ROYAL NORWEGIAN MINISTRY OF GOVERNMENT ADMINISTRATION AND REFORM EFTA Surveillance Authority Rue Belliard 35 B-1040 BRUSSELS Belgium Your reference Our reference Date 65806 200800617-/HBU 03.04.09 Additional information regarding renegotiation of the Hurtigruta Agreement Reference is made to the letter from the EFTA Surveillance Authority dated 18 February 2009, in which the Norwegian authorities are invited to submit additional information regarding renegotiation of the Hurtigruta agreement. Please find enclosed a letter from the Ministry of Transport and Communication of 3 April 2009. Yours sincerely, Pål Hellesylt Deputy Director General Hanne Buch Senior Adviser Postal address Office address Telephone Department of Competition Our officer Policy PO Box 8004 Dep Akersg. 59 +47 22 24 90 90 Telefax Hanne Buch N-0030 OSLO Vat no. +47 22 24 27 23 +47 22244685 972 417 785 DET KONGELIGE SAMFER'DSELSDEPARTEMENT Ministry of Transport and Communications EFTA Surveillance Authority (ESA) Rue Belliard 35 B-1040 Brussels Belgium Your ref Our ref Date Case No 65806 09/573- MLA 03.04.2009 Event No: 502277 Renegotiation of the Hurtigruten Agreement 1. Introduction Reference is made to the Authority's formal request for information of 18 February 2009 regarding the renegotiation of the present contract on maritime service on the distance Bergen-Kirkenes (the Hurtigruten Agreement). By a letter of 17 March 2009 the Authority granted an extension of the deadline to submit further information until 3 April 2009. A brief presentation of the renegotiation result was given in the Ministry's letter of 26 November 2008. In section 2 below the Ministry presents the process and the result of the renegotiation in more detail. In section 3 the Ministry provides the information requested by the Authority, while the question whether a formal notification of the renegotiation result should have been submitted is commented on in section 4. 2. Background 2.1 The renegotiation process As the Authority is well acquainted with the historical facts leading to the present Hurtigruten Agreement, the Ministry will confine itself to a brief summary. The Ministry will be happy to provide a more detailed account if the Authority so requests. For several decades the Norwegian authorities have considered it an important public obligation to ensure the provision of a reliable maritime transport service along the Postal address: Office address: Tel. - switchboard Departement of Reference: Postboks 8010 Dep Akersg. 59 +47 22 24 90 90/ Transport Marie Landsverk 0030 OSLO +47 22248241 Telefax:+4722 24 95 73 +4722 24 82 67 Org. no.: 972 417 904 Norwegian coastline. At the time of entry into force of the EEA Agreement daily transport services between Bergen and Kirkenes (the Hurtigruten service) were provided jointly by the two companies Ofotens og Vesteraalens Dampskibsselskab (OVDS) and Troms Fylkes Dampskibsselskap (TFDS) with whom the Norwegian authorities had entered into an 11 year contract in 1991. This contract expired 31 December 2001. By letter dated 5 July 2000 the Norwegian Authorities, acting upon a request from the Authority, notified a new draft contract with the same companies. Based on subsequent commitments given by the Norwegian authorities the Authority approved the State's compensation under the draft contract as compatible with the functioning of the EEA Agreement (Dec. No. 417/01/COL). Among the commitments given by the Norwegian government was the obligation that a new contract regarding the provision of services along the coast would be awarded following an open, transparent and non-discriminatory procedure, and that this new contract should enter into force by 1 January 2005. In accordance with the commitment an invitation to tender was announced in June 2004 for the period 2005-2012 (enclosed as Annex 1 (in Norwegian) and Annex 2 (in English)). The parties to the old contract, OVDS and TFDS acting jointly, submitted the only bid. Following negotiations between the companies and the Norwegian authorities the new contract (the Hurtigruten Agreement) was concluded in December 2004 (enclosed as Annex 3). In 2006, OVDS and TFDS merged and formed the company Hurtigruten ASA - the present contracting party to the Hurtigruten Agreement. The renegotiation process leading to the revised agreement concluded in ultimo October 2008 started almost two years earlier. Following the Government's proposal for the 2007 State budget in October 2006, which La. introduced a tax on NOx emissions, representatives from Hurtigruten ASA approached the Norwegian authorities in order to clarify the implications of the NOx tax for the compensation under the Hurtigruten Agreement. Following a series of informal talks and meetings the first formal demand for a renegotiation of the agreement with regard to the NOx tax was presented in a letter dated 15 January 2007 (enclosed as Annex 4). The increase in fuel costs was an issue during most of the renegotiation process. The first specific demand for renegotiation with regard to fuel costs was presented 8 May 2007 in a letter from Hurtigruten ASA (enclosed as Annex 5). However, at that time the subject had already been the topic of discussion at previous meetings. A revised agreement based on the renegotiations was not concluded before 27 October 2008. There were several reasons why it took so long to finalize the renegotiations. Page 2 Firstly, the parties had very different starting points in the negotiations. Hurtigruten ASA demanded that the State compensated the full increase in costs resulting from the NOx tax and the increased fuel prices, whereas the Ministry did not regard this as the necessary outcome of the negotiations. Secondly, as further explained in section 3.4 below the parties agreed that the economic effect of the NOx tax should be documented properly through specific measurements showing the real NOx emission figures for the vessels in question. However, as such measurements should be carried out on a large number of NOx emitting vessels and installations it was not until October 2008 that the result of the measurements with regard to the 11 vessels was available. Overall, the renegotiations may be characterized as challenging, with the parties maintaining their original positions for a long time. In a letter of 29 August 2008 (enclosed as Annex 6) Hurtigruten ASA explained that the company experienced serious financial problems and that the company considered terminating the Hurtigruten Agreement in whole or in part, invoking inter alia section 36 of the Norwegian Agreements Act of 31 May 1918. The company's position was further explained in a letter of 23 September 2008 (enclosed as Annex 7). The realization of the difficulties Hurtigruten ASA experienced, and the potential problems a termination of the Hurtigruten Agreement would entail for the provision of maritime transport services along the coastline, eventually lead the Ministry to accept several, though not all, of the demands from Hurtigruten ASA, and a revised agreement was concluded 27 October 2008. On the same date the renegotiation result was made public by the parties in a press release (enclosed as Annex 8). Furthermore, the terms of the revised agreement are described in a letter of 5 November 2008 from the Ministry to Hurtigruten ASA, which has previously been submitted to the Authority. As the result entailed a budget appropriation the case was also submitted to the Storting. The Storting made the appropriation in accordance with the Ministry's proposal, cf. Stprp. nr. 24 (2008-2009) and Innst. S. 92 (2008-2009) (enclosed as Annex 9 and Annex 10). While the financial difficulties faced by Hurtigruten ASA were instrumental in the Ministry's decision to accept the revised agreement, the Ministry also considered the outcome acceptable from a commercial perspective. This was particularly so taking into account that Hurtigruten ASA had few possibilities to transfer the increased costs to its passengers. Reference is made to section 5 of the Hurtigruten Agreement, which significantly restricts the company's commercial freedom to raise ticket prices on the Hurtigruten service. Other alternatives than increasing the compensation to Hurtigruten ASA under the agreement were considered by the Norwegian authorities. However, the present solution was commonly regarded as the less costly alternative. As further set out in Page 3 section 4 below, a termination of the Hurtigruten Agreement would have implied that the State would be incapable of providing the necessary transport services for quite some time, and that the services - to the extent that another provider would be possible to find - would be uncertain in terms of price and quality. Thus, the revised agreement was considered necessary to ensure that the transport service remained in force. At the same time the Norwegian authorities notified Hurtigruten ASA of its intention to launch a new tender procedure as soon as possible and that a new contract would most likely be awarded before the original expiration date of the Hurtigruten Agreement. The Ministry would like to add that it has paid close consideration to the State Aid rules during the renegotiation process. Both during the renegotiations and later the Ministry has been adamant to prevent any kind of overcompensation to Hurtigruten ASA. The fact is, however, that the State's compensation under the Hurtigruten Agreement in combination with the income generated from goods and passengers, has been far from sufficient to cover the actual costs related to the Hurtigruten service. 2.2 The result of the renegotiation As noted by the Authority the renegotiations resulted in an increase of the compensation paid by the State under the Hurtigruten Agreement, consisting of three different elements. 1. The reimbursement of 90% of the NOx tax attributable to the Hurtigruten service for 2007 and 90% of the corresponding payments to the NOx Fund for the first half of 2008, in total NOK 59 million. The reimbursement is intended to continue in the remaining duration of the Hurtigruten Agreement.