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Cite as: [2000] ScotCS 201

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OUTER HOUSE, COURT OF SESSION

P682/00

OPINION OF LORD GILL

in the cause

ANGUS COUNCIL

Pursuer;

against

DR LYNDA CLARK QC MP,

THE ADVOCATE GENERAL FOR SCOTLAND

for judicial review of a decision to exclude Arbroath from the revised Assisted Areas Map for the purposes of the Industrial Development Act 1982, section 1

Defender:

________________

Glennie, QC Tods Murray WS (Petitioner)

Brodie, QC, S P L Wolffe Solicitor to the Advocate General (Respondent)

18 July 2000

The parties

The petitioner is a local authority whose area includes the town of Arbroath. The respondent is the Advocate General for Scotland, as representing in Scotland the Department of Trade and Industry (DTI), the Department of the Environment, Transport and the Regions (DETR), the Welsh Office and the Scotland Office (the UK Government Departments). The petition has been intimated to the Lord Advocate for any interest that he may have. The Lord Advocate has not entered appearance.

The petition

The petitioner seeks judicial review of a decision to exclude Arbroath from the revised Assisted Areas Map for the purposes of section 1 of the Industrial Development Act 1982 (the 1982 Act); reduction of that decision, and reduction of the Map itself, on the ground that the decision was unlawful in respect that it was unreasonable.

The case has come out for a first hearing. The pleadings have not been fully adjusted; but it is my impression from the petitioner's replies to the Answers for the respondent and from the submissions of counsel that there is little, if any, dispute on the facts. The following narrative of the background is, I hope, confined to facts that are either formally admitted or clearly established in the documents lodged.

Assisted Areas

Under section 1 of the 1982 Act the Secretary of State may, by order, designate areas as development areas or intermediate areas which are known as "assisted areas" (1982 Act, s 7(6)). Section 1 sets out the criteria by which the Secretary of State may designate an assisted area, that is to say,

"all the circumstances actual and expected, including the state of employment and unemployment, population changes, migration and the objectives of regional policies."

Section 1(4) sets out the types of area, for example wards or travel to work areas (TTWAs), by reference to which an assisted area may be designated. Designation under section 1 is necessary if an area is to be eligible for selective financial assistance (1982 Act, s 7). The administration of such assistance in Scotland is a function devolved to the Scottish Executive.

Regional Selective Assistance (RSA)

Regional Selective Assistance under section 7 of the 1982 Act is the principal form of regional aid in the United Kingdom. Section 7 sets out the purposes and the considerations, all of them of an economic nature, that the Secretary of State has to take into account (ss. (1) and (2)). Sections 1 and 7, read together, indicate that the Secretary of State has a wide discretion in his decisions on these matters.

State aid under the European Treaty

In general, state aid is prohibited under the European Treaty (Article 87) except with the prior approval of the EC Commission (Article 88(3)). Where such prior approval is given, it constitutes a derogation from the general prohibition. Such a derogation is necessary before a member state can give state aid within a designated assisted area; for example, in the case of the United Kingdom, state aid under the 1982 Act.

The Assisted Areas in existence before 1 January 2000 were last designated in about August 1993. The derogation granted in respect of those areas ceased to have effect on 31 December 1991.

Articles 87(3)(a) and 87(3)(c) of the Treaty

Approval of state aid may be granted by the Commission under Articles 87(3)(a) and 87(3)(c) of the Treaty.

Areas approved under Article 87(3)(a) are known in the United Kingdom as "Tier 1 areas". These are areas "where the standard of living is abnormally low or where there is serious unemployment". Under the Commission Guidelines (infra) such areas are geographical areas within the member states of a prescribed size with a per capita gross domestic product of less than 75% of the Community average. Such areas automatically qualify for inclusion within the Assisted Areas of the member state.

In respect of regional aid schemes the Commission has put a ceiling on the overall total of the derogations that it will permit throughout the Community under Article 87. This maximum is calculated in terms of the maximum population levels that may benefit from regional aid.

When the derogations automatically allowed as Tier 1 areas are deducted from the total derogations permitted overall, the remainder provides the total of the derogations potentially available under Article 87(3)(c). These are known as "Tier 2 areas" (cf Guidelines, para 3.9). The derogations potentially available as Tier 2 areas have to be allocated among the member states and have to be specifically identified within the territory of each individual member state.

The European Commission's guidance on national regional aid (The Guidelines)

The Commission issued new Guidelines on National Regional Aid applicable with effect from 1 January 2000. These set out the criteria that the Commission will apply in considering whether to grant derogations.

Population ceilings

The current Guidelines were issued as part of the Commission's policy to reduce the overall level of aid available to industry within the Community. The Commission reduced the proportion of the population covered by areas where state aid is permitted. It did so by imposing absolute limits, known as "population ceilings", on the cumulative population of all of the assisted areas within any member state.

The population ceiling allocated to the United Kingdom is 16.88 million. Of this, the Tier 1 areas automatically eligible for state aid under Article 87(3)(a) account for 5.08 million.

The balance of about 11.8 million fell to be allocated under Article 87(3)(c). The comparable balance available under Article 87(3)(c) up to 31 December 1999 was 20.3 million.

The Commission later indicated that it would require a further reduction in the United Kingdom population ceiling of about 339,000. That left a balance for Tier 2 designation of about 11.4 million.

NUTS areas

The Guidelines refer to Nomenclature for Units of Territorial Statistics (NUTS). A NUTS area is a geographical area defined for statistical purposes. A NUTS I area is a territory or government office region such as Scotland. A NUTS II area is a sub-region of the area, such as Eastern Scotland. A NUTS III area corresponds with a county or unitary authority or group of unitary authorities such as Angus and Dundee City. A NUTS IV area corresponds with a local authority district such as that of the petitioner . A NUTS V area corresponds with a ward.

Coherence (compactness and contiguity)

The Guidelines require that a proposed assisted area should have coherence. This is assessed in terms of compactness and contiguity in geographical terms.

Minimum population size

The Guidelines imposed a minimum notional population size of 100, 000 for each proposed assisted area. If a proposed assisted area contains a smaller population than that, a population of 100,000 is nonetheless attributed to it for the purpose of calculating whether the proposed areas cumulatively come within the overall population ceiling.

The objectives of the Guidelines and the form and content of applications for derogation

To set the scene for the parties' submissions, I shall quote selectively but not, I hope, tendentiously, from the Guidelines. These extracts cover the passages to which counsel particularly referred. I have omitted the footnotes. The reference to Article 92(3)(c) of the Treaty is a reference to what is now Article 87(2)(c).

"1. INTRODUCTION

The criteria applied by the Commission when examining the compatibility of national regional aid with the common market under Articles 92(3)(a) and 92(3)(c) of the EC Treaty have been set out in a number of documents of various sorts brought to the attention of the Member States and other interested parties.

The growing number of these documents, their heterogeneous nature and the long time-frame involved, the changes in thinking and practice both within the Commission and within Member States and the need to concentrate aid and reduce distortions of competition make it necessary to aim for transparency, up-to-dateness and simplification by revising all the criteria currently applied and replacing the said documents with a single text. The test that follows seeks to meet this need ...

DEMARCATION OF REGIONS

In order that the aid schemes directed at them may benefit from one of the derogations, the regions concerned must satisfy the conditions set forth in those derogations. The Commission establishes whether the conditions are met by applying predetermined analytical criteria ...

The derogation in Article 92(3)(c)

In contrast to Article 92(3)(a), where the situation in view is identified precisely and formally, Article 92(3)(c) allows greater latitude when it comes to defining the difficulties of a region that can be alleviated with the help of aid measures. The relevant indicators do not therefore necessarily boil down in this case to standards of living and underemployment. In any case, the appropriate framework for evaluating these difficulties may be provided not only by the Community as a whole but also by the relevant Member State in particular ...
The regional aid covered by the derogation in point (c) must, however, form part of a coherent regional policy of the Member State and adhere to the principles of geographical concentration set out above. Inasmuch as it is intended for regions which are less disadvantaged than those to which point (a) relates, such aid is, to a greater extent than the latter, exceptional and can be allowed only to a very limited degree. This being so, only a small part of the national territory of a Member State may prima facie qualify for the aid in question. This is why the population coverage of regions falling under Article 92(3)(c) must not exceed 50% of the national population not covered by the derogation under Article 92(3)(a).

On the other hand, the fact that the nature of such aid makes it possible to take account of the national peculiarities of a Member State does not exempt the aid from the need for scrutiny from the viewpoint of Community interests. The determination of the regions eligible in each Member State must therefore fit into a framework guaranteeing the overall coherence of such determination at Community level.

So as to afford national authorities sufficient latitude when it comes to choosing eligible regions without jeopardizing the effectiveness of the system of checks operated by the Commission in respect of this type of aid and the equal treatment of all Member States, the determination of the regions eligible under the derogation in question consists of two parts:

the fixing by the Commission, for each country, of a ceiling on the coverage of such aid;

the selection of eligible regions.

The latter part will obey transparent rules but will also be sufficiently flexible to allow for the diversity of situations potentially justifying the application of the derogation. The aid coverage ceiling is designed to be conducive to the abovementioned flexibility in the choice of eligible regions whilst ensuring the uniform treatment required by acceptance of such aid from the Community point of view ...

The Member States notify to the Commission, under Article 93(3), the methodology and the quantitative indicators which they wish to use to determine the eligible regions, and the list of regions they propose for the (c) derogation and the relative intensities. The percentage for the population of the regions concerned may not exceed the said ceiling on coverage for the purposes of the 92(3)(c) derogation.

The methodology must satisfy the following conditions:

it must be objective;

it must make it possible to measure the disparities in the socio-economic circumstances of the regions in question in the Member State concerned, highlighting significant differences;

it must be presented in a clear, detailed fashion, to enable the Commission to assess its merits.

The indicators must satisfy the following conditions:

their number, including both simple indicators and combinations of indicators, must be limited to five;

they must be objective and relevant to the examination of the socio-economic circumstances of the regions;

they must either be based on statistical series relating to the indicators used over a period including at least the three years prior to the moment of notification, or be derived from the last survey carried out, if the relevant statistics are not available on an annual basis;

they must be drawn up by reliable statistical sources.

The list of regions must satisfy the following conditions:

the regions must conform to NUTS level III or, in justified circumstances, to a different homogeneous geographical unit. Only one type of geographical unit may be submitted by each Member State;

the individual regions proposed or the groups of continguous regions must form compact zones, each of which must have a population of at least 100,000. If the population of regions is less, a fictitious figure of 100,000 inhabitants will be used for the calculation of the percentage of the population covered. Exceptions to this rule are the NUTS level III regions with a population of less than 100,000, islands and other regions characterized by similar geographical isolation. Where one region adjoins regions eligible for regional aid in other Member States, the rule applies to the whole complex formed by those regions;

the list of regions must be arranged on the basis of the indicators set out at point 3.10.2. The regions proposed must show significant disparities (half of them the standard deviation) compared with the average of the potential 92(3)(c) regions of the Member State concerned, in respect of one or other indicator used in the method."

Re-designation of Assisted Areas

In consequence of the new Guidelines, and the requirements of the Commission, the United Kingdom government had to re-designate the Assisted Areas. The Commission required member states to submit proposals for the re-designated Assisted Areas by 31 March 1999.

The 1998 consultation paper

In July 1998 the government issued a consultation paper entitled Review of the Assisted Areas Map. In it the government sought views on the areas that might be designated as Tier 2 Assisted Areas and on the geographical units and criteria to be used in the assessment process.

The consultation paper discussed the possibility of having smaller units than Travel To Work Areas; but mentioned that in that event the smaller units would have to be amalgamated in order to meet the minimum population level of 100,000 for any one Assisted Area that the Guidelines specified.

The consultation paper (para 9) mentioned that criteria other than, and in addition to, labour market indicators might be appropriate and that "different indicators may be given varying importance and weight in the final assessment."

There was strong competition for Assisted Area status. According to the respondent, over 350 responses were received. These included 244 responses from local authorities.

In October 1988 the petitioner and Dundee made a joint submission. They proposed an Assisted Area comprising the whole of the new Dundee Travel To Work Area built up using NUTS V areas, that is to say wards, as the geographical unit. The new Dundee Travel to Work Area included four wards in Arbroath. The joint submission recognised the logic of amalgamating the then existing Dundee and Arbroath Travel To Work Areas into the new Dundee Travel To Work Area and stressed the inter-relationship between Dundee and Arbroath.

The July 1999 proposals

The areas proposed in response to the 1998 consultation paper greatly exceeded the available population-ceiling limit for Tier 2 areas. The government therefore had to make a choice. The criteria that it used in making that choice have given rise to the central issue between the parties.

Having considered the responses to the 1998 consultation paper, the government published its revised proposals on 15 July 1999 in "The Government's Proposals for New Assisted Areas". The government submitted these proposals to the Commission.

The responses to the 1998 consultation paper had favoured the use of NUTS V areas in the designation of these areas. According to the respondent, there were reasons for this, namely that the use of the smaller geographical unit afforded the greatest flexibility in terms of identifying need, matching that need to areas of opportunity and doing so within the population ceiling, and of building up clusters of wards meeting the specified criteria into areas capable of satisfying the minimum population figure of 100,000. The use of relatively small geographical units enabled areas of need and opportunity to be targeted in the most efficient way having regard to the population ceiling, commensurate with the overall interest of the United Kingdom.

The government adopted this approach in the 1999 proposals. In relation to the criteria for the selection of wards, the government adopted four principal criteria; namely (1) employment participation rates (2) residence-based unemployment rates (3) workforce-based unemployment rates and (4) local dependence on manufacturing. They then added an amalgamation of three of these. According to the respondent these criteria reflected inter alia the government's policy preference that areas of need, and in particular those with labour market weaknesses, should be identified and matched to neighbouring areas of opportunity where regional aid might be most effective in alleviating that need.

In August 1993 the Arbroath TTWA had been designated with full Development Area Status for the purpose of RSA. The petitioner assumed responsibility for that area when it came into existence. The revised proposals announced by the government in July 1999 affected this area.

Among the 1999 proposals was the amalgamation of certain wards in Arbroath with certain wards in Dundee. This would have resulted in those wards that were included in the amalgamated area (the new Dundee TTWA) retaining Assisted Area status, if the Commission granted the necessary derogation. The new Dundee TTWA would have replaced the former Arbroath and Dundee TTWAs.

The respondent avers that in making the final selection, the DTI considered the statistical criteria to which I have referred, the consultation responses and the availability of areas of opportunity. The DTI also consulted the UK government offices, the regional development agencies in relation to England, the National Assembly for Wales and the Scottish Executive on regional priorities for Assisted Areas.

According to the respondent the government had regard to, among other factors, (1) the responses to the 1998 consultation paper (2) the government's view on the appropriate regional balance of the proposals (3) the impact of change from any existing map (4) the availability of other forms of aid (5) the nature of the economy of the relevant area, regard being had to the government's objective of identifying those areas where assistance is needed and where regional industrial aid is the appropriate policy response. In short, the respondent makes it clear that factors other than purely statistical indicators had an important bearing on the formulation of the July 1999 proposals. The petitioner had no quarrel with the July 1999 proposals.

The Commission's response to the July 1999 proposals

The Commission rejected the July 1999 proposals. It then sought the further reduction of 390,000 in the population coverage of the proposed Assisted Areas to which I have referred. The Commission commented particularly on the application of the criterion of compactness and contiguity to the proposed Assisted Area in and around Dundee. That Area included the four Arbroath wards.

The government had discussions with the Commission on the July 1999 proposals. According to the respondent, the Commission thereafter refined its interpretation of the Guidelines. In substance the Commission interpreted compactness and contiguity to mean that any particular assisted area required to have a certain coherence in relation to its shape and had to be a self-contained area. A member state would not be permitted, for example, to propose as an assisted area the area around a conurbation but excise from that area the large population concentrated within the conurbation itself as a means of avoiding the population ceiling. The Commission deployed the idea of compactness to preclude member states from identifying areas of predominantly industrial activity, from which enterprises would benefit, and designating them as assisted areas but without including areas in the vicinity in which populations were concentrated. The Commission also required governments to demonstrate that particular assisted areas proposed were self-contained.

The April 2000 proposals

From these discussions there emerged the revised proposals published on 10 April 2000, "Amendments to the Government's Proposals for New Assisted Areas." The government sought to demonstrate that the revised Areas were self-contained by showing that a substantial proportion of the working age population living in the whole of those Areas either worked in them or were unemployed or were economically inactive (cf para 8).

In making these proposals the government took account of the Commission's views on the concept of "compactness and contiguity" so far as that affected the proposed Dundee/Arbroath Assisted Area. If the government were to include any of the wards in Dundee while meeting the requirements of compactness and maintaining the balance of Assisted Areas throughout all of the regions of Great Britain and within Scotland, it was necessary to make a proposal that included Dundee city centre, and therefore its population. Wards in Dundee city centre were therefore included in the April 2000 proposal. This proposal therefore included more of Tayside's population than had been included in the July 1999 proposals. This had knock-on effects, the most direct of which was the exclusion of the Arbroath wards from the proposed Area (cf April 2000 proposals, paras 11 to 13 and relative appendices), with obvious adverse consequences for Arbroath.

The revised Proposals, with a revised Assisted Areas Map, were published by the DTI in conjunction with the DETR, the Welsh Office and the Scotland Office on 10 April 2000.

It appears that the amended revised Proposals were formerly notified to the Commission on 15 June 2000.

The petitioner's response

On 28 April 2000 the petitioner submitted observations on the revised Proposals arguing for the retention of assisted area status for Arbroath. The petitioner also made representations at meetings attended by a UK Minister and a Scottish Executive Minister.

The petitioner has prepared a table ranking the 60 former TTWAs in terms of unemployment rates and manufacturing dependency. Of these 35 have been included in the revised Map. Of the 60 former TTWAs, Arbroath has the ninth highest unemployment rate and the tenth highest degree of manufacturing dependency. Compared with the other Areas in the now reduced list on the revised Map, Arbroath, according to the petitioner's most up-to-date assessment, would rank third overall if one applied a composite of these indicators. I am prepared to find these as facts on the basis that this information is uncontradicted.

The letter dated 16 June 2000 from the Minister for Enterprise and Lifelong Learning

By letter dated 16 June 2000 to the petitioner's chief executive, the Minister for Enterprise and Lifelong Learning informed the petitioner that the UK government departments had decided to exclude Arbroath from the revised map to be submitted to the Commission for approval. The material part of the letter is as follows:

"I refer to our recent discussions and various correspondence, including your most recent letter of 13 June to Muir Russell, regarding the review of the Assisted Areas. Arbroath representatives have made a very strong case for their area. As you are aware this is a reserved matter, albeit one on which my officials have worked very closely with The Scotland Office and DTI. Against this background, we have thought long and hard about how to include Arbroath whilst still working within the constraints - and crucially the population ceiling - set by the European Commission. I very much regret to have to tell you however, that it has not been possible to do this. It may perhaps help if I outline some of the background.

You will recall that the Assisted Areas map proposals published in July 1999 reflected a significant reduction in UK population coverage as compared with the previous Assisted Areas map. In order to minimise the impact of this cut and also reflecting the results of the public consultation exercise carried out in 1998, a mapping methodology was devised, based on the aggregation of wards. This optimised the balance of opportunity and need in the map, and also ensure that no local authority area completely lost Assisted Areas coverage. Within Tayside, primarily residential wards in Dundee were excluded from the map and coverage was extended from Dundee along the coast to include many of the industrial areas around the edge of Arbroath.

The European Commission had expected the UK to use NUTS 3 areas of Travel-To-Work Areas (TTWAs) as the building blocks for the new map. This would have greatly reduced our scope to balance need with opportunity, and would also have led to large areas being dropped completely from the map. Indeed had the new map been drawn on either of these bases it is by no means certain that any coverage could have been extended to Tayside, let alone to Arbroath.

In the event, the European Commission was not prepared to accept the July 1999 map proposals. They were concerned that we had included areas of opportunity without including all of the corresponding population that might benefit from that opportunity had they also insisted that the UK take a further population cut. Scotland had to take a share of that cut, and we had to make a number of changes to the map, all of which were reflected in the revised version, published on 10 April. In order to meet Commission concerns and thereby retain coverage in Tayside at all, we had to add into this map the previously excluded wards in Dundee, at considerable population cost to other parts of Scotland. To also retain Arbroath on the map would have required still further population cuts elsewhere in Scotland.

We recognise the strength of the case for Arbroath put forward by the Council and others in response to the 10 April proposals, and have considered carefully whether there is any way that we can retain Arbroath on the map.

I am aware from our meeting, and from the discussions you have had with Brian Wilson and our respective officials, of the suggestion that the additional coverage required to include Arbroath should be achieved through the exclusion or other parts of Scotland. I can understand why you might suggest this. It is inevitable - if unfortunate - that in drawing up any such map, apparent inconsistencies will arise. It may be of scant comfort to you, but there are many other needy areas in Scotland and elsewhere in Britain, not included on this map.

I should, though, point out that far from ignoring the needs of your area, the proposed map provides extensive coverage for the new Dundee TTWA, of which Arbroath is a part. Indeed the priority accorded to the region (and to Scotland) is clearly illustrated by fact that 69% of that TTWA's population is included, as against 48% for Scotland and less than 29% for Great Britain as a whole.

I should also stress that the Assisted Areas are only one part of a package of measures that we have in place to meet regional priorities and address the problems of Scotland's needier areas. For example much of Arbroath is covered by the new Objective 2 Structural Funds map. Also Arbroath has good transport links to Dundee - as reflected in it being part of the new Dundee TTWA - and as such its residents should be able to benefit from employment opportunities arising from the Assisted Area status of Dundee ... "

Written Answers in the Scottish Parliament

In a series of Written Answers in the Scottish Parliament on 4 July 2000, the Minister for Enterprise and Lifelong Learning stated that, on national statistics as at May 2000, Arbroath had the fourth highest unemployment rate, and that by reference to the latest relevant available national statistics, dating from 1998, Arbroath had the tenth highest dependency on manufacturing industries. These answers are said by the petitioner to confirm that on the information available to the UK government departments there is a greater disparity in the case of Arbroath compared with the majority of the areas included in the proposed revised Map assessed by reference to the relevant indicators.

The case for the petitioner

The petitioner submits (a) that neither the Scottish Executive nor any of the UK government departments has given any reasoned justification for the exclusion of Arbroath; (b) that the decision complained of is unreasonable because the Guidelines imposed a mandatory requirement that the proposed areas be selected by means of the transparent rules and objective statistical criteria set out in paragraphs 3.8 and 3.10 of the Guidelines whereas, as is accepted by the respondent, the selection was made partly on policy grounds; and (c) that even if that submission is unfounded, the decision is irrational because, on the application of these criteria, it is plain that there can be no reasonable basis for the exclusion of Arbroath.

The case for the respondent

The respondent submits (a) that the petition is irrelevant; (b) that the UK Government Departments have not taken any decision susceptible of judicial review since legal effect will be given to the revised designation of the proposed Assisted Area only if and when the Commission decide to grant the derogation in respect of it, and (c) that even if there has been a decision that is open to judicial review, that decision was within the wide discretion confided to the government by the 1982 Act.

Decision

In my opinion there are three issues to be decided; namely, (1) whether a decision has been made and, if so, whether it is open to judicial review; (2) whether in that event proper reasons have been given for the decision, and (3) whether the decision is illegitimate either (a) on the basis that the government in making it took into account considerations that ought not to have been taken into account or (b) that if the government was entitled to take such considerations into account, the decision is nonetheless irrational on the face of it.

Has a decision been made and, if so, is it open to judicial review?

Counsel for the respondent submitted that no decision had been made. The government had merely submitted factual information and recommendations to the Commission in terms of its Guidelines. The operative decision would be made in due course by the Commission itself.

I disagree. That submission is contrary to the respondent's main proposition, namely that the government has brought policy considerations to bear in the formulation of the revised proposals and was entitled to do so. In my view it is plain beyond any doubt that a concluded decision has been made to omit Arbroath from the new Dundee Travel To Work Area. That is the decision communicated to the petitioner in the letter dated 16 June 2000 from the Minister for Enterprise and Lifelong Learning.

The question then is whether that decision is open to judicial review. In my view, it is. The Commission has no investigative role in these matters. It is not part of its function to make proposals. The Commission merely receives proposals from member states, assesses them by reference to its published Guidelines and then decides whether or not to grant the derogations applied for. If the submission to the Commission is vitiated, the decision of the Commission upon it will be vitiated too.

The crucial step leading to the grant or refusal of a derogation is the decision by the member state as to what proposals, and what supporting information, to submit. That is plainly a decision having significant legal and practical consequences. In this case, it means that Arbroath will be excluded from assisted area status, come what may. The Commission will not even have the opportunity to consider the merits of Arbroath's claim, nor will the Commission be entitled to reinstate Arbroath to the proposals Map at its own hand. A governmental decision having such consequences is, in my view, open to judicial review on any relevant ground.

The reasons for the decision

Counsel on both sides accept that this is not a case where the decision-maker was under any positive duty to give reasons. Nevertheless, in my view, reasons have in the event been given.

Since the Scotland Office was directly involved in the decision; since the Scottish Executive has competence in the administration of selective regional assistance, and, not least, since it is obvious that the Minister for Enterprise and Lifelong Learning had a key role in the formulation of the revised proposals so far as they affected Scotland, I consider that the letter from the Minister dated 16 June 2000 may fairly be taken into account as the source of a statement of reasons.

The question then becomes whether the letter states adequate reasons for the decision. In a case where there is no duty to give reasons, the absence of adequate reasons will be significant if the decision appears on the face it to be irrational (cf R v Secretary of State for Trade and Industry, ex p Lonrho plc, [1989] 1 WLR 525; Bass Taverns Ltd v Clydebank District Licensing Board, 1995 SLT 1275, at 1277).

Counsel for the petitioner submitted that in the light of the statistical information placed before the court, the decision appears to be irrational. When the letter is then examined, it is apparent that it fails to give any cogent reason for the exclusion of Arbroath.

The point is not one that is capable of any great elaboration. In my opinion, on a fair reading the letter of 16 June 2000 states concise reasons with adequate clarity. These reasons, when read in the context of the 1982 Act and the provisions of the Treaty, appear to be logical and coherent. I conclude therefore that the petitioner's case on irrationality derives no support from the terms of the Minister's letter. On the contrary, I consider that that letter sets out a reasoned explanation of the government's decision.

Whether the decision itself is unlawful either because (a) it was based on illegitimate considerations or (b) it was irrational per se in the context of the known facts

This question raises the central issue in this case. Counsel for the petitioner has argued that the methodology and indicators described in the Guidelines are mandatory. Paragraph 3.10 of the Guidelines sets out what a member state must do when putting forward a region as eligible for a derogation under Article 87. Furthermore, these criteria as well as being mandatory are also exclusive in this case. There is no scope for the application of further considerations of government policy. If the argument for petitioner on this point is sound, the government has taken into account matters that it ought not to have taken into account.

Counsel for the petitioner argued, alternatively, that if the government was entitled to take into account considerations other than the mandatory considerations referred to in paragraph 3.10, those other considerations rendered the decision reducible on the ground of irrationality.

Counsel for the respondent argued that in the context of the 1982 Act and the explanation given in the letter of 16 June 2000, the court could not conclude that the decision was irrational. In deciding which areas to propose to the Commission, the government was entitled not only to use the quantitative indicators to which I have referred but also to apply policy considerations in choosing as between one candidate area and another. That is what the government did in this case.

In my view, the submission for the petitioner is flawed on both points. It is important to keep in mind the respective functions and spheres of competence of the Commission and of the governments of the member states.

State aid cannot, in general, be given unless the Commission grants the necessary derogation. The derogation opens a door that would otherwise be locked and barred. The function of the Commission is therefore simply to facilitate the granting of state aid within the member states. How the aid is distributed within the member states is a matter for the internal policies of the individual governments.

In the present case sections 1 and 7 of the 1982 Act confide a wide discretion in the disbursement of selective financial assistance. Section 1 expressly provides for the application of regional policies in the making of the decision to designate an Assisted Area.

If I am right in this view, I think that it would be surprising if the Guidelines had the consequence that Assisted Area status had to be awarded to those areas, and only those areas, that scored highest in the statistical exercise that the Guidelines require. In that event, the resulting list, if approved, could subvert government policy: for example, if it resulted in the Assisted Areas Map's being lopsided; or if it prevented the government from checking a process of depopulation in a specific area; or if it prevented the government from favouring social and economic development in, say, a crofting area or in a group of islands. Moreover, it could be incompatible with the proper exercise of ministerial discretion under sections 1 and 7 in accordance with the criteria that those provisions lay down.

In interpreting the Guidelines, the court is not dealing with a document that has the semantic precision of a statute. The court has to read the Guidelines as a whole and interpret them in accordance with what seem to be their objectives. On that approach, I consider that the Guidelines do not require the individual member state to submit as candidates only those areas that come highest in the mechanistic tests for which paragraph 3.10 provides. If that was the intention of the Commission in framing these Guidelines, I would have expected the Guidelines to say so expressly.

On the contrary, in my view, the true sense of the document is that the member state must not select candidate areas on a haphazard or subjective basis. The selection process must be done according to objective statistical criteria. The methodology used is one to be chosen at the discretion of the member state; but whatever it is, it too must be objective, it must enable meaningful comparisons to be made between one candidate area and another, and it must be presented clearly so that the Commission can assess the merits of the proposal overall and in detail. Likewise the choice of statistical indicators is to a great extent at the discretion of the member state; but these indicators must be statistically sound and useful for their purpose. Lastly, the list of regions must be arranged on the basis of these indicators. Inclusion in the list does not mean that no other area would have been better qualified if it had been put forward.

I see nothing in these Guidelines to deprive the Government of any discretion in the choice of the areas that it submits. Paragraph 3.6 of the Guidelines, in stating that the "appropriate framework" in the evaluation of the difficulties of a region may be provided by the relevant member state, and paragraph 3.7, in its reference to the "coherent regional policy of the member state" seem to me to support this view.

Since the total of derogations available is subject to an absolute limit, and one that has been reduced, it is probably inevitable that in any member state there will be more areas eligible for derogations than can be accommodated on the list. That means that there must be a process of selection. That process must be carried out within the member state prior to there being any submission to the Commission. In my view, in making the selection, the government is free to apply considerations of a wider nature in accordance with its own domestic policies.

Interlocutor

I understand counsel to agree that it if I do not uphold the submissions made on behalf of the petitioner, the appropriate course is to make a final disposal of the petition at this stage. I shall therefore pronounce an interlocutor refusing the petition.