(1)

By letter dated 15 June 2004, the Commission was informed by a citizen of the United Kingdom of aid granted by the Shetland Islands Council, the public authority in the Shetlands Islands of the United Kingdom to the fisheries sector, which possibly concerned illegal State aid. By letters dated 24 August 2004, 4 February 2005, 11 May 2005 and 16 December 2005, the Commission requested the United Kingdom to provide information about such aid. The United Kingdom provided the Commission with further information by letters dated 10 December 2004, 6 April 2005, 8 September 2005 and 31 January 2006.

(2)

By letter dated 13 September 2006, the Commission informed the United Kingdom of the decision to initiate the procedure laid down in Article 88(2) of the EC Treaty in respect of the aid. The United Kingdom provided its comments on the aid by letter dated 16 October 2006. Following the requests from the Commission dated 31 January 2007 and 5 February 2008, additional information was provided by letters dated 4 September 2007 and 27 February 2008.

(3)

The Commission decision to initiate the procedure was published in the Official Journal of the European Union on 30 November 2006 (3). The Commission invited any interested parties to submit their comments on the aid. The Commission received no comments from interested parties.

(4)

The Shetland Islands Council made payments to the fisheries sector under the scope of two general aid measures named ‘Aid to the Fish Catching and Processing Industry’ and ‘Aid to the Fish Farming Industry’, which actually consisted of several different types of aid schemes. Amongst these schemes were the so-called Loan assistance schemes (‘the scheme’).

(5)

Aid has been granted to salmon farmers, by way of loan assistance granted through the Fish Farming Association and to fish processors, by way of loan assistance granted through the Fish Processors' Association.

(6)

The Salmon Farming Loan Assistance was established in 2000 for the purpose of providing working capital loans to individual salmon farming companies to on-grow fish to a harvestable size. The loans granted under the scheme vary from GBP 87 000 to GBP 250 000, those amounts representing a maximum of 75 % of the costs of buying smolts (young salmon). The total amount of the loans granted is GBP 3 477 130.

(7)

The loans were made to companies that could demonstrate viability through the production of an acceptable business plan and financial projections for a period covering at least three years. The loans were subject to interest at rates generally corresponding to the applicable UK base rate plus 2 %. In order to secure the loan, it was granted under the condition that the lender took the ‘right of title’ on the smolts, thus securing the loan on the basis of the sale value of the adult fish.

(8)

Under the Loan scheme for fish processing, five loans were granted during the period from 1996 to 2002. The loans varied from GBP 73 000 to GBP 200 000, with a total of GBP 698 300. The loans were made to companies that during the period of the loan undertook to provide professionally audited accounts, to work to the relevant national and Community standards on hygiene, health and safety, and to be a member of the Shetland Fish Processors' Association.

(9)

The Commission considered that it could not be established from the information available whether the loans under the schemes were granted under conditions acceptable to normal private lenders on the market. As the loans appeared to have been granted under more favourable circumstances or with more favourable conditions than would be acceptable to a normal private lender, the beneficiaries appeared to have been granted a benefit which they would not have received under normal economic circumstances. As, moreover, the companies concerned were considered to be in direct competition with other companies in the fisheries sector, the loans appeared to be State aid within the meaning of Article 87 of the EC Treaty.

(10)

As regards the compatibility of the loans, as State aid, with the Guidelines for the examination of State aid to fisheries and aquaculture applicable at the time the aid was granted, the Commission doubted that the loans could be considered commercial loans and therefore considered them to be State aid. As regards the compatibility of the loans with the common market, the Commission moreover doubted that, on the basis of the information available, they could be considered to comply with the conditions of the respective Guidelines for the examination of State aid to fisheries and aquaculture, applicable at the respective times of granting the aid.

(11)

In its letters dated 16 October 2006, 4 September 2007 and 27 February 2008, the United Kingdom provided further information on the loans granted under the schemes.

(12)

The United Kingdom stated that the loans had been granted under circumstances acceptable to a normal private lender and that, therefore, the loans did not constitute State aid within the meaning of Article 87(1) of the Treaty.

(13)

In this respect, the United Kingdom provided a description of the interest rate policy applied with regard to granting the loans. The interest rates had been set by reference to achievement of a return on capital consistent with the EC (UK) base rate and following an assessment of the risk. This resulted in an interest rate policy giving indicative interest rates of UK base rate plus 2 % for low-risk loans, UK base rate plus 3 % for medium-risk loans and UK base rate plus 4 % for high-risk loans. The United Kingdom considered this policy to be in line with the market economy investor principle.

(14)

As regards the loans granted to salmon farmers under the Salmon Farming Loan Assistance, 15 loans were granted during the period from September 2000 to January 2003. The conditions and interest rates of the loans varied as follows:

(15)

The United Kingdom stated that majority of these loans had been granted by applying the Bank of England base rate plus 2 %, sometimes plus 3 %. The repayments terms had been designed to reflect the growing cycle of the smolts. Typically the term was approximately 2 years with interest being paid monthly and capital being repaid on expiry of the loan period, which was structured to coincide with the harvest. The loan to value ratios ranged from 24 % to 75 %.

(16)

In order to secure the loans, they were granted under the condition that the lender took the ‘right of title’ on the smolts, thus securing the loan on the basis of the sale value of the adult fish. The United Kingdom claimed that, in a normal market, it would be anticipated that the value of the smolts would increase over the on-growing period, and therefore the loan to value ratio would improve over the same period. In addition, security had been held for the loans advanced by way of floating charges, which provided security not only through the value of the fish, but also through all tangible assets held by the company, for example, fish cages, licences, etc.

(17)

The United Kingdom finally provided details of the undertakings to which the loans were granted, their registered capital, the percentage of lost capital at the time of the investments and in the 12 months before the investments, information showing that none of the undertaking had been subject to insolvency proceedings at the respective times of grant, and the financial projections submitted by the undertakings demonstrating their financial viability at the moment of application, as well as information on the specific securities and ranking arrangements of each loan.

(18)

Concerning the loans granted to fish processors under the Loan scheme for fish processing, the loans were as follows:

(19)

The United Kingdom stated that all the loans, except one, had been granted at interest rates in excess of both the Bank of England base rate and the EC (UK) reference rate; that the loans were typically for equipment and generally for terms of 10 years; the terms were considered to be in line with the terms which would be offered by normal commercial lenders and that, in all cases, the loan value rate was not greater than 40 %. The loans were subject to securities in the form standard securities and floating charges.

(20)

The United Kingdom provided details of the undertakings to which the loans were granted, their registered capital, the percentage of lost capital at the time of the investments and in the 12 months before the investments, information showing that none of the undertaking had been subject to insolvency proceedings at the respective times of grant, and the financial projections submitted by the undertakings demonstrating their financial viability at the moment of application, as well as information on the specific securities and ranking arrangements of each loan.

(21)

Finally, as regards the loan granted to D Watt (Shetland) Ltd in 1998, the United Kingdom stated that although the original interest rate for this loan was 8 %, it had been reduced to 5 % trough an interest reduction grant of GBP 20 000 paid directly to the lender by the Shetland Islands Council. The United Kingdom noted that the grant element could have been paid directly to the borrower, as the borrower was eligible for grant assistance. However, to make matters easier to administer, the grant had been paid to the lender and the loan interest reduced.

(22)

The United Kingdom submitted that, if the Commission were to consider the loans not to be commercial, they were compatible with the relevant State aid rules.

(23)

Finally, the United Kingdom indicated that if the Commission adopted a negative decision, recovery of aid granted prior to 3 June 2003 should not be required as that would be contrary to the principle of the protection of legitimate expectations. In this respect, the United Kingdom made reference to Commission Decision 2003/612/EC of 3 June 2003 on loans for the purchase of fishing quotas in the Shetland Islands (United Kingdom) (5) as well as to Commission Decision 2006/226/EC of 7 December 2005 on investments of Shetland Leasing and Property Developments in the Shetland Islands (United Kingdom) (6), stating that until 3 June 2003 the Shetland Islands Council legitimately considered the funds used to be private rather than public.

(24)

It must be determined first if the measure can be regarded as State aid and if this is the case, whether the aid is compatible with the common market.

(25)

According to Article 87(1) of the EC Treaty, ‘save as otherwise provided in this 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, insofar as it affects trade between Member States, be incompatible with the common market’.

(26)

According to established case-law (7) the granting of a loan by the State or by State-controlled entities to a firm may favour that firm within the meaning of Article 87(1) of the EC Treaty if the borrower is granted terms that are more favourable than those that it would have obtained in the capital market.

(27)

An appropriate way of establishing whether a loan is State aid is to apply the criterion of determining to what extent the undertaking would have been able to obtain the sums in question on the private capital markets under similar conditions.

(28)

Relevant factors for assessing the loan in comparison with private capital markets are in particular the duration and amount of the loan, the risk of default by the borrower, the interest rate, the nature of the security given and the ranking arrangement.

(29)

As regards the interest rate of such loans, the market rate to be used as a reference point for comparison is the reference rate established by the Commission in accordance with the Commission notice on the method for setting the reference and discount rates (8). The reference rate thus determined is a floor rate which may be increased in situations involving a particular risk (for example, where an undertaking is in difficulty or where the security normally required by banks is not provided). In such cases, the premium may amount to 400 basis points or more if no private bank would have agreed to grant the relevant loan.

(30)

The table below compares the applied interest rates under the schemes with the Community reference rate applicable at the respective times of granting.

(31)

In the case of the three loans granted under the Loan scheme for fish processing in May 1996 to Lerwick Fish Traders Ltd, in October 1996 to Shetland Seafood Specialities Ltd and in August 1997 to Whalsay Fish Processing Ltd, the applied interest rates were below the Community reference rate. Moreover, the interest rate of the loan granted to D Watt (Shetland) Ltd in 1998, although originally set at a level above the Community reference rate, was lowered by way of an interest relief grant to a level below the Community reference rate. These loans should thus be considered to have been granted under terms that are more favourable than those in the capital market and thereby to favour the undertakings concerned.

(32)

However, it can be established that the interest rates for all other loans, provided from September 2000 onwards under the Loan Scheme for Fish Processing and the scheme for Salmon Farming Loan Assistance, were all above the Community reference rate applicable at the time the respective loans were granted and might therefore have been granted under normal market conditions on the capital market. Consequently, it is relevant to establish how all other aspects of those loans compare to loans granted under normal market conditions.

(33)

The information submitted by the United Kingdom, providing the financial situation of each undertaking, shows that the loans were granted in accordance with the interest rate policy referred to in recital 13 and have been subject to a case-by-case risk assessment, allowing the granting authority to establish the duration, interest rate and securities and ranking arrangements on a case-by-case basis for each loan depending on the actual risk of each loan and in line with normal commercial conditions.

(34)

In this regard, it is noted in particular that none of the undertakings were, at the time the respective loans were granted, firms in difficulty within the meaning of the Community Guidelines on State aid for rescue and restructuring firms in difficulty (10). In view thereof, as regards the risk of default by the borrower, it is also noted that, although some undertakings showed a greater risk of defaulting than others, that risk has been offset in such cases by a higher interest rate combined with extra security in a way which is comparable to normal conditions on the private market for loans to this sector.

(35)

Consequently, it may be concluded that the loans granted from September 2000 onwards can be regarded comparable to what a private lender, acting in a market economy, would have been prepared to lend on the same terms and that these loans therefore were granted on terms which were no more favourable that normal market conditions.

(36)

Loans made on terms reflecting normal market conditions do not provide an advantage to the beneficiaries of the loans as compared with other operators on the market and, in the absence of an advantage to the undertakings concerned, are thus not to be regarded as State aid within the meaning of Article 87(1) of the Treaty.

(37)

The undertakings in question are in direct competition with other companies in the fisheries sector, in particular in the sector of fish processing, both within the United Kingdom and in other Member States, which competition is distorted or can be threatened to be distorted by the loans. Consequently, these loans must be considered State aid within the meaning of Article 87(1) of the Treaty.

(38)

State aid may be declared compatible with the common market if it complies with one of the exceptions provided for in the EC Treaty. As regards State aid to the fisheries sector, State aid measures are deemed to be compatible with the common market if they comply with the conditions of the applicable Guidelines for the examination of State aid to fisheries and aquaculture.

(39)

According to the second paragraph of point 5.3 of the current Guidelines for the examination of State aid to fisheries and aquaculture (11) an ‘unlawful aid’ within the meaning of Article 1(f) of Regulation (EC) No 659/1999 will be appraised in accordance with the guidelines applicable at the time when the administrative act setting up the aid has entered into force. As this assessment concerns four loans granted in 1996, 1997 and 1998, the aid must be assessed on the compatibility with the Guidelines for the examination of State aid to fisheries and aquaculture of 1994 (‘the 1994 Guidelines’) and those of 1997 (12) (‘the 1997 Guidelines’) (13).

(40)

Point 2.3 of the 1994 Guidelines stipulates that aid for investments in the processing and marketing of fishery products may be deemed to be compatible with the common market provided that the conditions for granting it are comparable with those laid down in Council Regulation (EC) No 3699/93 of 21 December 1993 laying down the criteria and arrangements regarding Community structural assistance in the fisheries and aquaculture sector and the processing and the marketing of its products (14) and are at least as stringent and provided that the level of the aid does not exceed, in subsidy equivalent, the overall level of the national and Community subsidies permitted under Annex IV to that Regulation.

(41)

According to Article 11 of Regulation (EC) No 3699/93 and point 2.4 of Annex III thereto, eligible investments are to relate in particular to the construction and acquisition of buildings and installation, the acquisition of new equipment and installations needed for the processing and the marketing of fishery and aquaculture products between the time of landing and the end-product stage and the application of new technologies intended in particular to improve competitiveness. Investments are not to be eligible for assistance when they concern fishery and aquaculture products intended to be used and processed for purposes other than human consumption, with the exception of investments exclusively for the handling, processing and marketing of fishery and aquaculture wastes.

(42)

The loan of GBP 200 000, granted in May 1996 to Lerwick Fish Traders Ltd, served to assist in the financing of the establishment of a salmon packing and processing factory. Such a project falls within the scope of the requirements outlined in recitals 40 and 41. In particular, it concerns assistance to an investment for the construction of building and installation and the acquisition of new equipment. Moreover, the investments did not concern fishery and aquaculture products intended to be used and processed for purposes other than human consumption.

(43)

The loan of GBP 73 000, granted in October 1996 to Shetland Seafood Specialities Ltd, served to assist the purchase and installation and commissioning of a soup production line. Such a project falls within the scope of the requirements outlined in recitals 40 and 41. In particular, it concerns assistance to an investment for the acquisition of new equipment and installations needed for the processing and marketing of fishery and aquaculture products between the time of landing and the end product stage. Moreover, the investments did not concern fishery and aquaculture products intended to be used and processed for purposes other than human consumption.

(44)

As regards the loans granted in 1997 and 1998, point 2.3 of the 1997 Guidelines repeats the conditions previously laid down in the 1994 Guidelines, referred to in recital 39. Thus the aid falls to be assessed under the conditions of Regulation (EC) No 3699/93.

(45)

The loan of GBP 173 000, granted in August 1997 to Whalsay Fish Processors Ltd, concerned a project to install a fish processing line and chill facility in the existing factory. Such a project falls within the scope of the requirements outlined in recitals 40 and 41. In particular, it concerns assistance to an investment for the acquisition of new equipment and installations needed for the processing and marketing of fishery and aquaculture products between the time of landing and the end product stage. Moreover, the investments did not concern fishery and aquaculture products intended to be used and processed for purposes other than human consumption.

(46)

As regards the aid granted to D Watt (Shetland) Ltd in December 1998, Regulation (EC) No 3699/93 was replaced by Council Regulation (EC) No 2468/1998 of 3 November 1998 laying down the criteria and arrangements regarding Community structural assistance in the fisheries and aquaculture sector and the processing and marketing of its products (15). According to Article 20 of Regulation(EC) No 2468/98, references to Regulation (EC) No 3699/93 are to be construed as references to the new Regulation. The provisions concerning aid for investments in processing and marketing of fisheries products are laid down in Article 11 of Regulation (EC) No 2468/98 and point 2.4 of Annex II thereto.

(47)

According to Article 11 of and Point 2.4 of Regulation (EC) No 2468/98 and Annex II thereto, eligible investments are to relate in particular to the construction and acquisition of buildings and installations, the acquisition of new equipment and installations needed for the processing and marketing of fishery and aquaculture products between the time of landing and the end product stage (including in particular data-processing and data-transmission equipment). Investments are not to be eligible for assistance when they concern fishery and aquaculture products intended to be used and processed for purposes other than human consumption, with the exemption of investments exclusively for the handling, processing and marketing of fishery and aquaculture wastes.

(48)

The loan of GBP 110 000, granted in December 1998 to D Watt (Shetland) Ltd, was granted for the building and equipping of a new shellfish processing factory. Such a project falls within the scope of the requirements outlined in recital 47. In particular, it concerns assistance to an investment for the acquisition of new equipment and installations needed for the processing and marketing of fishery and aquaculture products between the time of landing and the end product stage. Moreover, the investments did not concern fishery and aquaculture products intended to be used and processed for purposes other than human consumption.

(49)

According to Annex IV to Regulation (EC) No 3699/93 and Annex III to Regulation (EC) No 2468/98, aid may be granted up to 50 % of the eligible costs.

(50)

The loan of GBP 200 000 to Lerwick Fish Traders Ltd was granted for a project with a total cost of GBP 819 672, thus covering approximately 24,4 % of the actual project cost. The loan was to be paid back in 108 equal monthly instalments of GBP 2 784,94. The applied interest rate was 7,75 %, compared to a Community reference rate of 11,18 %.

(51)

The loan of GBP 73 000 to Shetland Seafood Specialities Ltd was granted for a project with a total cost of GBP 186 000, thus covering approximately 39,2 % of the actual project cost. The loan was to be paid back in 120 equal monthly instalments. The applied interest rate was 9 %, compared to a Community reference rate of 10,26 %.

(52)

The loan of GBP 173 000 to Whalsay Fish Processors Ltd was granted for a project with a total cost of GBP 473 150, thus covering approximately 36,6 % of the actual project cost. The loan was to be paid back in 96 equal monthly instalments commencing 24 months after the advance of the loan or the first instalment thereof. The applied interest rate was 8 %, compared to a Community reference rate of 8,15 %.

(53)

The loan of GBP 110 000 to D Watt (Shetland) Ltd was granted for a project with a total cost of GBP 510 000, thus covering approximately 21,6 % of the actual project cost. The loan was to be paid back in 120 equal monthly instalments. The applied interest rate was 5 %, compared to a Community reference rate of 7,77 %.

(54)

To calculate the aid rate it is necessary to compare the project costs related to each loan with the gross grant equivalent of that loan. In the light of the figures referred to in recitals 50 to 53, each of the loans, even before calculating the gross grant equivalent, comprised less than 50 % of the total project cost.

(55)

Therefore, the aid rate for the loans can be regarded as complying with the conditions of Annex IV to Regulation (EC) No 3699/93 and Annex III to Regulation (EC) No 2468/98, as referred to in recital 49.

(56)

In view of the foregoing, the Commission finds that the aid granted under the Scheme for Salmon Farming Loan Assistance as well as the aid granted in 2002 to D Watt (Shetland) Ltd under the Loan Scheme for Fish Processing does not constitute State aid within the meaning of Article 87(1) of the Treaty.

(57)

The Commission finds that the aid granted under the Loan Scheme for Fish Processing in May 1996 to Lerwick Fish Traders Ltd, in October 1996 to Shetland Seafood Specialities Ltd, in August 1997 to Whalsay Fish Processors Ltd and in December 1998 to D Watt (Shetland) Ltd constitutes State aid within the meaning of Article 87(1) of the Treaty. However, that aid complies with the conditions of the Guidelines for the examination of State aid to fisheries and aquaculture and is therefore considered compatible with the common market on the basis of Article 87(3)(c) of the EC Treaty,