Brussels, 26 March 2021 Case No: 86598 Document No: 1200352 Decision No 023/21/COL [Non-confidential version] [The information in square brackets is covered by the obligation of professional secrecy] Ministry of Finance and Economic Affairs Arnarhvoli 101 Reykjavík Iceland Subject: Aid to Farice ehf. for investment in a third submarine cable 1 Summary (1) The EFTA Surveillance Authority (“ESA”) wishes to inform Iceland that, having assessed the aid to Farice ehf. for investment in a third submarine cable (“the measure”), it considers that the measure constitutes state aid within the meaning of Article 61(1) of the EEA Agreement and decides not to raise objections1 to the measure, as it is compatible with the functioning of the EEA Agreement, pursuant to its Article 61(3)(c). ESA has based its decision on the following considerations. 2 Procedure (2) The Icelandic authorities notified the measure on 23 March 2021.2 3 Description of the measure 3.1 Factual background (3) Iceland is among the world’s most digitalised countries and reliance on international telecommunications connectivity is a critical component for most sectors of Icelandic society. (4) Farice ehf. (“Farice”) currently operates the two submarine cables running from Iceland to Europe, FARICE-1 and DANICE. FARICE-1 runs from Seyðisfjörður, on the east coast of Iceland, and lands in Scotland, with a branch unit into the Faroe Islands. DANICE runs from Landeyjarsandur, on the south coast of Iceland, and lands in Denmark. The routes of FARICE-1 and DANICE, the only submarine cables running from Iceland to Europe, intersect in the Atlantic Ocean. A third submarine cable, Greenland Connect, runs from Iceland to Canada (see Section 3.2.2). (5) FARICE-1 was laid in 2003 and put into commercial operation in 2004. The Icelandic Government participated in the financing of the project by: (a) granting a state guarantee in the amount of EUR 9.4 million; and (b) providing a capital injection in the amount of EUR 13 million. In July 2006, ESA concluded that these measures constituted compatible state aid.3 1 Reference is made to Article 4(3) of the Part II of Protocol 3 to the Agreement between the EFTA States on the Establishment of a Surveillance Authority and a Court of Justice. 2 Documents No 1189996, 1190000 and 1190159, and attachments, Documents No 1189980, 1189982, 1189986, 1189988, 1189990, 1189992, 1189994, 1190002, 1190004 and 1190006. 3 See ESA’s Decision No 227/06/COL State aid in favour of Farice hf. Rue Belliard 35, B-1040 Brussels, tel: +32 2 286 18 11, www.eftasurv.int Page 2 (6) Preparations for the second cable, DANICE, commenced in 2007. At the time, Farice was jointly owned by Icelandic telecommunications operators and the Icelandic Government. The construction of DANICE was funded on market terms.4 DANICE was put into commercial operation in 2009. (7) Farice entered into severe financial difficulties in 2008 as a result of the financial crisis and the devaluation of the Icelandic currency. From 2010 to 2012, the Icelandic authorities initiated measures for the restructuring of Farice. These measures included a capital increase, debt conversion and a state guarantee. In addition, Farice and the Icelandic authorities entered into a public service contract whereby the Icelandic authorities provided Farice with funding to support the operations of the company. On 19 July 2013, ESA issued a comfort letter to Iceland regarding the public service contract.5 (8) On 23 February 2021, ESA received a complaint from Sýn ehf. (“Vodafone Iceland”) regarding Farice.6 In its complaint, Vodafone Iceland alleges that Farice has received public service compensation from the Icelandic authorities in violation of SGEI rules,7 including compensation for costs related to surveys conducted in preparation for a possible third submarine cable. At the date of this decision, the complaint case remains open. 3.2 Policy background and current vulnerabilities of international connections 3.2.1 Iceland’s Telecommunications Policy (9) On 3 June 2019, the Icelandic Parliament adopted a parliamentary resolution approving the Government’s telecommunications policy for the years 2019–2033 (“the Telecommunications Policy”).8 (10) The objectives of the Telecommunications Policy are, inter alia, to promote accessible and effective communications and to guarantee the security of telecommunication infrastructures. (11) To achieve those objectives, the Telecommunications Policy emphasises that three active submarine telecommunications cables shall connect Iceland with Europe from different landing sites. As a geographically remote country, effective international connections are a prerequisite for the development of Iceland as a modern technology-based society. A substantial part of IT systems in use in Iceland today are hosted in data centres outside of Iceland. A serious disruption in international connectivity would cause major damage to the Icelandic economy and society as a whole. (12) According to a risk assessment produced by Farice, the main vulnerabilities of the current international connections network relate to human error, malfunctions, accidents, natural disasters and other unforeseen events.9 Furthermore, the lengths of the submarine cables increase the probability of incidents compared to shorter cables going from Scandinavia and the UK to mainland Europe. Moreover, 4 See ESA‘s Decision No 787/08/COL regarding the DANICE project. 5 See, ESA comfort letter of 19 July 2013. 6 Document No 1182556. 7 “SGEI” stands for “Services of General Economic Interest”. 8 https://www.althingi.is/altext/pdf/149/s/1688.pdf. 9 See Document No 1190004. Page 3 other countries in the EEA are connected to major international network connection points via a diversified network of multiple land and/or submarine cables while Iceland is dependent on only two submarine cables. 3.2.2 Greenland Connect submarine cable (13) A third submarine cable, Greenland Connect, owned and operated by Tele Greenland, terminates in Iceland and its traffic is directed through Danice and FARICE-1 on the way to Europe. It is possible to buy services to mainland Canada, and from there to New York, from Tele Greenland. However, the Icelandic authorities consider that Greenland Connect does not meet the requirements for serving as a backup for Iceland.10 (14) In this context, for a cable to provide additional security it needs to have a separate risk profile from existing cables. As Greenland Connect shares a landing station and the route out from Iceland with DANICE, it does not meet the required criteria of a backup cable. In addition, the marine route of the cable has proven to be faulty with long periods of outage. In December 2018, Greenland Connect experienced a fault that lasted until August 2019. Also prior to that, Greenland Connect had experienced multiple faults. (15) Moreover, one of the more serious risk factors that needs to be mitigated with a backup cable is the need for the network to withstand flooding from a large volcanic eruption of the Katla volcano that is situated close to the landing site of DANICE and Greenland Connect. A severe flooding that would cause harm to the landing station or cables close to the mountain would cause fault in both DANICE and Greenland Connect at the same time. For these reasons, the Icelandic authorities do not consider Greenland Connect to meet the requirements needed to secure international connections to Iceland. 3.2.3 Current vulnerabilities of international connections (16) According to the Icelandic authorities, the current risks relating to possible malfunctions to international connections have been analysed in a statistical model taking into account the probability of a total outage, meaning an outage of both paths simultaneously during a 10-year period, and the proportional projected availability. Simultaneous interruptions of the submarine cables would be the worst case scenario and the single most critical risk factor. The expected11 theoretical availability of both cables as one system is 99.96% and therefore the probability of one outage during a 10-year period is 12%.12 A simultaneous outage of both cables has an expected duration of about 10 days, meaning no international service would be provided by Farice to Iceland during that period. The calculations above only model pure submarine failures. Other threats on-land increase the outage probability. (17) Furthermore, there are permanent risk factors that could disrupt the international connection network. The most realistic risk factors are disruptions caused by 10 The requirements for increased security in international connectivity by a third cable are based on the objectives of the Icelandic authorities in its Telecommunications Policy. 11 Based on international statistics of submarine cable where Mean Time Between Failures (MTBF) is 3 years and assumed repair time (MTTR) of 3 weeks per cable. 12 Based on exponential distribution: p(failure during a period T) = 1 - P(no failure) = 1- e-(T/MTBF), where T = 10 years, e=2.71 and MTBF is the Mean Time Between Failures for the system in years. Page 4 human error, e.g. mistakes and disruptions caused by fishing vessels or other man-made objects in the ocean. Should a fishing vessel cause a submarine cable to break, the repair time will be counted in weeks, or months should the break occur during wintertime, as the repair vessels require favourable weather conditions to operate. During such a period, Iceland would only be connected to Europe via a single submarine cable, where a simple land connection failure will cause a full network outage. (18) Moreover, there are several natural events that could jeopardise the security of FARICE-1 and related terrestrial routes. Mainly, there is a possibility of flooding in the Skeiðará river in south Iceland which could rupture the southern path of the terrestrial cables of FARICE-1 causing outage for weeks. This would result in the disconnection of a large part of FARICE-1 as traffic cannot be re-routed to the northern path within a short timeframe.