 it also opened container freight services to
Orkney (15) with a subsidiary, Orkney Line Limited.

2.1.6.3. Pentland Fer r ies

49. Pentland Ferries operates a daily ferry service between Gills Bay, in Caithness, Scotland, about 3 miles

West of John O'Groats, and St Margaret's Hope on South Ronaldsay, in Orkney.

50. The company has currently two vessels although only one operates on the route at any time. Both are

now due for replacement for the summer season 2008 by a new catamaran ferry.

51. Pentland Ferries is a privately owned company, which has operated routes to Orkney only, since the
summer of 2001. While not being considered to be a “lifeline” service, this company carries some
80 % of the livestock, dangerous goods cargoes,
including aviation fuel, although it receives no
subsidy or other financial assistance.

(14) Twenty-feet equivalent unit.
(15) Source: website of Streamline Shipping:

http://www.streamlineshippinggroup.com/flash/

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2.1.6.4. John O'Groats Fer r ies

52. John O'Groats Ferries is a company ensuring passenger ferry service from John O'Groats in the Far
North of Scotland to Orkney, every day all summer from 1st May to 30 September, with one vessel,
MV Pentland Venture.

2.1.7. Public service

2.1.7.1. The 1997 public ser vice contract with P&O

53. The Scottish Office launched an open competitive tendering exercise in June 1995 for

the
Aberdeen-Lerwick and Scrabster-Stromness routes. In March 1997 the then Minister of State for the
Scottish Office announced as owner that CalMac would not be allowed to bid. (16).

54. The tender led the Scottish Office to choose P&O. Pursuant to the contract eventually signed (herein-
after “the 1997 contract”), P&O was to be paid a basic annual block grant, subject to “clawback
arrangements” aimed at capping possible benefits, should the company's profits exceed forecasts. P&O
received GBP 55 million from the Scottish authorities over the period 1997-2002 (17) for the execu-
tion of the contract.

55. Under the contract, the subsidy was limited to passengers, accompanied cars and associated vehicles,
such as motorhomes and motorcycles. The level of tariffs for lorries was left to the discretion of the
holder of the contract.

2.1.7.2. The 2000 public ser vice contract with Nor thLink

56. In 1998 the Scottish Executive launched a new tendering process for a public service contract on the
routes between Aberdeen, Kirkwall and Lerwick and between Scrabster and Stromness over the
2002-2007 period. As was already the case in the former contract, no exclusive right was granted to
the selected bidder. While the service specifications of the tender indicated that operators would be
required to provide capacity to carry freight, this element of the service was expected to be operated
on a commercial basis, i.e. without subsidy.

57. The invitation to tender (18):

— specified the route configuration and minimum number of sailings required but expected bidders

to propose detailed timetables,

— indicated that the new contract would continue subsidising services for routes between the ports
used in the current contract with P&O that is to say: Aberdeen, Lerwick, Scrabster and Stromness,

— stipulated that the services should provide for the carriage of freight, without any subsidy; it was
left for bidders to determine the precise level of freight services to be made available, although
they should be sufficient to carry at least the levels currently provided by P&O plus reasonable esti-
mates of growth,

— required that freight services must include sufficient appropriate capacity for the carriage of live-
stock; the service was to be made available all year round, and particularly during the main live-
stock shipment period of August to October,

— expected three combined passenger/freight vessels to operate the routes but was open to consider
alternative proposals providing that its other service requirements were met; vessel size, carrying
capacity and speed were also matters for bidders to consider with a proviso that, as a minimum,
they matched those of the P&O contract,

— required the successful bidder's pricing plan to be agreed with the Scottish Executive and
maximum tariffs to be published. It was expected that initial tariffs would not be set at a level
significantly above prevailing rates.

(16) Source Report of Audit Scotland of December 2005 on the NorthLink ferry services contract. Paragraph 2.20. The

text of the reported is available at the following Internet address:
http://www.audit-scotland.gov.uk/docs/central/2005/nr_051222_northlink_ferry.pdf

(17) Source Report of Audit Scotland of December 2005 on the NorthLink ferry services contract. The text of the reported

is available at the following Internet address:
http://www.audit-scotland.gov.uk/docs/central/2005/nr_051222_northlink_ferry.pdf

(18) Source Report of Audit Scotland of December 2005 on the NorthLink ferry services contract. Paragraph 2.16.

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58. In November 1998, thirteen shipping operators expressed an interest in the tender after advertisement
in the Official Journal of the European Communities. Six ferry operators were short-listed and three ulti-
mately submitted bids in June 1999.

59. The Scottish Executive ruled out one of the three bidders, SERCO Denholm, because it considered unac-
ceptable its request to get the possibility to sell its vessels or transfer ongoing leases to the Scottish
Executive at the end of the contract, and also because it was the highest bid. The Scottish Executive
had then to choose between the respective bids of P&O and of NorthLink, which had just been set up.
The Scottish Executive chose NorthLink as the preferred bidder in September 2000.

it anticipated generating about GBP 8 million more passenger

60. NorthLink's bid for basic subsidy of GBP 45,7 million was within the affordability price set for the
five-year contract and was GBP 14 million cheaper than the bid of P&O. NorthLink's costs were higher
than P&O's but
income and
GBP 13 million more from freight surpluses because its traffic growth assumptions were higher.
According to the UK authorities, it was also prepared to accept less profit from the contract than
P&O. The UK authorities have indicated to the Commission that the analysis made by the Scottish
losses could be
Executive on NorthLink's bid “suggested that even if no passenger growth were achieved,
contained within NorthLink's available working capital” (19).

61. The contract between NorthLink and the Scottish Executive was thus signed in December 2000. It had
first been anticipated that the new operator would have the time to commission and build new vessels
to be ready to start operations in April 2002. Following the contract award in October 2000,
NorthLink ordered three new passenger/vehicle ferries and acquired a second-hand dedicated freight
vessel.

62. However NorthLink was only able to start operations on 1 October 2002. Because of this delay, the

Scottish Executive prolonged the public service contract operated by P&O for 6 months.

63. The contract with NorthLink provided for a method to calculate the annual compensation, taking
account of inflation, only for obligations imposed on the carriage of passengers and accompanied
cars. This would have implied a basic subsidy of GBP 12,0 million in the first year of operation
(1 October 2002-30 September 2003) and one of GBP 11,1 million in the second year
(i.e. 2003-2004).

2.1.7.3. The 2004 MoA with Nor thLink

64. The bidding process required bidders to estimate the total cost of providing the services specified
(which include a capacity to carry cars) and then to calculate how much revenue would be secured
from:

— passengers and cars, reflecting the specified fares and the assessments by the bidder of traffic

volumes, and

— freight traffic, on the basis of their own decisions on commercial rates and their own assessments

of volumes, based on the historical statistics provided by the Scottish Executive.

65. While P&O provided the service under public service contract over the period between April 1997
and March 2002, it was then the only operator offering a roll on/roll off (ro-ro) service for passengers,
cars and freight between the Scottish mainland and the Northern Isles. According to the UK authori-
in preparing its bids, NorthLink assumed that it would also enjoy a monopoly on the ro-ro
ties,
traffic (20).

66. This assumption proved however incorrect. In the run-up to the start of the new contract, there were,
according to the UK authorities, new developments which undermined the initial calculations made by
NorthLink:

— In the spring of 2001 a new operator, Pentland Ferries, began services from the Scottish mainland
to Orkney and progressively took a substantial share of the Orkney passenger, car and freight
market.

(19) Letter from the UK authorities of 14 September 2006.
(20) By letter of 4 October 2004.

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— In July 2002 a consortium of three road hauliers (21) announced that they would be part of a new
ferry company, Norse Island Ferries Ltd, in reaction to the freight fares announced by NorthLink in
2001, which they considered too high compared to fares previously offered by P&O. In early
September 2002 Norse Island Ferries Ltd started to offer a daily ro-ro freight service between
Shetland and the Scottish mainland and, for the early months of its operation, appeared to be
carrying a large proportion of the freight market.

— As from 1 October 2002, NorthLink was obliged to temporarily charter in a new vessel due to the
failed schedule of the construction of a new pier at Scrabster Harbour. The service specification for
the subsidy competition combined with new rules on vessel safety implemented under the
Stockholm Agreement (22) meant that the new vessels to provide for the specified service were
substantially larger than those previously operating the routes. This necessitated significant harbour
works at all of the five ports from which the services operate. In four cases, this work was
completed by the contract implementation date. However, in the fifth case, construction of a new
pier at Scrabster Harbour slipped badly behind schedule. As a result, NorthLink was unable to bring
the new vessel designed for this route into service until April 2003.

67. Under the contract, the non availability, at the designated ports, of harbour facilities which can
accommodate their vessels was a “relief event” that removed any obligation on NorthLink to provide
the relevant services. In these circumstances, NorthLink indicated that it would continue to provide a
Scrabster-Stromness crossing only if it were reimbursed for the additional costs involved in laying up
their vessel and chartering a smaller substitute vessel capable of using the original port facilities at
Scrabster. It was then estimated that the additional costs involved would amount to about GBP 30 000
per week.

68. Following the announcement

in 2001 of

the new freight service by Pentland Ferries, NorthLink
requested discussions with the Scottish Executive on the impact of this new competition on its finan-
cial position. NorthLink made available to the Scottish Executive their business model to allow it to
examine the impact of the competition on the company's viability. Based on this model, NorthLink was
initially projecting a total return over the lifetime of the contract of GBP 14,9 million. The changed
circumstances turned this figure into a projected loss of GBP 16,4 million. This raised serious concerns
over the solvency of the contractor and its ability to execute the contract. The chief factor in this was
the competition from Norse Island Ferries as this accounted for over GBP 25,5 million of
the
GBP 31,3 million negative turnaround in the company's books.

69. The competition on the Shetland freight market from Norse Islands Ferries came to an end in early
June 2003, following the decision of the latter to cease to trade. This offered the prospect of NorthLink
moving back on to a viable basis. The Scottish Executive thus decided to continue to fund NorthLink
in line with the terms of the contract, believing that the cessation of Norse Islands Ferries could be suffi-
cient to allow the contract to run its full term.

70. However,

in the summer of 2003, few months after starting operations, NorthLink informed the
Scottish Executive that it could no longer realistically deliver its contractual obligations over the
remainder of the contract period, i.e. to the end of September 2007.

71. The Scottish Executive reviewed the company's financial position, with the assistance of independent
accountants, and concluded that NorthLink was heading for insolvency. In view of the threat of insol-
vency, if additional subsidy were not to be paid, the Scottish Executive took into consideration the risk
that, if the company had any formal insolvency proceedings taken against it (which could have been
done by a number of creditors), the life line services could have been interrupted.

72. According to the Scottish Executive, the longer term future would be dependent upon the attitude of
the receiver appointed to manage the company. The receiver would not be bound by any contractual
obligations of the company and would not, therefore, be bound to provide the subsidised service.

(21) These three road hauliers between them traditionally handled 80 % of the freight going between Shetland and the Scottish

mainland, resorting to ferry services of P&O Scottish Ferries.

(22) Following two passenger ship disasters in the 1990's, eight North European States agreed to set a higher standard for ship
stability in what has become known as the Stockholm Agreement. The eight States were Denmark, Finland, Germany,
Ireland, the Netherlands, Sweden, the United Kingdom, and Norway.

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73. On 8 April 2004, the Scottish Executive announced, following contacts with the Commission, its
intention to re-tender the service and published a Contract Notice in the Official Journal of the European
Union relating to such tendering. In parallel to this new tendering procedure, which will be described
further below, the Scottish Executive took a number of actions to ensure the continuity of lifeline
service in the interim.

74. On 29 September 2004, the Scottish Executive concluded with NorthLink revised funding arrange-
ments, through a Minute of Amendment (hereinafter “the MoA”) to the public service contract. This
MoA provided for a deficit funding system, ensuring that NorthLink could continue the services until
the handover of the contract and to the standard specified in its specifications. The MoA also provided
that certain assets, leased or owned by NorthLink, could be made available on the occasion of the next
public tender, on a discretionary basis and at estimated market value, to bidders who would wish to
use them in delivering the services within the framework of the future contract. With a view to main-
taining budgetary control over that period, the MoA involved measures controlling NorthLink's ability
to go beyond the terms of an agreed budget without the approval of the Scottish Executive.

75. In addition, the MoA provided for limited “incentive payments” of around GBP 1,5 to GBP 2 million
per year, assuming a range of demanding service performance, cost and revenue targets would be met
or exceeded. A first element of the incentive payment would be paid provided a range of punctuality,
reliability and other service performance targets were met in full. This element was designed to replace
and enhance the system of performance penalties built into the original agreement. A second element
would be paid on the delivery of cost savings/revenue gains in comparison to a benchmark budget
which the Scottish Executive's independent accountants would have approved.

76. In August 2005 the Auditor General for Scotland asked Audit Scotland to examine the new public
service contract awarded to NorthLink. Audit Scotland is a statutory body set up in April 2000 under
the Public Finance and Accountability (Scotland) Act 2000 to provide services to the Auditor General.
Their mission is to ensure together that the Scottish Executive is held to account for the proper, effi-
cient and effective use of public funds.

77. According to the report published by Audit Scotland (23) in December 2005, NorthLink received from
the Scottish Executive GBP 71 million over the 3 first years of the public service contract, covering
the period from October 2002 to end September 2005, to be compared with compensation under the
contract limited to GBP 50,7 million. The report gives the following break-down of the GBP 71 million:

— GBP 33,6 million of basic compensation under the original contract,

— GBP 16,7 million of additional compensation, allegedly allowed under the original contract,

— GBP 18,2 million of additional funding, and

— GBP 2,5 million to pay off in one instalment some leases used by NorthLink.

78. On the basis of the information given by the UK authorities (24), the Scottish Executive further granted
to NorthLink GBP 21,6 million between September 2005 and the handover of the contract to its
successor on 6 July 2006.
In conclusion, for the execution of the contract, NorthLink received
GBP 97,6 million in total, over a period of just 3 years and 9 months, to be compared with a cost of
around GBP 55 million for the former contract with P&O over 1997-2002. However, these amounts
may be difficult to compare directly, in the light of possible cost differences between both contracts.

79. Based on a table provided later by the UK authorities (see Table 3 below) (24), NorthLink appears to
have received a little less money (GBP 92,5 million) from the Scottish Executive than announced
earlier (GBP 97,6 million (25)).

(23) The text of the reported is available at the following Internet address:

http://www.audit-scotland.gov.uk/docs/central/2005/nr_051222_northlink_ferry.pdf

(24) By their letter of 30 July 2007.
(25) By their letter of 14 September 2006.

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Public money granted by the Scottish Executive to NorthLink1 over 2002-2006 (1)

Table 3

Category of payment

2002/03

2003/04

2004/05

2005/06

Total

Basic grant

GBP 11 605 168

GBP 10 702 000

GBP 11 257 000

GBP 8 514 000

GBP 42 078 168

Material change — Capital expendi-
ture

GBP 400 000

GBP 400 000

GBP 400 000

GBP 306 000

GBP 1 506 000

Material change — Staff costs

GBP 828 615

GBP 593 016

GBP 583 796

GBP 440 000

GBP 3 645 427

Material change — Harbour dues

GBP 1 758 368

GBP 2 922 588

GBP 2 812 190

GBP 2 100 000

GBP 9 593 146

Material change — Fuel variance

Scrabster Pier delays

GBP 831 157

Lease payments

Additional funding

GBP 2 525 704

GBP 7 200 000

GBP 831 157

GBP 2 525 704

GBP 25 162 799

Total

GBP 18 423 308

GBP 29 350 092

GBP 23 195 000

GBP 21 574 000

GBP 92 542 401

(1) Figures relate to years beginning on 1 October. Contract ended on 6 July 2006.

It has not proved possible for the UK authorities to allocate all of the material change figures to individual years and, as a result, the “additional funding” figure (which is
calculated as a residual) cannot be allocated by year.
One payment (of GBP 140 000) has been made to NorthLink 1 since the handover of the contract in July 2006. This represented a balancing item reflecting the return of
excess operator return to the Scottish Executive (as provided for by the MoA of 29 September 2004) and the payment by the Scottish Executive of liabilities relating to
the transfer of employees from P&O Scottish Ferries to NorthLink Orkney & Shetland Ferries (as provided for in the contract of December 2000).

2.1.7.4. The 2006 public ser vice contract with Nor thLink 2

80. In a submission dated 9 March 2004 to the Commission, the UK authorities indicated the intention of
the Scottish Executive to re-tender the contract as quickly as possible. The submission envisaged that
this process could be completed by November 2005.

81. The new invitation to tender (26) provided that the 2005 tariffs and schedule for car and passenger
would be maintained and indexed on the Consumer Prices Index. However, unlike the 2000 tender
exercise, the invitation to tender introduced public service obligations on freight service and foresaw
various requirements:

— tariff requirements: the tariff levels had to be reduced on the Aberdeen/Kirkwall (Hatston)/Lerwick
routes in each direction, by 19 % on the Kirkwall to Aberdeen route and 25 % from Shetland on
the basis of 2005 freight fares charged by NorthLink,

— capacity and frequency requirements: a comprehensive ro-ro freight service, encompassing live-
stock and dangerous goods and an additional freight sailing required during the week on the
Kirkwall to Aberdeen service.

82. On 8 April 2004, the Scottish Executive publicly announced its intention to re-tender the service and
published a Contract Notice in the Official Journal of the European Union relating to the tendering of the
service. On 27 May 2004, it published a draft service specification for the tender as part of a consulta-
tion exercise (27). On 19 July 2005, it announced the issue of an invitation to tender to the three
short-listed companies, following which two bids were submitted on 30 November 2005, (the third
company withdrew from the process in October 2005). It announced on 9 March 2006, the selection
of the preferred bidder, CalMac.

83. Subsequently the Scottish Executive established a new company NorthLink Ferries Ltd (hereinafter
NorthLink 2) as a wholly-owned subsidiary of CalMac and transferred to that new company the
contract won by CalMac, which was signed on 6 July 2006 (hereinafter “the 2006 contract”). NorthLink
2 thus took over the service previously carried out by NorthLink Orkney & Shetland Ferries Ltd (herein-
after NorthLink 1, in order to differentiate the old entity from the new one). NorthLink 2 has taken
over from NorthLink 1 personnel and assets, on market conditions according to the UK authorities.

(26) A summary of the 2006 invitation to tender is available at the following address on the website of the Scottish

Executive:
http://www.scotland.gov.uk/Resource/Doc/55971/0015831.pdf

(27) Publication of the tender in OJ of 3 September 2005 under Reference S 170/2005-169336.

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84. NorthLink 2 has continued to sail under the NorthLink Ferries brand and to operate the same ships on
the routes to Orkney and Shetland. The company has continued to operate from offices in Kirkwall,
Lerwick and Aberdeen and from the ferry terminals at Scrabster and Stromness (28).

85. The MoA involved the Scottish Executive paying off some leases that NorthLink 1 had entered into (for
a freight vessel, towing vehicles and a ticketing system), with these assets to be made available, on a
discretionary basis and at a price based on estimated market value, to bidders participating in the
re-tendering process. In addition, NorthLink 1 owned a number of other items that were relevant to
the operation of the contract and these, too, were made available to all bidders on the basis of an esti-
mate of market value. This included information technology hardware, vessel spare parts and equip-
ment, port equipment, office equipment and livestock trailers.

86. In addition, NorthLink 1 offered its brand to bidders and a value of GBP 350 000 was put on this by
the Scottish Executive, reflecting an independent consultant's estimate of the basic cost of re-branding
(mainly changing the fleet's livery). In total, NorthLink 2, as the newly-appointed operator, bought all
of these items from NorthLink 1 for a sum of GBP 1 554 000. In addition, NorthLink 2 bought the
stocks, such as fuel, catering, held on the vessels at the point of contract handover at the supply prices
paid by NorthLink 1.

87. According to the UK authorities, all of the assets of NorthLink 1 that NorthLink 2 wished were bought
by the latter at actual or estimated market prices. In terms of the transmission of debts to NorthLink 2,
the deficit funding mechanism put in place under the MoA was designed to ensure amongst others
that NorthLink 1 did not get into debt. There were, therefore, according to the UK authorities, no debts
in the system to transmit to NorthLink 2 and that company began operating the contract without any
debt inherited from NorthLink 1.

88. The cost for delivering the requested public services by NorthLink 2 proves to be higher in the third
public service contract, as shown by the following table summarizing the State resources that it
received.

Table 4

Payments made by the Scottish Executive to NorthLink 2 for 2006/2007 (1)

Category of payment

Deficit grant

Funded assets (capital grant)

Total

(1) Figures relate to period from 6 July 2006-30 June 2007.

2006/07

GBP 31,132 million

GBP 1,044 million

GBP 32,176 million

89. While an element of revenue risk is still borne by the operator under the public service contract
arrangements, the UK authorities informed the Commission that the form of contract put in place in
2006 is robust enough to cope with the type of difficulties that undermined the previous public
service contract that ran from October 2002 to July 2006.

Table 5

Traffic and revenue of NorthLink 1 and NorthLink 2 (1)

Year

2002

2003

2004

2005

2006

2006 (2)

Passengers

Cars

37 000

241 000

289 000

301 000

126 000

178 000

10 000

59 000

64 000

67 000

29 000

40 000

(28) Source: website of CalMac.

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Year

2002

2003

2004

2005

2006

2006 (2)

Commercial vehicles

41 000

265 000

266 000

256 000

143 000

143 000

Revenue GBP million

—

15,8

20,3

21,6

14,8

7,0

(1) Notes: Passenger,

car and commercial vehicle

statistics on a calendar year basis. Revenue on the basis of a
1 October-30 September financial year (e.g. revenue for 2003 relates to 1 October 2002-30 September 2003). NorthLink 1
contract began on 1 October 2002 and ended on 6 July 2006. Commercial vehicle figures relate to lane metres occupied.
(2) Notes: NorthLink 2 contract began on 6 July 2006. Passenger, car and commercial vehicle statistics are on a calendar year basis
(i.e. 6 July 2006-31 December 2006). Revenue figures are on the basis of a 1 October-30 September financial year (i.e. revenue
for 2006 relates to 6 July 2006-30 September 2006).

2.1.8. Transport fares

90. The table below shows the fares charged since 2000 by the public service contract operator and by

Streamline, which provides only lo-lo freight services.

Table 6

Comparison of fares between public service contract operator and Streamline, according to Streamline

Year

Public service contract operator/per
linear metre

Streamline/per linear metre

Shetland

Orkney

Shetland

Orkney

2000 (P&O rates)

GBP 43,70

GBP 37,90

GBP 37,05

GBP 31,62

2002 indicative rates by NorthLink 1

GBP 44,00

GBP 36,00

2002/2003 (NorthLink 1 rates)

GBP 36,00

GBP 25,50

GBP 33,69

GBP 29,40

2004 (NorthLink 1 rates)

GBP 38,50

GBP 27,50

GBP 34,87

GBP 28,86

2005 (NorthLink 1 rates)

GBP 39,45

GBP 28,20

GBP 33,24

GBP 30,29

2006 (NorthLink 1 rates)

GBP 40,60

GBP 29,00

GBP 40,43

GBP 32,07

July 2006 (NorthLink 2 rates)

GBP 30,60

GBP 23,50

GBP 40,43

GBP 32,07

Source: Streamline.

91. Up until October 2002, P&O was the unique ro-ro operator. Under the terms of its contract with the
Scottish Executive, P&O received a subsidy of GBP 11,5 million for the calendar year 2000. This
subsidy was not intended to include any subsidy for freight services. As shown in Table 6 above,
its rates to both Shetland and
Streamline contends, on the basis of published data that,
Orkney were cheaper than those offered by P&O (29). However, the Commission notes that such
comparisons do not necessarily take into account the operational costs and efficiencies, which may be
different between a lo-lo and a ro-ro service.

in 2000,

92. As with the first public service contract with P&O, the Scottish Executive provided NorthLink 1 with

compensation for passenger traffic only, excluding in principle any subsidy for freight services.

93. NorthLink 1 indicated in December 2001 — prior to executing the contract — that it would charge
GBP 44,00 and GBP 36,00 per linear metre for trailers to Shetland and Orkney respectively. These
rates were justified on the basis that NorthLink 1 needed to charge a rate that was both commercially
sustainable and acceptable to the market. It was also stated that these rates would be fixed for a period
of five years. NorthLink 1 stated that it could not “sustain a situation when we [NorthLink 1] carry trailers
for free or for very small amounts”. At the same time, NorthLink 1 emphasised that its freight business
was not subsidised.

(29) As rates for lo-lo operations are not usually charged per linear metre, Streamline has calculated its rates on a per linear

metre basis so as to provide a like for like analysis.

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94. According to Streamline, NorthLink 1 responded to the competition from Streamline and Norse Island
Ferries by introducing in 2002, at the very beginning of
its contract, significant reductions (to
GBP 36,00 and GBP 25,50 per linear metre for trailers to Shetland and Orkney respectively) on the
charges previously indicated by NorthLink 1 as being commercially sustainable. Streamline and Norse
Island Ferries, suspect that NorthLink 1 was providing its freight services at below cost.

95. NorthLink 1 introduced specific reduced rates in December 2003:

— a special rate for empty trailers,

— a special flat rate of GBP 200 for non time-sensitive goods travelling between Aberdeen and

Kirkwall (the so-called “Sunday Special”), and

— a commercial traffic rebate scheme providing for discounts of up to 10 % determined according to

the level of eligible lane metres shipped per month.

96. Since NorthLink 2 started in July 2006 to execute the third public service contract, the commercial
pressure exerted on Streamline has allegedly increased further. According to Streamline, the then
Minister for Transport, when awarding to NorthLink 2 the new public service contract, announced that
freight rates from Aberdeen to Shetland will be reduced by 25 % and to Orkney by 19 %. This was
only possible, according to Streamline, thanks to the increased annual subsidy to NorthLink 2 reaching
GBP 31 million.

97. According to Streamline, the standard rates charged by NorthLink 2 are now at GBP 30,60 per linear
metre for Shetland and GBP 23,50 per linear metre for Orkney. These rates are to be compared with
GBP 40,43 per linear metre for Shetland and GBP 32,07 per linear metre for Orkney charged by
Streamline. In addition, the empty trailer and “Sunday Special” concessions have allegedly remained in
place, with reductions on the rates offered by NorthLink 2 of up to 73 %.

98. Streamline argues that, whist it has sought in the past to compete by reducing rates, the scale of the
reductions afforded to customers by NorthLink 2 has rendered this strategy no longer possible.
Streamline estimates that to cover its costs it must charge rates which are equivalent to GBP 36,67 per
linear metre. Such a rate is higher than the rates currently offered by NorthLink 2.

3. PRELIMINARY ASSESSMENT OF THE EXISTENCE OF AID

99. By virtue of Article 87(1) of the EC Treaty “any aid granted by a Member State or through State resources
in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or
the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with
the common market”.

100. The criteria laid down in Article 87(1) of the EC Treaty are cumulative. Therefore, in order to deter-
mine whether, as is alleged by complainants, the above-described payments to CalMac, NorthLink 1
and/or NorthLink 2 constitute State aid within the meaning of Article 87(1) of the EC Treaty, it must
be established whether the financial support:

— involves a loss of State resources imputable to the State,

— provides a selective advantage to certain undertakings or the production of certain goods,

— distorts or threatens to distort competition, and

— affects trade between Member States.

3.1. Fulfilment of the criteria of Article 87(1) of the EC Treaty

101. The Commission notes that the various payments described in Section 2 have been granted through
State resources and are imputable to the Member State. Thus the first criterion is met. In addition,
although NorthLink 1 was half owned by CalMac and therefore half publicly owned, the Commission
cannot exclude at this stage of its investigation if the lease of vessels thereto may have involved State
resources.

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102. The relevant payments, as summarized above in Tables 1 and 3, as well as those involved in the new
2007 contract with CalMac and the new 2006 contract with NorthLink 2 concern certain specific
undertakings. They are therefore selective. The question of whether these payments involve the grant
of an advantage to these specific undertakings will be further examined thereafter in the light of the
Altmark judgment (30).

103. The market for maritime cabotage routes is fully liberalised since the entry into force of the Maritime
Cabotage Regulation (31), that is to say since 1 January 1993. The Commission therefore considers at
this stage that, should indeed a selective advantage have been granted to any of the above-mentioned
undertakings, it would be liable to distort competition and affect trade between Member States. As
such, the third criterion and the fourth criterion for there to be State aid within the meaning of
Article 87(1) of the EC Treaty would also be fulfilled.

3.2. Applicability of the private market economy investor principle

104. Article 295 of the EC Treaty provides that Community rules are neutral as regards public and private
ownership. In accordance with a constant jurisprudence of the European Courts (32), when a Member
State grants public money to undertakings, no advantage is present if such Member State's behaviour
is consistent with that of a private market economy investor placed in a comparable situation.

105. The Commission considers at this stage that all the grants of public money to CalMac, NorthLink 1 or
NorthLink 2 described in Tables 1 and 3 above are not consistent with the behaviour a private market
economy investor would have. The UK authorities have not provided any evidence that might point in
that direction and have emphasised the public policy aims motivating these payments. Only
concerning loans advanced to CalMac, the rate of which has been set at UK Public Works Loans Board
(PWLB) rates, the UK authorities were of the opinion that these rates were made on market conditions.
The Commission however has doubts as to whether such rates of loans are consistent with those that
could have been offered by a private bank to a private company with the same level of debts as the
relevant undertakings.

3.3. Examination of the relevant payments in relation with the Altmark criteria

106. Direct payments to an undertaking without counterpart are usually presumed to confer upon that

undertaking an advantage.

107. However, further to the Altmark jurisprudence (32), compensation for public service obligations/con-
tracts does not favour the recipient(s) — and thus does not fall within the scope of the prohibition
laid down in Article 87 of the EC Treaty — where the four following conditions are cumulatively met:

— the recipient undertaking is actually required to discharge public service obligations and those obli-

gations have been clearly defined (hereinafter “the first Altmark criterion”),

— the parameters on the basis of which the compensation is calculated have been established before-

hand in an objective and transparent manner (hereinafter “the second Altmark criterion”),

— the compensation does not exceed what is necessary to cover all or part of the costs incurred in
discharging the public service obligations, taking into account the relevant receipts and a reason-
able profit for discharging those obligations (hereinafter “the third Altmark criterion”), and

(30) Judgment of the Court of Justice of 24 July 2003 in Case C-280/00, Altmark Trans & Regierungspräsidium Magdeburg [2003]

ECR I-7747.

(31) Council Regulation (EEC) No 3577/92 of 7 December 1992 applying the principle of freedom to provide services to mari-

time transport within Member States (maritime cabotage) (OJ L 364, 12.12.1992).

(32) See for example: Case T-296/97 Rec, Alitalia, Cases T-228/99 and T-233/99, WestLB v Commission; Case T-366/00, Scott
SA, Cases C-328/99 and C-399/00, Italy and SIM 2 Multimedia v Commission; Case T-358/94, Air France v Commission. In
Case T-296/97 Rec, Alitalia, the Court states that “It must be emphasised that the conduct of a private investor in a market
economy is guided by prospects of profitability. The measure was motivated by the desire to keep the jobs and therefore, above all, by
considerations pertaining to the applicant's viability and survival rather than by prospects of profitability”.

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— where the undertaking which is to discharge public service obligations is not chosen in a public
procurement procedure, the level of compensation needed has been determined on the basis of an
analysis of the costs which a typical undertaking, well run and adequately provided with means of
transport so as to be able to meet the necessary public service requirements, would have incurred
in discharging those obligations, taking into account the relevant receipts and a reasonable profit
for discharging the obligations (hereinafter “the fourth Altmark criterion”).

3.3.1. Preliminary assessment in the case of CalMac

108. As regards payments made to CalMac until the signature of the 2007 contract, the Commission has

the following doubts.

— Firstly, the Commission doubts whether the public service obligations imposed on CalMac were
clearly defined. This question will be further examined in Section 4.2 addressing the compatibility
of the measures at stake with the common market.

— Secondly, the parameters on the basis of which the compensation is calculated do not seem to
have been established before the imposition of obligations in an objective and transparent manner.
The public authority has determined deficit grants ex post, partly on the basis of the deficits
sustained by CalMac. In addition, capital grants and loans have been linked to the purchase of new
vessels but do not seem to have been linked to the execution of the public service obligations.

— Thirdly, the Commission questions whether the costs borne by CalMac have been overcompen-
sated. This is also related to the fact that, in the absence of a clear definition of the relevant public
service obligations it is difficult to identify the relevant costs to be compensated.

— Fourthly, based on the information at the disposal of the Commission, CalMac was not chosen in a
public procurement procedure. Furthermore, the Commission does not have any indication that
the level of compensation needed has been determined on the basis of an analysis of the costs
which a typical undertaking, well run and adequately provided with means of transport so as to be
able to meet the necessary public service requirements, would have incurred in discharging those
obligations, taking into account the relevant receipts and a reasonable profit for discharging the
obligations.

— Fifthly, at this stage of its investigation the Commission cannot establish whether the requirement
in the invitation to tender published on 14 December 2006 that any successful bidder had to
charter the CMAL vessels may have constituted an advantage to CalMac (including CMAL).

109. Therefore the Commission must at this stage conclude that the relevant grants to CalMac until signa-
ture of the 2007 contract can involve an advantage and, in the light of the above consideration, may
thus constitute State aid to CalMac, within the meaning of Article 87(1) of the EC Treaty.

110. As regards the 2007 contract, the Commission requests the UK authorities to provide further comple-

mentary information to enable it to assess:

— firstly, whether the public service obligations are sufficiently clearly defined in the 2007 contract

or otherwise,

— secondly, whether the parameters on the basis of which the compensation is calculated have been

established beforehand in an objective and transparent manner,

— thirdly, whether the total compensation is limited to what is necessary to cover the costs incurred
in discharging the public service requirements, taking into account the relevant receipts and a
reasonable profit for ensuring those requirements, and

— fourthly, whether the call for tender that led to the conclusion of the 2007 contract can guarantee
that the service has been carried out at the lowest overall cost for the Scottish Executive or, alterna-
tively, whether the level of compensation needed has been determined on the basis of an analysis
of the costs which a typical undertaking, well run and adequately provided with means of trans-
port so as to be able to meet the necessary public service requirements, would have incurred in
discharging those requirements, taking into account the relevant receipts and a reasonable profit
for discharging them.

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111. As regards notably the fourth question, the Commission notes that some interested parties are of the
view that the bundling of all routes, with the exception of the route between Gourock and Dunoon,
unduly and significantly restrained competition during the tender, since only CalMac was allegedly able
to offer a bid covering the entire bundle. In that respect, the UK authorities argue that the bundling
reinforces the reactivity of the operator in cases where one or more vessels are suddenly unavailable
for service on certain routes. The Commission will need to assess the impact of the bundling on the
tender procedure; If it were to conclude that such bundling was not justifiable, then the Commission
would consider that the contract has not been awarded through a really open and non-discriminatory
public procurement procedure. This would lead to a situation where the public authorities paid a
higher compensation for the relevant public service requirements that would otherwise have been the
case. In such a situation, the Commission should verify that the costs paid by the public authorities do
not exceed the costs which a typical undertaking, well run and adequately provided with means of
transport so as to be able to meet the necessary public service requirements, would have incurred in
discharging those obligations, taking into account the relevant receipts and a reasonable profit for
discharging the obligations. Should that not be the case, the Commission would not be able to
exclude, on the basis of the Altmark case-law, the presence of an advantage. This could lead to a
conclusion that State aid is involved, which would then have to be tested for compatibility.

112. At this stage, the Commission is not in a position to respond to all these questions and therefore
cannot exclude that grants made to CalMac pursuant to the 2007 contract constitute State aid within
the meaning of Article 87(1) of the EC Treaty.

3.3.2. Preliminary assessment in the case of NorthLink 1 and NorthLink 2

113. The Commission preliminary considers that the grants made to NorthLink 1 pursuant to the MoA are
unlikely to fulfil the fourth Altmark criterion. Firstly, while the 2000 public service contract had been
granted to NorthLink 1 pursuant to an open tender, the additional payments made pursuant to the
MoA were not the consequence of the bid selection through the tender in question. Secondly, the level
of additional compensation foreseen under the MoA does not appear to have been determined on the
basis of an analysis of the costs which a typical undertaking, well run and adequately provided with
means of transport so as to be able to meet the necessary public service requirements, would have
incurred in discharging those requirements. As such, the payments in question likely constitute State
aid to NorthLink 1 within the meaning of Article 87(1) of the EC Treaty.

114. The Commission requests the UK authorities to clarify whether NorthLink 1 still exists as a legal entity,
to indicate any modification in its share capital and, if this company has been liquidated, to provide
details on the liquidation procedure. Furthermore, the Commission wishes to ascertain whether or not
NorthLink 2 constitutes a successor company to NorthLink 1, thus having indirectly benefited from aid
granted to NorthLink 1 through the MoA and from aid through the transfer of NorthLink 1 assets at a
value below market price and termination of its liabilities. According to the UK authorities, all assets
transferred from NorthLink 1 to NorthLink 2 were paid by NorthLink 2 at market price. The Commis-
sion requests the UK authorities to provide a detailed justification for this claim, and the supporting
data and information. The Commission further wishes to ascertain how the acquisition of the neces-
sary assets, and more generally the establishment of NorthLink 2 as a company able to provide the rele-
vant services was financed, and whether such investment constitutes State aid.

115. Similarly, as regards the 2006 contract with NorthLink 2, the Commission requests the UK authorities

to provide further complementary information to enable it to assess:

— firstly, whether the public service obligations are sufficiently clearly defined in the 2006 contract

or otherwise,

— secondly, whether the parameters on the basis of which the compensation is calculated have been

established beforehand in an objective and transparent manner,

— thirdly, whether such compensation is limited to what is necessary to cover the costs incurred in
discharging the public service requirements, taking into account the relevant receipts and a reason-
able profit for discharging them, and

— fourthly, whether the call for tender that led to the conclusion of the 2006 contract can guarantee
that the services have been carried out at the lowest overall cost for the Scottish Executive or, alter-
natively, whether the level of compensation needed has been determined on the basis of an
analysis of the costs which a typical undertaking, well run and adequately provided with means of
transport so as to be able to meet the necessary public service requirements, would have incurred
in discharging them, taking into account the relevant receipts and a reasonable profit for dischar-
ging them.

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116. At this stage, the Commission is not in a position to respond to all these questions and therefore
cannot exclude that payments made pursuant to the 2006 contract may entail the grant to NorthLink 2
of State aid within the meaning of Article 87(1) of the EC Treaty

4. DOUBTS ABOUT THE COMPATIBILITY OF THE MEASURES WITH THE COMMON MARKET

4.1. Legal basis

117. By way of preliminary observation, the Commission notes that the aid preliminarily identified in
Section 3 of the present Decision would, if confirmed, constitute non degressive operating aid.

118. Such aid could not be considered compatible with Article 87(3)(a) of

the EC Treaty of with
Article 87(3)(c) of the EC Treaty as regional aid since the Community guidelines on regional aid (33)
does not provide for the possibility for granting such non degressive operating aid except in outermost
regions, as defined by Article 299(2) of the EC Treaty (34). Scotland is not an outermost region listed
in that Article.

119. Similarly, none of the possible aid concerned may be authorised as restructuring aid within the
meaning of the Community guidelines on State aid for rescue and restructuring firms in difficulty (35).
Indeed, no restructuring plan has been notified to the Commission for any of the possible benefici-
aries.

(33) See paragraphs 79 to 81 of the Community guidelines on national regional aid for 2007-2013 (OJ C 54, 4.3.2006).

The text of the Guidelines is available at the following Internet address:
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52006XC0304(02):EN:HTML
“79. Because it is intended to overcome delays and bottlenecks in regional development, except as provided for in paragraphs 80
and 81, operating aid should always be temporary and reduced over time, and should be phased out when the regions
concerned achieve real convergence with the wealthier areas of the EU [73].

80. In derogation from the previous paragraph, operating aid which is not both progressively reduced and limited in time may

only be authorised:
— in the outermost regions, in so far as it is intended to offset the additional costs arising in the pursuit of economic
activity from the factors identified in Article 299(2) of the Treaty, the permanence and combination of which severely
restrain the development of such regions (remoteness,
insularity, small size, difficult topography and climate, and
economic dependence on a few products) [74],

— in the least populated regions, in so far as it is intended to prevent or reduce the continuing depopulation of these
regions [75]. The least populated regions represent or belong to regions at NUTS-II level with a population density of
8 inhabitants per km2 or less and extend to adjacent and contiguous smaller areas meeting the same population density
criterion.

81. In addition, in the outermost regions and low population density regions, aid which is not both progressively reduced and
limited in time and which is intended partly to offset additional transport costs may be authorized under the following
conditions:
— aid may serve only to compensate for the additional cost of transport, taking into account other schemes of assistance to
transport. While the amount of aid may be calculated on a representative basis, systematic overcompensation must be
avoided,

— aid may be given only in respect of the extra cost of transport of goods produced in the outermost regions and low popu-
lation density regions inside the national borders of the country concerned. It must not be allowed to become export aid.
No aid may be given towards the transport or transmission of the products of businesses without an alternative location
(products of the extractive industries, hydroelectric power stations, etc.),

— for the outermost regions only, aid may also cover the cost of transporting primary commodities, raw materials or inter-

mediate products from the place of their production to the place of final processing in the region concerned,

— the aid must be objectively quantifiable in advance, on the basis of an aid-per-passenger or aid-per-ton/kilometer ratio,
and there must be an annual report drawn up which, among other things, shows the operation of the ratio or ratios,
— the estimate of additional cost must be based on the most economical form of transport and the shortest route between
the place of production or processing and commercial outlets using that form of transport; external costs to the environ-
ment should also be taken into account.”.

(34) “2. The provisions of this Treaty shall apply to the French overseas departments, the Azores, Madeira and the Canary Islands.

However, taking account of the structural social and economic situation of the French overseas departments, the Azores,
Madeira and the Canary Islands, which is compounded by their remoteness, insularity, small size, difficult topography and
climate, economic dependence on a few products, the permanence and combination of which severely restrain their develop-
ment, the Council, acting by a qualified majority on a proposal from the Commission and after consulting the European
Parliament, shall adopt specific measures aimed, in particular, at laying down the conditions of application of the present
Treaty to those regions, including common policies.
The Council shall, when adopting the relevant measures referred to in the second subparagraph, take into account areas such
as customs and trade policies, fiscal policy, free zones, agriculture and fisheries policies, conditions for supply of raw materials
and essential consumer goods, State aids and conditions of access to structural
funds and to horizontal Community
programmes.
The Council shall adopt the measures referred to in the second subparagraph taking into account the special characteristics
and constraints of the outermost regions without undermining the integrity and the coherence of the Community legal order,
including the internal market and common policies.”.

(35) Communication from the Commission — Community guidelines on State aid for rescuing and restructuring firms in diffi-

culty (OJ C 244, 1.10.2004) and previous guidelines.

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120. The Commission considers at this preliminary stage that Article 86(2) of the EC Treaty is the appro-
priate legal basis for assessing the compatibility with the common market of the relevant payments
and grants, to the extent they may constitute compensation for public service obligations or payments
under public service contracts, provided that they do not affect trade to an extent contrary to the
common interest.

121. Article 86(2) of the EC Treaty provides that: “Undertakings entrusted with the operation of services of
general economic interest […] shall be subject to the rules contained in this Treaty, in particular to the rules on
competition, in so far as the application of such rules does not obstruct the performance, in law or in fact, of the
particular tasks assigned to them. The development of trade must not be affected to such an extent as would be
contrary to the interests of the Community.”.

122. The Commission adopted on 28 November 2005 Decision 2005/842/EC (36) on the application of
Article 86(2) of the EC Treaty to State aid in the form of public service compensation granted to
certain undertakings entrusted with the operation of services of general economic interest. With
respect to this Decision, the Commission notes that it applies only as from 19 December 2005 and
that its substantial criteria do not appear to be met in the cases under examination for the following
reasons:

— The financial grants under examination may fall only within one of the two following exemptible

State aid categories as set out in Article (2) of the Decision:

“(a) public service compensation granted to undertakings with an average annual turnover before tax, all
activities included, of less than EUR 100 million during the two financial years preceding that in
which the service of general economic interest was assigned, which receive annual compensation for the
service in question of less than EUR 30 million;”;

“(c) public service compensation for air or maritime links to islands on which average annual traffic during
the two financial years preceding that in which the service of general economic interest was assigned
does not exceed 300 000 passengers;”.

— The Commission wonders whether or not, for the purpose of applying the Decision, NorthLink
and CalMac, and the various entities that are collectively referred to as CalMac, should be treated as
one single undertaking, or should be considered separately, or otherwise grouped in a number of
undertakings. Depending on the Commission's conclusion on that point, the grants concerned
may or may not fall under category (a) of exemptible State aid. Together NorthLink and Calmac
receive far more than the threshold of 30 million a year.

— With respect to category (c) of exemptible State aid, the Commission notes that the routes operated
by CalMac and NorthLink taken as a whole concern an annual traffic exceeding the threshold of
300 000 passengers per year. In addition, with respect to CalMac, the Commission doubts whether
the public service obligations were precisely defined prior to the award of a public service contract
in 2007.

123. Furthermore the Commission notes that the Community framework for State aid in the form of
public service compensation (37) cannot be applied to the present case since transport is excluded from
its scope pursuant to its paragraph 3 (38).

124. The Commission considers that, consistently with its practice so far, in order to fall under Article 86(2)

of the EC Treaty, a measure must cumulatively meet the following conditions:

— firstly, there must be an act of entrustment, whereby the State confers responsibility for the execu-
tion of a certain task to an undertaking (existence of an act establishing the public service obliga-
tions),

— secondly, the entrustment must relate to a service of general economic interest (existence of a

service of general economic interest),

— thirdly, the measure must be necessary for the performance of the tasks assigned to the under-
taking and proportional to that end (absence of overcompensations) and must not affect competi-
tion to such an extent as would be contrary to the interests of the Community.

(36) OJ L 312, 29.11.2005, p. 67.
(37) OJ C 297, 29.11.2005, p. 4. The text is available at the following Internet address:

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52005XC1129(01):EN:NOT

(38) OJ C 297, 29.11.2005, p. 4. See point 3 thereof: “3. This framework is applicable to public service compensation granted to under-
takings in connexion with activities subject to the rules of the EC Treaty, with the exception of the transport sector, and the public service
broadcasting sector covered by the Communication from the Commission on the application of State aid rules to public service broad-
casting.”.

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4.2. Compatibility of aid granted to CalMac

4.2.1. Existence of an act of entrustment

125. The payments made by the Scottish/Executive permitted under the Undertaking “are for the support of
sea transport services provided by [CalMac] which in the opinion of the Secretary of State are necessary to main-
tain or improve economic or social conditions in the Highlands and Islands and which he may approve for the
purposes of advances under this Undertaking (referred to as “approved services”)” (39).

126. Whereas the UK authorities hold that CalMac has been entrusted by the Scottish Office and by its
successor, the Scottish Executive, with the task of serving the Western Isles and some mainland-to-
mainland connections, the Commission does not have information establishing that the payments
preliminary characterised as aid to CalMac until the 2007 contract in fact corresponded to public
service obligations that have been clearly entrusted to CalMac beforehand by the public authorities.

frequency and fares (40). From the information submitted by the UK authorities,

127. The Undertaking does not specify what the “approved services” are in practice, in terms of routes,
capacities,
the
Commission understands that, in practice, the Scottish Executive used to explicitly approve the charac-
teristics of the service in terms of ports to be served, regularity, continuity and frequency. Capacity to
provide the service and tariffs seems to have been explicitly approved whenever it was not a mere
consequence of the already approved service characteristics. Fares do not appear to have been systema-
tically approved.

128. In such situations, the Commission has doubts as to whether, through the combination of the Under-
taking and the ex ante approbation of the service characteristics, CalMac has been entrusted with suffi-
ciently clearly defined public service obligations.

129. In that respect, the Commission has not been provided by the UK authorities with evidence docu-
menting how the system of entrustment was thus functioning, and cannot conclude on the presence
of a sufficiently clear act of entrustment of public service obligations without a formal investigation
procedure and, in particular, without having given an opportunity to interested third parties to make
their views known on that issue.

4.2.2. Existence of a service of general economic interest

130. The Commission must here check that the services entrusted to CalMac can be qualified as services of

general economic interest.

131. The Commission considers that the services delivered by CalMac pursuant to the Undertaking and to
the 2007 contract can correspond to the notion of a service of general economic interest since these
services are limited to the transport by sea of passengers and/or freight on maritime routes that may
be covered by public service obligations/contracts within the meaning of Article 4 of the Maritime
Cabotage Regulation (41).

132. However, as already mentioned, the Commission needs further information as to the way how CalMac

was entrusted with the obligation to provide such services of general economic interest.

4.2.3. Proportionality of the compensation (absence of overcompensation) and absence of trade distortion that

would be contrary to the interest of the Community

133. The Commission wishes to ascertain whether the grants of public money to CalMac as described
above in Table 1 more than compensate costs incurred by CalMac in carrying out services of general
economic interest. Such assessment cannot be carried out at this stage, not least because, as already
mentioned in Section 4.2.1.1 the Commission does not have a clear picture of the public service obli-
gations entrusted to CalMac, let alone of the costs incurred as a result of such obligations.

(39) Extract of the Undertaking.
(40) The Secretary of State and, after devolution, the Scottish Executive, seem to have had a wide margin of manoeuvre for

determining the approved services and the acceptable level of tariffs.

(41) That is to say routes between the mainland and an island or between two islands, or as set out in the Commission Commu-
nication on the implementation of the Maritime Cabotage Regulation, between two continental ports, where the route
onshore is ten time longer than the maritime route. See Commission Communication of December 2003, C(2003) 595.

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134. Even assuming that the aid corresponds to a well defined service of general economic interest and is
proportionate to its aim, the Commission must ensure that it does not affect trade to such an extent
as would be contrary to the interests of the Community. The Commission therefore wishes to obtain,
through the opening of the formal investigation procedure, more information on the extent to which
the aid to CalMac has affected trade.

4.2.4. Preliminary conclusion

135. In conclusion, the Commission has doubts as to whether the preliminarily identified aid to CalMac

constitutes public service compensations that are compatible with the common market.

4.3. Compatibility of aid granted to NorthLink 1 and NorthLink 2

136. As regards aid granted to NorthLink 2 through possible capital grants to the company or acquisition of
assets from NorthLink 1 at below market rates, the Commission is not able to identify at this stage,
notably in the light of the limited information available to it, a suitable basis to establish whether such
aid is compatible with the common market.

137. As regards possible aid to NorthLink 1 granted under the MoA and possible aid granted to NorthLink 2
under the 2006 contract, the Commission will set out below its preliminary assessment under
Article 86(2) of the EC Treaty.

4.3.1. Existence of an act of entrustment

138. The Commission considers that the act of entrustment is materialised through the two successive

public service contracts awarded to NorthLink.

4.3.2. Existence of a service of general economic interest

139. The Commission must here check whether the services entrusted to NorthLink 1 and NorthLink 2
pursuant to the 2000 and 2006 contracts respectively can be qualified as service of general economic
interest within the meaning of Article 86(2) of the EC Treaty.

140. As with CalMac, the Commission considers that the services delivered by NorthLink 1 and NorthLink 2
pursuant to the 2000 and the 2006 contracts can correspond to the notion of a service of general
economic interest since these services are limited to the transport by sea of passengers and/or freight
on maritime routes that may be covered by public service obligations/contracts pursuant to Article 4
of the Maritime Cabotage Regulation (42).

141. However, as already mentioned, the Commission needs further information as to the way how
NorthLink 1 and NorthLink 2 were required to provide such services of general economic interest.

4.3.3. Proportionality of financial compensation (absence of overcompensation) and absence of trade distortion

that would be contrary to the interest of the Community

142. Whether for the 2000 and 2006 contracts, the Commission has not got sufficient information to
establish that overcompensation is excluded. Therefore the Commission doubts whether the aid
granted to NorthLink is proportionate.

143. Furthermore, as was explained above in relation with CalMac, the Commission therefore wishes to
obtain, through the opening of the formal investigation procedure, more information on the extent to
which the aid to NorthLink 1 or NorthLink 2 has affected trade.

(42) That is to say routes between the mainland and an island or between two islands, or as set out in the Commission Commu-
nication on the implementation of the Maritime Cabotage Regulation, between two continental ports, where the route
onshore is ten time longer than the maritime route.

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4.3.4. Preliminary conclusion

144. In conclusion, the Commission has doubts as to whether the preliminarily identified aid to NorthLink 1
and NorthLine 2 constitute public service compensations that are compatible with the common
market.

5. DECISION

145. In the light of the above, the Commission decides to open the formal investigation procedure with
respect to all financial transactions between the Scottish authorities and CalMac (see in particular
Table 1 and points 108 to 112) and NorthLink 1 and 2 (see in particular Table 3 and points 113
to 116). The Commission invites the UK authorities to send without delay a copy of the present Deci-
sion to all potential beneficiaries.

146. The Commission wishes to remind the United Kingdom that Article 88(3) of the EC Treaty has
suspensory effect, and would like to draw attention to Article 14 of the State Aid Procedure Regu-
lation (43), which provides that in case of negative decisions, the Member State shall take all necessary
measures to recover the aid from the beneficiaries, including indirect beneficiaries, unless this runs
contrary to a general principle of Community law. The same Article provides that the aid to be recov-
ered pursuant to a recovery decision shall include interest which shall be payable from the date on
which the unlawful aid was at the disposal of the beneficiary until the date of its recovery. The interest
shall be calculated in conformity with the provisions laid down in Chapter V of Commission Regu-
lation (EC) No 794/2004 of 21 April 2004 implementing the State Aid Procedure Regulation (44).

147. The Commission warns the UK that it will inform interested parties by publishing this letter and a
meaningful summary of it in the Official Journal of the European Union. It will also inform interested
parties in the EFTA countries that are signatories to the EEA Agreement, by publication of a notice in
the EEA Supplement to the Official Journal of the European Union and will inform the EFTA Surveillance
Authority by sending a copy of this letter. All such interested parties will be invited to submit their
comments on the preliminary findings of the Commission within one month of the date of such
publication, and to complement or correct the facts described in the present Decision.’

(43) Council Regulation (EC) No 659/1999 laying down detailed rules for the application of Article 93 of the EC Treaty.

The text of the Regulation is available at the following Internet address:
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:31999R0659:EN:HTML

(44) Commission Regulation (EC) No 794/2004 of 21 April 2004 implementing Council Regulation (EC) No 659/1999
laying down detailed rules for the application of Article 93 of the EC Treaty (OJ L 140, 30.4.2004, p. 1). The text of
the Regulation is available at the following Internet address:
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32004R0794:EN:HTML