EUROPESE ECONOMISCHE RUIMTE


EUROPESE ECONOMISCHE RUIMTE


TOEZICHTHOUDENDE AUTORITEIT VAN DE XXX


Uitnodiging om overeenkomstig artikel 1, lid 2, van deel I van protocol 3 bij de Overeenkomst betreffende de oprichting van een Toezichthoudende Autoriteit en een Hof van Justitie opmer- kingen te maken over het IJslandse onderzeese kabelproject (Farice)


(2005/C 277/08)


De Toezichthoudende Autoriteit van de XXX heeft bij Beschikking nr. 125/05/COL van 26 mei 2005 dat na deze samenvatting in de authentieke taal is weergegeven de procedure van artikel 1, lid 2, van deel I van protocol 3 bij de Overeenkomst tussen de EVA-staten betreffende de oprichting van een Toezichthou- dende Autoriteit en een Hof van Justitie (Toezichtovereenkomst) ingeleid. De IJslandse regering werd hiervan in kennis gesteld en heeft een afschrift van de beschikking ontvangen.

De Toezichthoudende Autoriteit van de XXX verzoekt de EVA-staten, EU-lidstaten en belanghebbenden hierbij hun opmerkingen over de betrokken steunmaatregel kenbaar te maken door deze binnen één maand vanaf de datum van deze bekendmaking te zenden aan:

Toezichthoudende Autoriteit van de EVA Xxxxxxxxxxxxxx 00

XX-0000 Xxxxxxx

Deze opmerkingen zullen ter kennis van IJsland worden gebracht. Een belanghebbende die opmerkingen maakt, kan, met opgave van redenen, schriftelijk verzoeken om vertrouwelijke behandeling van zijn identi- teit.



Procedure

SAMENVATTING

Het Farice-project kwam tot stand op initiatief van de bijna voor 100 % in handen van de overheid zijnde IJslandse telecomexploitant Síminn en de traditionele telecomexploitant op de Faroë-eilanden, Føroya Tele. In 2002 werd duidelijk dat het Farice-project niet goed op gang zou komen als puur

Bij brief van 27 februari 2004 stelden de IJslandse autoriteiten

de Toezichthoudende Autoriteit van de XXX (hierna „de Autori- teit”) in kennis van een staatsgarantie voor een onderzees kabel- project in IJsland. Het project werd evenwel uitgevoerd alvorens de Autoriteit haar opmerkingen kon maken. Ook had de Auto- riteit, in het kader van een afzonderlijke procedure op het gebied van de concurrentie, Farice hf. om informatie verzocht opdat zij een beoordeling zou kunnen maken overeenkomstig artikel 53 en/of 54 van de EER-Overeenkomst.


Beschrijving van de maatregel

Het Farice-project betrof de bouw en het beheer van een onder- zeese telecommunicatiekabel die IJsland en de Faroë-eilanden met Schotland zou verbinden.


Sinds 1994 beschikten IJsland en de Faroë-eilanden over een internationale verbinding via de onderzeese telecommunicatie- kabel CANTAT-3. CANTAT-3 werd opgericht als een kabelcon- sortium met internationale en IJslandse partijen (Og Vodafone en Landssími Islands hf — hierna Síminn). IJsland heeft nooit een ander glasvezelkabelsysteem gehad. Aangezien CANTAT-3

commerciële onderneming. Derhalve werd besloten dat de IJslandse staat actief zou moeten bijdragen tot het project. Ten tweede werd Og Vodafone gevraagd om deel te nemen aan het project. Een houdstermaatschappij, E-Farice, die alle IJslandse aandelen in Farice hf bezit (E-Farice heeft een aandeel van 80 % in Farice hf), nam de aandelen van Og Vodafone en Síminn in CANTAT-3 over. Bijkomende onderhandelingen werden voor- genomen om aanvullende CANTAT-3- capaciteit te huren van Teleglobe, een lid van het CANTAT-3-consortium. Volgens de aanmelding zou E-Farice alle internationale verbindingen naar IJsland voor haar rekening nemen.

De aanmelding betreft een staatsgarantie voor een lening van 9,4 miljoen EUR ten behoeve van Farice hf. Deze lening maakt deel uit van een groter leningspakket op lange termijn (dat drie andere, door verschillende banken verleende leningen omvat) voor een maximumbedrag van 34,5 miljoen EUR. Farice hf. betaalde vooraf een jaarlijks berekende marktpremie. Síminn en Føroya Tele stonden borg voor twee van de andere leningen; voor de vierde lening was er geen garantie. De lening met de garantie van de IJslandse staat als zekerheid had de beste markt- voorwaarden, d.w.z. Euribor […] (*) per jaar (in vergelijking met Xxxxxxx […] per jaar voor de lening zonder garantie).

technische beperkingen had en satellieten economisch niet

levensvatbaar waren, werd naar andere transmissie-alternatieven gezocht die voor een betrouwbare verbinding konden zorgen.

(*) De cijfers tussen haakjes werden weggelaten omdat zij bedrijfsge- xxxxxx vormen.

In januari 2003 verhoogde de IJslandse staat — in het kader van een verhoging van het totale aandelenkapitaal van Farice hf

— haar belang van voorheen 27 % naar 46,5 %. Volgens de IJslandse autoriteiten wilden de particuliere exploitanten niet meer aandelenkapitaal ter beschikking stellen. Síminn, die voor- heen 47 % van de aandelen in handen had, verminderde haar aandelenkapitaal tot 33,33 %.


Staatssteun in de zin van artikel 61, lid 1, van de EER- Overeenkomst


De Autoriteit merkt op dat de IJslandse autoriteiten, door de Autoriteit te laat in kennis te stellen van de twee steunmaatre- gelen, de verplichte wachttijd niet hebben geëerbiedigd, met als gevolg dat indien de maatregelen als staatssteun in de zin van artikel 61, lid 1, van de EER-Overeenkomst zouden worden beschouwd, zij „nieuwe steun” zouden vormen in de zin van artikel 1, onder f), in deel II van protocol 3 van de Toezicht- overeenkomst.


De Autoriteit is niet van mening dat de leninggarantie en de kapitaalverhoging van de IJslandse staat ten gunste van het Farice-project ten goede komen aan een algemeen infrastruc- tuurproject, waardoor deze bedragen eventueel niet als staats- steun zouden worden beschouwd. De Autoriteit meent dat het niet om een infrastructuurproject gaat dat op niet-discrimine- rende basis openstaat voor alle gebruikers, maar dat het project veeleer ten goede komt aan bepaalde commerciële exploitanten,

d.w.z. aanbieders van telecomdiensten. Deze exploitanten vormden een particulier initiatief waarop de staat heeft gerea- geerd. Bovendien biedt Farice hf., als beheerder van de infra- structuur, tegen betaling een dienst aan. Overeenkomstig de praktijken van de Commissie kan in een dergelijke situatie niet worden ontkend dat een individuele onderneming een voordeel ontvangt.


De Autoriteit baseert haar beoordeling van de in de leningga- rantie vervatte staatssteun op hoofdstuk 17.4, punt 2, van de richtsnoeren inzake staatssteun van de Autoriteit, waarin de voorwaarden zijn opgesomd waaronder een garantie niet in het toepassingsbereik van artikel 61, lid 1, van de EER-Overeen- komst valt. De Autoriteit merkt op dat de tussenkomst van de staat tot betere interestvoeten heeft geleid. De IJslandse autori- teiten weerleggen dat niet maar voeren aan dat een staatsga- rantie altijd leidt tot betere marktvoorwaarden en dat de enige relevante overweging is of een passende premie werd betaald. De Autoriteit betwijfelt of Farice hf. — zonder de staatsgarantie

— zelfs in staat zou geweest zijn een lening van 9,4 miljoen EUR te verkrijgen, aangezien zij reeds andere leningen had opgenomen om het project te financieren. De Autoriteit is van mening dat de vier leningen apart moeten worden beschouwd, omdat zij door verschillende banken werden verleend, zij verschillende terugbetalingsmechanismen en rentevoeten hebben en zij door verschillende garantieverleners gedekt zijn. In dit verband is de Autoriteit ook van oordeel dat de IJslandse staat de lening van 9,4 miljoen EUR voor 100 % garandeert. De Autoriteit meent voorts dat de betaalde premie het voordeel dat de tussenkomst van de staat oplevert, niet compenseert. De Autoriteit is voorlopig van mening dat Farice hf. geen profijt mag trekken uit financiële voorwaarden die zij — zonder staatstussenkomst — niet op de markt had kunnen krijgen. Farice hf. profiteert, in het bijzonder in vergelijking met de

lening zonder garantie, van betere financieringsvoorwaarden, die zij niet op passende wijze vergoedt.


De Autoriteit beoordeelde de kapitaalverhoging van de IJslandse staat overeenkomstig hoofdstuk 19 van de richtsnoeren inzake staatssteun van de Autoriteit. Zij merkt op dat, terwijl het totale aandelenkapitaal van Farice hf. aanzienlijk werd verhoogd waarbij ook particuliere exploitanten kapitaalverhogingen hebben verricht, het belang van de IJslandse staat onevenredig is gestegen in vergelijking met dat van de particuliere aandeel- houders, namelijk met 20 procentpunten. Aangezien de IJslandse autoriteiten hebben verklaard dat Síminn het project als financieel risicovol beschouwde, is de Autoriteit vooralsnog van mening dat de particuliere exploitanten zich relatief gesproken uit het project hebben teruggetrokken wegens de slechte winstverwachtingen ervan.


Volgens het voorlopige standpunt van de Autoriteit bevoor- delen de maatregelen Farice hf. in vergelijking met de concur- renten die geen beroep kunnen doen op een participatie of leninggarantie van de staat, waardoor de concurrentie wordt verstoord of dreigt te worden verstoord. Aangezien de verstrek- king van telecomdiensten een verhandelbare activiteit vormt, beïnvloedt dit ook het handelsverkeer tussen de contractslui- tende partijen.


Verenigbaarheid krachtens artikel 61, lid 3, onder c), van de EER-Overeenkomst


De Autoriteit beoordeelde de maatregelen onmiddellijk over- eenkomstig artikel 61, lid 3, onder c), van de EER-Overeen- komst, aangezien er geen richtsnoeren of groepsvrijstellingen bestaan krachtens welke de maatregelen gerechtvaardigd zouden kunnen zijn.


Wat de noodzakelijkheid van de steunmaatregelen betreft, erkent de Autoriteit dat de nieuwe onderzeese kabel, die de belangrijkste transmissieverbinding naar IJsland moet worden, een grotere capaciteit heeft, betrouwbaarder is en — met de ondersteuning van CANTAT-3 — de verstrekking van telecom- municatiediensten aan IJsland veilig kan stellen. De beschik- baarheid van een breedbandverbinding is een gerechtvaardigde doelstelling en is een dienstverlening die, door haar aard zelf, de productiviteit en groei van een groot aantal sectoren en acti- viteiten positief kan beïnvloeden. Zonder de deelname van de staat zou het project uitgesteld of helemaal niet uitgevoerd geweest zijn, aangezien het project op zichzelf niet commer- cieel levensvatbaar was.


Overeenkomstig het principe van de evenredigheid moet de Autoriteit bij haar beoordeling nagaan of de voordelen in termen van betrouwbare levering van telecommunicatiedien- sten aan IJsland opwegen tegen de nadelen van een concurren- tieverstoring in vergelijking met de concurrenten die geen toegang hebben tot overheidsmiddelen bij de realisatie van soortgelijke projecten. Derhalve zal de Autoriteit in de formele onderzoekprocedure onder andere op de volgende punten ingaan:


— de Autoriteit wijst er allereerst op dat de bouw noch het beheer van de kabel aan Farice hf. werd toegekend na uitschrijving van een openbare aanbesteding.

— de Autoriteit merkt op dat de aandeelhoudersovereenkomst voorziet in een niet-discriminerende, doorzichtige prijsstel- ling onder marktvoorwaarden. Hoewel de aandeelhouders- overeenkomst over het algemeen openstaat voor nieuwe marktdeelnemers, gaat de Autoriteit ervan uit dat in deze overeenkomst is bepaald dat de oprichters steeds de moge- lijkheid hebben om hun aandeelhouderspositie te behouden, wat hen in een betere positie plaatst dan de nieuwe markt- deelnemers.


— de Autoriteit zal het totale steunbedrag in aanmerking nemen, dat beperkt is tot de garantie. Wat de verhoging van het belang van de staat betreft, merkt de Autoriteit op dat de staat haar aandeel in juni 2003 reeds tot 41 % had verminderd, terwijl het belang van Síminn steeg tot 29 %.

— de Autoriteit heeft bepaalde bedenkingen met betrekking tot de concurrentie. Het Europese Hof van Justitie heeft bepaald dat een beoordeling van de verenigbaarheid in het kader van de staatssteunregels niet tot een resultaat mag leiden dat in strijd is met andere bepalingen van het Verdrag, waaronder ook artikel 53 en/of artikel 54 van de EER-Overeenkomst. In dit verband merkt de Autoriteit onder andere op dat, hoewel de bestaande infrastructuur CANTAT-3 nog in stand wordt gehouden, er in de toekomst gevreesd kan worden dat alle CANTAT-3-verbin- dingen naar IJsland over E-Farice hf, meerderheidsaandeel- houder van Farice hf., zullen worden geleid. Derhalve bestaat het risico dat de concurrentie op het gebied van de verbindingen naar IJsland zou verdwijnen, aangezien er slechts één aanbieder op de markt zou overblijven.



EFTA SURVEILLANCE AUTHORITY DECISION No 125/05/COL

of 26 May 2005

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


THE EFTA SURVEILLANCE AUTHORITY,


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


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


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


Whereas:


I. FACTS


1. Procedure


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


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


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


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


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


(1) Hereinafter referred to as the EEA Agreement.

(2) Hereinafter referred to as the Surveillance and Court Agreement.

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

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


2. Description of the Farice project


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


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


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


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


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


Secondly, it was considered important that Og Vodafone, a major player in the Icelandic telecom market, should participate actively in the project. It was decided that besides the establishment of Farice hf, a holding company Eignarhaldsfélagið Farice ehf. (hereinafter ‘E-Farice’) (8) should be established. This company, while holding all the Icelandic shares in Farice, should buy Og Vodafone's capacity in CANTAT-

3. A similar offer was made to Síminn which, according to the IBM report submitted by the Icelandic authorities, resulted in E-Farice handling all international connectivity for Iceland. As stated in the notifica- tion, CANTAT-3 capacity will consequently be operated and sold by E-Farice (9).


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

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

(6) See Summary Report, provided as Annex 1 to the notification.

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

(8) In 2003, E-Farice ehf held 80 % of the shares in Farice hf, with the 20 % remaining shares held by Føroya Tele (17,3 %) and other Faeroe parties (together 2,7 %).

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

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


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


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


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


3. Description of the aid measure


a. The loan guarantee


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


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



Loan


Million EUR


Lender


Interest rate (1)


Interest periods

Repayment


Guarantor

Number of instalments

Start of repayment

A

9,4

The Nordic Investment Bank

[…] (*)

6 months

8 semi-annual payments

Sept. 2011

Government of Iceland

B

4,7

The Nordic Investment Bank

[…]

6 months

5 semi-annual payments

Sept. 2009

Landssími Íslands hf (Síminn)

4,7

Íslandsbanki hf

C

4,7

Føroya banki

[…]

3 months

10 quarterly payments

Sept. 2009

Telefon verkið P/F

D

11

Íslandsbanki hf

[…]

1 month

48 monthly payments

Sept. 2005

None

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

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


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


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

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


b. The Icelandic government's increase in share capital


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


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

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


Share capital of Farice hf.


(amounts in '000s)



Preparation phase

January 2003

June 2003

ISK

EUR

Share

ISK

EUR

Share

ISK

EUR

Share

Eignarhaldsfélagið Farice ehf.




947 944

11 965

79,90 %

947 944

10 657

79,90 %

Government of Iceland

8 200

92

27,33 %

552 067

6 206

46,53 %

491 737

5 528

41,45 %

Síminn

14 200

160

47,33 %

395 477

4 446

33,33 %

352 259

3 960

29,69 %

Og Vodafone

400

4

1,33 %

400

1 312

0,03 %

103 949

1 169

8,76 %

Xxxx.Xxx

400

4

1,33 %

400

4

0,03 %

400

4

0,03 %

Fjarski ehf.

400

4

1,33 %

400

4

0,03 %

400

4

0,03 %

RH-net

400

4

1,33 %

400

4

0,03 %

400

4

0,03 %

Telefonverkið

5 200

58

17,33 %

236 486

2 659

19,93 %

236 486

2 659

19,93 %

Kall

400

4

1,33 %

400

4

0,03 %

400

4

0,03 %

SPF spf.

400

4

1,33 %

400

4

0,03 %

400

4

0,03 %

Total

30 000

337

100,00 %

1 186 430

14 646

100,00 %

1 186 430

13 338

100,00 %


4. Comments by the Icelandic authorities


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


Further, the Icelandic authorities argue that the State guarantee fulfils all the conditions set out in Chapter

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

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


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


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


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


II. APPRECIATION


1. Obligation to notify

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


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


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


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

Article 61(1) of the EEA Agreement reads as follows: ‘…any aid granted by EC Member States, EFTA States or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods, shall, in so far as it affects trade between Contracting Parties, be incompatible with the functioning of this Agreement.’

The Authority will therefore assess whether:

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

— which confers an advantage on the recipient;

— distorts or threatens to distort competition; and

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


2.1 The Farice project as an infrastructure project


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


(11) It seems however, that this statement by the Icelandic authorities rather refers to the share capital split between the capital holder in June 2003. In January 2003, the Icelandic government had a share of EUR 6,2 million.

(12) Press release of 3 February 2004.

(13) Communication of 13.2.2001, COM (2001) 35 final.

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


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


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


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


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


2.2. The loan guarantee by the Icelandic State


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


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


(a) The borrower is not in financial difficulty;


(b) The borrower would, in principle, be able to obtain a loan on market conditions from the financial markets without any intervention by the State;


(14) Commission decision N 527/02 — Greece Financial support of a private company for the design, construction, testing and commissioning of the aviation fuel pipelines for supply of the new Athens International Airport.

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

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

(17) See Case X-000/00, Xxxxxxxxx de Paris v. European Commission, [2000] ECR II-3929.

(18) See Commission decision N 213/2003 — Project Atlas, broadband infrastructure for business parks.

(c) The guarantee is linked to a specific financial transaction, is for a fixed maximum amount, does not cover more than 80 % of the outstanding loan and is not open-ended;

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



First/second condition


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


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


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


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



Third condition


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


The Icelandic authorities argue that there is only one loan at stake, at EUR 34,5 million. However, as can be seen from the loan agreement, while granted for the same collateral, the four loans are granted by diffe- rent banks which assume the responsibility for their loan amount only. None of the banks would take over

— in case of a failure of Farice hf. — the liability for any of the other loans. The different loans do not only have different repayment periods and a different number of instalments, but also different guarantors. Against this background, the combination of the loans in one joint document does not appear to be of significant relevance.


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

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


Fourth condition


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


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


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


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


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


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


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


(19) The provisions of the loan agreement foresee the possibility of prepaying the whole or part of the loan, except for the A term loan, without any prepayment fee.

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

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

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

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


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


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


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


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


As can be seen from the table above (see section I.3.b. of this Decision) Farice hf.'s capital rose from EUR 337 000 to EUR 14 646 000 in January 2003. The share of the Icelandic State grew from 27,33 %

(EUR 92 000) to 46,5 % (EUR 6 206 000), i.e. by almost 20 percentage points. While it is correctly stated by the Icelandic authorities that the share of Síminn grew from EUR 160 000 to EUR 4 446 000, in rela- tive terms the share of Síminn fell from 47,33 % to 33,33 % (14 percentage points). Except for Telefon- verkið, the shares of all other participants also fell (from 1,33 % to 0,33 %), which shows that in relative terms the private operators disengaged from the project.


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


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

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


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


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


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

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

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


a. Conclusion

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


3. Compatibility

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

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

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

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

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


3.1 The necessity of the aid measures

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


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

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

(27) As stated in the summary report submitted by the Icelandic authorities in the notification dated 27 February 2004, the consortium member Teleglobe, in particular, was faced with business difficulties.

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

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

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


3.2 The proportionality of the aid measures


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


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


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

— The Authority notes that the shareholders' agreement provides for a non-discriminatory, transparent pricing on market terms.

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

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

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


4. Conclusion


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


(30) The Icelandic authorities state: ‘Widespread participation was sought in Iceland and the Faeroe Islands for shareholders in the Farice project and all telecoms operators were invited to participate in the foundation of the company.’

(31) Commission Decision N 307/2004, N 199/2004 and N 213/2003.

(32) Cf. Case C-225/91, Matra SA v Commission, [1993] ECR-3203, paragraph 41.

(33) On the co-existence of existing infrastructure, see Commission Decision N 307/2004, paragraph 45, where it is positively outlined that this minimises the risk of unnecessary duplication and limits the economic impact for opera- tors that already have infrastructure in place. See also Commission Decision N 199/2004, paragraph 41, X 000/ 0000, paragraph 47.

(34) See footnote 8 of this Decision.

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

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

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


HAS ADOPTED THIS DECISION:

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

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

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

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

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

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

7. This Decision is authentic in the English language.


Done at Brussels, 26 May 2005.


For the EFTA Surveillance Authority

Xxxxx X. XXXX

Acting President


Xxxxx XXXXXXXXXX

College Member


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Filed: November 9th, 2005