House of Commons - Foreign Affairs

Select Committee on Foreign Affairs Eleventh Report

Spanish restrictions on Gibraltar

97. Restrictions by the Spanish Government on telephone access between Spain and Gibraltar were discussed in the Reports of our predecessor Committee. The principal restrictions emanate from Spain's non-recognition of Gibraltar's international dialling code. Calls from Spain—or international calls passing through Spain—using this dialling code are blocked, and do not reach their destination. Spanish mobile telephone service providers also refuse to enter into roaming agreements with the Gibraltar service provider, apparently at the insistence of the Spanish Government. As a result, Gibraltar mobile telephones cannot be used in Spain, and Spanish mobile telephones cannot be used in Gibraltar.

98. Telephone calls between Spain and Gibraltar are possible, but only via 30,000 Spanish telephone numbers, which Spain has allocated to Gibraltar. These numbers can be accessed from Spain by dialling a regional Spanish code, and from outside Spain by dialling either the Spanish number, or a related number using Gibraltar's international dialling code (as long as the call is not routed through Spain).

99. Gibraltar has long claimed that the cap on telephone numbers accessible from Spain, at 30,000, restricts Gibraltar's economic potential and is contrary to European competition law. The matter was first taken up with the European Commission in 1996 by two Gibraltar telecommunications companies, Gibtel and Nynex. In June 2000, the Commission wrote to the United Kingdom Permanent Representative to the EU, urging that the United Kingdom and Spain should find a bilateral solution to the problem.[96] Peter Caruana told us that the Commission has been "completely inactive" on this issue, an allegation which the evidence certainly

supports.[97]

100. In November 2001, following the recommencement of meetings under the Brussels Process, the Spanish Government published a proposal, which, it claimed, would allocate an additional 70,000 telephone numbers to Gibraltar. In evidence to us in the same month, Peter Hain presented this announcement as one of the "positive things which have come out of the Brussels Process ... to the benefit of the people of Gibraltar".[98] Peter Caruana was less impressed:

101. The Gibraltar Government's opinion of the Spanish offer did not improve on examination of its detail. This revealed that the offer consisted of:

(2) all the new 70,000 numbers were to be allocated to a Spanish telecoms licencee (Telefonica), who would then administer the 70,000 numbers by subassigning them (on application) to Gibraltar telecoms licencees. In other words, Gibraltar licencees would have to apply for numbers, not to the Gibraltar Regulator or the Gibraltar licensing authority, but to a telecoms company in Spain."[100]

102. Under the circumstances, we are scarcely surprised that the Gibraltar Government has rejected the Spanish offer.[101] The British Government's initial enthusiasm also seems to have been somewhat dampened, and the Foreign Secretary has understandably described the Spanish Government's position as "a matter of some frustration to me, offering quite a large number of phone numbers and then frankly not delivering those".[102]

103. According to the Gibraltar Government, Spain intends to terminate the existing access to 30,000 numbers as of 31 December 2002.[103] If so, this would put wholly unacceptable pressure on Gibraltar to accept Spain's offer to avoid losing all telephonic communications with Spain and would be a further example of a gratuitously provocative action, which can only inflame opinion on the Rock.

104. Our predecessor Committee recommended that "the Government take all steps open to it under the Treaties to ensure that a determination is made by the European Commission with no further delay in the case of telephone operations" and concluded that "it is unacceptable that Spain's inadequate allocation of telephone numbers to Gibraltar remains unresolved 5 years after it was put before the Commission in 1996."[104] The British Government has consistently argued that "the only comprehensive solution to Gibraltar's telephone problems is Spanish recognition of the international dialling code", a position with which we wholeheartedly concur.[105] But attempts at bilateral negotiation on this issue have so far produced only an unacceptable offer based on Spanish control of the Gibraltar telephone network, and, apparently, the threat of an end to the existing communication links between Spain and Gibraltar.

105. This is surely a prime example of Spain's failure to grasp an opportunity of favourably influencing opinion in Gibraltar. It is an issue which needs urgently to be resolved. Ideally, it should be resolved bilaterally with Spain. The British Government has proposed a meeting of British, Spanish and Gibraltar experts to seek to resolve the issue, and the Gibraltar Government has made it clear that it would be willing to participate in such talks provided they are not part of the Brussels Process.[106] We recommend that the Government seek as a matter of urgency a meeting between British, Spanish and Gibraltar officials to find a workable solution to the issue of communications between Gibraltar and Spain.

106. But recent history does not bode well for such talks. Spain, even in the face of an unprecedented attitude of compromise on the British side on the issue of sovereignty, has been able only to offer a limited number of extra telephone numbers under unacceptable conditions. The European Commission ought to adjudicate on the matter, but its dilatory stance since 1996 suggests a supine unwillingness to act against a flagrant breach of competition law. Nevertheless, we recommend that if no solution to the Gibraltar communications issue can be found through negotiation with Spain, the Government should refer the matter back to the European Commission and should be prepared if necessary to take it to the European Court.

107. In such circumstances, we believe that the British Government should also be seeking an effective unilateral solution to the problem. It ought to be possible, for example, to make an arrangement under the British telephone numbering plan similar to that which currently exists for 30,000 Gibraltar numbers under the Spanish numbering plan. While the Gibraltar Government has rejected integration into the British numbering plan, it would probably be prepared to consider dual access: maintaining its international dialling code for most purposes, but allowing these numbers also to be dialled using a British local code where Gibraltar's international code is not recognised. Options such as these are explored by Kenneth Westmoreland and John Borda in evidence submitted to us.[107] While it would be technically possible for the Spanish Government to block access to British telephone numbers, it would almost certainly be politically untenable, and highly counter-productive in its relations with Gibraltar. In any case, Spain's main complaint (in principle, at least) appears to be Gibraltar's use of an international dialling code—as if recognition of that code might imply recognition of international status. We recommend that, in the absence of further progress on telecommunications access with Spain in the near future, the British Government should explore with Gibraltar the possibility of enabling access to Gibraltar telephone lines via the British numbering plan and dialling code as well as via Gibraltar's international dialling code.

AVIATION SERVICES

108. Spain has never recognised British title to the land ("the isthmus") on which Gibraltar airport is situated. An agreement reached between the United Kingdom and Spain in 1987 for joint use of the airport, which, it has been suggested, was originally accepted by the then Chief Minister,[108] was ultimately rejected by the Gibraltar Government. Since this time, Spain has blocked European Community measures relating to air services which would apply to Gibraltar. The British Government has agreed to suspend the application to Gibraltar of numerous such measures—including the Single European Sky—in the interests of the United Kingdom and the EU more widely.

109. Spain refuses to allow direct air communications between Gibraltar and Spain, and, according to the Gibraltar Government, discourages all other EU countries except the United Kingdom from establishing direct air links with Gibraltar.[109] This is a much more uncompromising position than that taken by the Franco regime, which allowed direct flights to operate between Gibraltar and Madrid.

110. Furthermore, if a flight bound for Gibraltar has to be diverted because of adverse weather conditions—a not uncommon occurrence, as the runway at Gibraltar makes for a particularly awkward landing—the aircraft may not land instead at a Spanish airport. The normal procedure is for the aircraft to land at Tangier in Morocco, to file a new flight plan, and only then to proceed to Malaga in Spain. If a Gibraltar-bound flight does divert directly to Malaga, that aircraft cannot be used to collect outbound passengers. It must return to the United Kingdom, and a separate, empty aircraft must be sent out to Malaga. The Gibraltar Government describes this situation as "scandalous".[110] We agree. We conclude that Spain's refusal to allow Gibraltar-bound aircraft to divert to Spanish airports in adverse weather conditions is potentially dangerous as well as unjustified. This is precisely the sort of incomprehensible restriction which obstructs hopes of understanding between Spain and Gibraltar.

111. An impediment to the use of the airport for which Spain is not responsible is the cost for commercial aircraft of landing at Gibraltar. Gibraltar airport is a joint-use facility operated by the Ministry of Defence (MoD). The landing charges imposed by the MoD are intended to recover the additional costs incurred by allowing commercial flights to use the airport. The cost for a commercial aircraft of landing at Gibraltar is nearly five times that of landing at Malaga and up to four times as much as a peak landing slot at Gatwick airport.[111] Clearly this is extremely uncompetitive. We recommend that the Government reexamine its landing charges for commercial aircraft at Gibraltar airport to ensure that they do not exceed the real cost of allowing commercial operations to take place. We further recommend that the Government should assess whether reducing the landing charges would encourage greater commercial use of the airport, thereby ensuring that current revenues are maintained.

BORDER CONTROLS

112. The existence of Spanish controls at the border with Gibraltar is understandable and legitimate. The problem—and Gibraltar's cause for complaint—is the way in which those controls are operated. One undeniable benefit to Gibraltar which has resulted from the Brussels Process is the opening on 21 March 2002 of a second customs lane at the border crossing from Gibraltar to Spain. We welcome the opening of a second customs lane at the crossing from Gibraltar to Spain, and we recommend that the Government encourage Spain also to open a second lane at the crossing from Spain to Gibraltar. Nonetheless, considerable delays at the border continue, as we observed during our visit.

113. Our predecessor Committee, during its last inquiry into Gibraltar, received evidence from the FCO, which stated:

"The Commission has said in response to a question from Lord Bethell MEP that it 'considers that the checks conducted at the border which lead to these delays could not be proportionate to the legal and practical objectives they are intended to pursue'."[

112

114. In March 2002, however, the Commission announced that it was closing its investigation into the border restrictions. In a press release, it claimed to have "found no evidence to legally support claims that the checks carried out by the Spanish authorities on travellers and on goods carried by travellers at the crossing point La Linea are disproportionate and therefore incompatible with Community law".[113]

115. We are frankly amazed that the Commission could find no evidence to give legal support to claims that the checks are disproportionate, especially in the light of its previous statement that they "could not be proportionate" and find that conclusion quite perverse. The Commission is correct in its argument that the existence of delays at the border at certain times is not in and of itself evidence that the checks being carried out are disproportionate. But our own observations at the border, our discussions with reliable sources in Gibraltar and evidence provided by the FCO[114] indicate that the problem is less the length of time that individuals must wait—although these can be excessive—but rather the arbitrary way in which checks are carried out, as a result of which people cannot know with any certainty for how long they will have to wait at the border crossing. In November 2001, the last month for which we have statistics, the maximum delay for vehicles exiting Gibraltar varied day by day from as little as 30 minutes to as much as 120 minutes, while the equivalent figure for vehicles entering Gibraltar varied from 0 minutes to 60 minutes.[115] Such actions by the Spanish authorities are hardly likely to ease suspicions of Spain among the people of Gibraltar.

116. The Spanish Government's claims that "persons are required merely to show their passport or identity card and cross practically without needing to stop" and that "the control of goods carried by travellers is implemented by means of random checks performed on not more than one in ten persons or vehicles, with these searches taking not more than one minute in each case" are not borne out by our own observations and discussions.[116] We are surprised that these claims seem to have been accepted by the European Commission. We conclude that it is mystifying that the European Commission has been unable to find any evidence at all to support the legal argument that Spanish checks at the border with Gibraltar are disproportionate. We recommend that the Government in its response to this Report set out its understanding of the basis on which the European Commission concluded that Spanish checks at the border with Gibraltar are not disproportionate, and the evidence that was considered in reaching this conclusion.

Financial Services

117. Since the downsizing of the British military presence in the 1990s, and a consequent reduction in the employment of local staff by the Ministry of Defence, financial services have become a mainstay of Gibraltar's economy, accounting, according to the International Monetary Fund (IMF), for roughly 30 per cent of gross domestic product. [117] All the same, Gibraltar's financial sector is tiny when viewed on a global scale. Assets of banks conducting only offshore business were assessed by the IMF at about £1.9 billion, about 0.4 per cent of the equivalent figure for the Cayman Islands.

118. Business is cultivated through low levels of taxation for non-residents. Gibraltar does not apply any tax on capital gains, sales tax or value-added tax, or inheritance tax. Income tax, corporation tax and withholding tax are applied to residents and resident companies. However, nonresident nonGibraltarian individuals and entities are usually either fully or mostly exempt from paying these taxes.

119. The claim that Gibraltar is a 'tax haven' is thus not without foundation, but there are other parts of the EU with similar exemptions. The Spanish territories of Ceuta and Melilla apply no VAT or customs duties, with other tax rates only half the level of standard Spanish rates. Financial services are a fruitful source of foreign investment for small territories without natural resources and with a small or non-existent agricultural base, which is why such services are strongly promoted by a number of British Crown Dependencies and Overseas Territories.

120. Financial services centres are of course attractive not only to legal business but also to criminal finance, which is why it is crucial that the industry should be closely regulated. Peter Caruana has reassured us that

118

121. Indeed, claims that financial regulation in Gibraltar is lax, and that Gibraltar is a "centre for money laundering",[119] do not seem to be borne out by the facts. During our visit to Gibraltar, we visited the Financial Services Commission, which regulates the financial services sector, and we were reassured that the level of regulation matches that in the United Kingdom. The Gibraltar Government has set out the extent of its good practice and compliance with international norms in a memorandum.[120] The FCO has written that "financial regulation in Gibraltar is recognised to be of a high standard".[121] Some recent statements by British Government ministers have appeared to cast doubt on the probity and effectiveness of the supervision of financial services in Gibraltar,[122] but this is all the more peculiar given not only the evidence to the contrary, but the fact that this supervision is the responsibility not of the Gibraltar Government, but of the British Government and its appointee, the Financial Services Commission.[123]

122. A further unimpeachably independent attestation to the soundness of financial regulation and supervision in Gibraltar comes from the International Monetary Fund, which reported in March 2002 that:

124

Specifically on the issue of money laundering, the IMF has reported that current measures "appear to be effective".[125] Gibraltar has also submitted its regulatory framework to peer scrutiny within the Financial Action Task Force. Gibraltar, a small financial centre with strong regulation and supervision, is far less likely to be an attractive base for money laundering than a larger market with similar standards of regulation, such as the City of London.

123. The Foreign Secretary has stated on the floor of the House of Commons that the tax incentives that Gibraltar uses to attract financial business, as well as zero-rate import duty and value-added tax, will cease to exist "over the next four or five years" because of decisions by the OECD and EU.[126] This is not the view of the Government of Gibraltar. The Minister for Trade and Industry and Telecommunications, Keith Azopardi, told us during our visit that in his view the Foreign Secretary's remarks about OECD requirements ending Gibraltar's tax status "make no sense", and that Gibraltar's tax and customs exemptions are sustainable both politically and economically in the long term. The Chief Minister has also implied as much to us in oral evidence.[127] In July, the Government of Gibraltar unveiled proposals to replace its company profits tax with payroll and business property occupation taxes, to be topped up with profits taxes of 8 per cent and 35 per cent respectively for financial service and utilities companies. The European Commission's Competition Commissioner has announced an inquiry into these proposals, on the basis that they may constitute unfair aid to a part of the United Kingdom, and a ruling is awaited.[128]

124. Confusingly, given the views expressed by the Foreign Secretary in the House, the FCO has written to us in connection with another inquiry that Gibraltar's "Finance Centre is well placed to adapt to the changing international environment and can continue to prosper".[129] Gibraltar's Chamber of Commerce has told us—and indeed it is clearly the case—that it is a matter of ongoing debate whether Gibraltar's tax status is sustainable. But if so, this is not a matter specific to Gibraltar, but will apply to all offshore financial services centres and to all parts of the EU with exemptions from customs and VAT regimes, including parts of Spain. We conclude that it would be inequitable were Gibraltar to be forced unilaterally to abolish its low rates of tax and import duty, without the same situation applying more widely. We recommend that the Government explain in its response to this Report its position on the sustainability of Gibraltar's tax and customs status, with detailed reasons for this position. We further recommend that, in the event of offshore financial centres being phased out, the British Government should provide practical assistance and advice to Gibraltar to help its economy to react to these changed circumstances.

Defence Issues

125. Some 440 British military personnel are based in Gibraltar. During our visit, we called at British Forces Headquarters (HQBF), and were impressed by the efficiency and dedication of the staff we met. The central message we garnered was that, despite expectations to the contrary in some quarters, Gibraltar's strategic significance remains undiminished in the 21st century. Indeed, with the new emphasis on mobility and rapid response, its significance may be enhanced.

126. Gibraltar's usefulness as a military base derives principally from its geographical location and topography. All vessels entering or leaving the Mediterranean must pass through the Straits. Gibraltar serves as a forward operating base and supply location for aircraft and ships destined for Africa and the Middle East. It played an important role as a base for British operations in Sierra Leone. The deep water harbour has almost unlimited safe anchorage, including for nuclear submarines, while the topography of the Rock is ideally suited for intelligence gathering.

SPANISH RESERVATIONS ON MILITARY MOVEMENTS TO AND COMMUNICATIONS WITH GIBRALTAR

127. As a result of its objections to the British presence in Gibraltar, Spain has for twenty years maintained a reservation to a NATO agreement on sea and air space, prohibiting direct movements between Gibraltar and Spain. Military vessels which have visited Gibraltar must ensure that their next port of call is not in Spain. Military aircraft may not use Spanish air space to take off or land in Gibraltar and constrained Gibraltarian air space restricts the airfield's operational capacity. There are, moreover, no direct contacts between the British military in Gibraltar and the Spanish armed forces. In order to communicate with their Spanish counterparts, British officers in Gibraltar must channel communications through the British embassy in Madrid. It is astonishing that Spain should impose such petty and awkward restrictions on a NATO ally. It is also unfortunate that these difficulties were not resolved at the time of Spain's accession to NATO. When asked very recently if he will list the restrictions imposed by the Spanish Government on the movements of NATO military aircraft and warships in the vicinity of Gibraltar and in transit between Spain and Gibraltar; and what steps have recently been taken by the UK Government to have these restrictions lifted, the Secretary of State for Defence replied:

"NATO Standardised Agreement (STANAG) 1100, sets out the procedures for visits to NATO and non-NATO ports by naval ships of NATO nations. This Agreement contains a reservation, inserted by the Spanish Government, which prevents visits by NATO ships to or from Gibraltar directly to or from Spanish ports. Any request by military aircraft from NATO (or other) nations, which has Gibraltar as a departure or arrival airfield, to overfly or land in Spain is routinely denied by Spanish authorities. We understand that NATO has no plans specifically to discuss the restrictions imposed by Spain on NATO ships and aircraft. Discussions between the British and Spanish Government in the context of the Brussels Process aim to resolve all outstanding issues between the United Kingdom and Spain over Gibraltar."[

130

We recommend that the Government take vigorous and determined steps through NATO to lift the reservation on direct military movements between Gibraltar and Spain and to end the ban on direct military communications between NATO forces in Gibraltar and Spain.

NEW PROPOSALS FOR ACCESS

128. On 25 July 2002, the Spanish daily El Pais published an interview with Peter Hain, in which he said that the British Government proposed to meet Spanish objections to the existence of a British military base in Gibraltar by converting it into a NATO military base, under British control but accessible to all NATO members. This would appear to contradict a previous assurance from the Foreign Secretary that "part of the aim of the negotiations is to ensure that it remains a British base".[131] The consequences of such a move would be profound from the point of view of the people of Gibraltar. The base is not a single set of buildings in a single location, but is rather a collection of sites dispersed throughout the territory of Gibraltar. Spanish military personnel would, in the event of the base becoming a NATO base, presumably gain access not to an isolated section of Gibraltar, but to much of its territory.

129. Despite extensive redundancies in the 1990s, the Ministry of Defence continues to employ about 1,000 Gibraltarian residents, and the support of this work force, together with that of the wider population, is essential for the military facilities to be able to operate satisfactorily. The military already operates under some constraints, as a result of the mistrust engendered by the recent job cuts. We conclude that there is a risk that in the event of an agreement concluded between Spain and the United Kingdom which did not enjoy the support, or at least the acquiescence, of the people of Gibraltar, the military base might find its ability to operate severely constrained by the local population.

Responsibility for Gibraltar within the FCO

130. Somewhat to our surprise, we have learnt that the British Permanent Representative on the North Atlantic Council (in effect Ambassador to NATO), Sir Emyr Jones Parry, has retained some of the responsibilities for Gibraltar which he held in his previous post as Political Director at the FCO.[132] In oral evidence to us in July, Sir Michael Jay, Permanent Under-Secretary at the FCO, explained to us that "the decision was ... that [Gibraltar] should stay with Emyr Jones Parry who had been handling it and who had the expertise, and that he should be supported by James Bevan who was promoted a Director and had the time to spend to focus on that issue, and around them form a team which has been working closely with Mr Hain and with the Foreign Secretary on Gibraltar".[133] It is also less than immediately obvious why principal responsibility for Gibraltar should rest with Mr Bevan, Director South-East Europe in the FCO. We recommend that the Government explain in its response to this Report how responsibility for Gibraltar is apportioned within the FCO, with an explanation of why this is the case.

96 Ninth Report from the Foreign Affairs Committee, Session 1999-2000, Gibraltar, HC 863, paras 8-9. Back

97 First Report from the Foreign Affairs Committee, Session 2001-2002, HC 413, Q 32. Back

98 Ibid., Q 69. Back

99 First Report from the Foreign Affairs Committee, Session 2001-2002, Gibraltar, HC 413, Q 34. Back

100 Ev 33, para 73. Back

101 See also Appendix 1, Ev 10. Back

102 Q 21 [Jack Straw]. Back

103 Ev 33, para 76. Back

104 Fourth Report from the Foreign Affairs Committee, Session 1998-99, Gibraltar, HC 366, para 67; Ninth Report from the Foreign Affairs Committee, Session 1999-2000, Gibraltar, HC 863, para 10. Back

105 Ev 17, paragraph on telephones. Back

106 Ev 17, paragraphs on the Brussels Process; letter from Mr Caruana, 18 March 2002, Ev 57-58. Back

107 First Report from the Foreign Affairs Committee, Session 2001-2002, Gibraltar, HC 413, pp 68-71; Appendix 4, Ev 12-14. Back