The Market Economy Investor Principle Applies also to Avoidance of Losses

A public authority can act as a private investor in paying to avoid costly contractual clauses. A public authority can act as a private investor in paying to bring forward future revenue.

Introduction
 
When a market operator invests to make profit, its underlying logic is the same as when it pays to avoid losses. In both cases it is motivated by the desire to maximise the value of its assets. In the first case it avoids loss of potential profit while in the second case it avoids loss of actual profit. This is the reason why the hypothetical private investor who underpins the legal concept of the market economy investor always takes into account all options. Also options which lie far into the future are not ignored. With the proper discounting they can be compared to options and values which are available today.The case reviewed in this article is a classic example of how examining only some of all potentially available options can lead to wrong conclusions. The case concerns an appeal brought by the Netherlands against the Commission which had found that a Dutch municipality did not comply with the MEIP. The payments it made to a property developer were found by the Commission to constitute incompatible aid which had to be recovered.The Netherlands succeeded to have the Commission decision annulled not because it proved that the municipality was a shrewd investor but simply because it demonstrated that the Commission ignored that the municipalities had limited options to recoup its investment and that alternative courses of action could have been costlier.
 
Background
 
Case T-186/13, Netherlands and others v Commission[1] was an application for annulment of Commission decision 2013/247 [OJ L 148, 1/6/2013].In 2004, the municipality of Leidschendam-Voorburg established a 50/50 public private partnership with construction company SJB. The purpose of the PPP was to develop an area in the centre of the municipality. The land and (run-down) buildings belonged to the municipality. SJB agreed to pay a fee to the municipality, via the PPP. The fee corresponded to the then value of the land plus certain other payments.

Do you know we also publish a journal on State aid?

EStAL banner
The European State Aid Law Quarterly is available online and in print, and our subscribers benefit from a reduced price for our events.


 

It is customary in the Netherlands for developers to pay land owners [in this case the municipality] when they start construction. Moreover, it is standard practice for developers not to start construction until a certain number of housing units are pre-sold. The original 2004 agreement contained a clause that SJB would start construction if 70% of the units were pre-sold. SJB intended to partly finance the project by pre-selling housing units. Because of delays in obtaining building permits and a slow-down in the housing market, SJB did not pre-sell enough units and, as a result, construction did not start. In 2010, the PPP decided to change the initial terms of the agreement and allow SJB to pay a smaller amount to the municipality. The Commission found that the change in the agreement and the lower amount constituted incompatible State aid. Under the 2004 agreement, the municipality appeared not to be liable for any market risk. Therefore, the Commission concluded that the municipality had no reason to accept a lower payment. The amount of aid that had to be recovered was estimated at EUR 6.9 million. The table below is from the Commission decision and shows how the Commission arrived at the amount of EUR 6.9 million.
The municipality claimed that it had acted as a private investor and that SJB bore an equal reduction in revenue. In other words, the issue at hand was whether the 2010 agreement was MEIP conform.Transfer of state resources

The General Court examined, first, whether the agreement of 2010 resulted in a transfer of state resources. The Commission claimed in its decision that since the municipality owned 50% of the PPP, no decision of the PPP could have been taken without its consent.

The Court first recalled three fundamental issues concerning transfer of state resources which were elaborated in the judgment of the Court of Justice in case C-399/10 P, Bouygues Telecom v Commission. First, there must be a reduction in the state budget or an increase in the liabilities or risks that burden that budget. Second, there must be a close link between the impact [i.e. the reduction of assets or increase in liabilities] on the state budget and the advantage that is conferred to an undertaking. Third, it is not necessary that the impact on the state budget is equivalent to the advantage that is conferred [paragraphs 70-71]. [It should be added that a fourth element that was included in the judgment of the Court of Justice in Bouygues v Commission was that several seemingly distinct measures can be subsumed to a single measure if they serve the same purpose and are chronologically close to each other.]

On the basis of the above principles and because the decision of the PPP could be attributed to the municipality, the General Court agreed with the Commission that the agreement of 2010 resulted in a transfer of state resources.

Existence of advantage and MEIP

After some preliminary observations, the General Court explained that in the case of sale of public land, the amount of aid is the difference between the market price of the land and the price at which it is actually sold. [Paragraph 77]

Then the Court found that the Commission made a serious mistake. It took the value of land in 2004 to be EUR 7.2 million on the basis of a valuation by an independent expert. However, in the Court’s view, the Dutch authorities did not accept that valuation as corresponding to the market price of the land [paragraph 81]. The Commission responded by pointing out that the exact market price was not relevant. What was relevant was the agreed price in the 2004 agreement. No private investor would accept a lower price six years later when it had secured a higher price through a contract [paragraph 83]. For this reason the Court had to examine whether a private investor in similar circumstances would have accepted such a change in the contract.

The General Court faulted again the Commission for not taking into account all the relevant facts at the time the 2010 agreement was signed. The Commission appeared to have ignored that SJB refused to proceed to the construction phase because it had invoked a number of escape clauses in the 2004 agreement concerning in particular delays in building permits. The Commission also appeared to neglect that the municipality had limited options because the building site was of little interest to other developers. [Paragraphs 98-108]

With respect to the latter point, the Commission counter-argued that a private investor would not be concerned about leaving a deserted area in the centre of town. If the municipality cared about the condition of its town centre it would act instead as a public authority. [Paragraph 109]

Although the General Court did not reject the argument concerning the interference of potential public policy objectives, it noted that the Commission did not try to examine whether the municipality would have an interest akin to that of a private investor in ensuring the speedy completion of the project so that it would expedite receipt of payment [paragraph 114]. In addition, the municipality would want to start receiving income as soon as possible from fees it could charge to owners of both commercial and residential space [paragraph 125].

For all of the above reasons, the General Court annulled the contested Commission decision.

Conclusion

It is worth summarising the reasoning of the General Court in faulting the Commission. The Court did not find that the municipality had acted like a private investor. It only concluded that the Commission failed to take into account all the relevant factors which could have influenced the decision of a private investor. These factors were:

i) the contractual escape clauses that were invoked by SJB,
ii) the limited options of the municipality to re-tender the project or find alternative uses for the land and
iii) the desire of the municipality to expedite the potential payments it could receive from completion of the project.

In other words, contractual constraints are a cost that an investor could legitimately pay to avoid. Bringing forward income streams is a benefit that an investor could legitimately pay to realise.

—————————————————————–

[1] The full text of the judgment can be accessed at:

http://curia.europa.eu/juris/liste.jsf?language=en&num=T-186/13.

 

 

Tags

About

Phedon Nicolaides

Dr. Nicolaides was educated in the United States, the Netherlands and the United Kingdom. He has a PhD in Economics and a PhD in Law. He is professor at the University of Maastricht and the University of Nicosia. He has published extensively on European integration, competition policy and State aid. He is also on the editorial boards of several journals. Dr. Nicolaides has organised seminars and workshops in many different Member States, and has acted as consultant to several public authorities.

Comments

  1. by José Antonio Rodríguez-Miguez

    Another interesting comment focused on an essential topic on state aid practice. The MEIP or, as Commission uses to say now, the “market economy operator (MEO) test” [See the Draft Commission Notice on the notion of State aid pursuant to Article 107(1) TFEU at http://ec.europa.eu/competition/consultations/2014_state_aid_notion/draft_guidance_en.pdf p. 21et seqs. ] it always a “risk” task for the Commission, as recent jurisprudence proofs. But, as Prof. NICOLAIDES points out again in this new interesting post, it’s basically a proof question, in which the Commission has the harder work. Thanks for this new post.

Leave a Reply

Related Posts

18. Oct 2022
by Phedon Nicolaides

Public Authorities Acting as Private Investors

It is a well-established principle in the case law that when a public authority acts as a private investor, it must disregard all public policy objectives and its obligations as an arm of the state. Many judgments of EU courts and Commission decisions have examined in detail the various elements that underpin the reasoning of a private investor such as […]
06. Sep 2022
State Aid Unciovered by Phedon Nicolaides

Special Economic Zones

Member States must check that the State aid claimed by undertakings established in special economic zones concern activities that are actually carried out within those zones. Introduction Several Member States have special economic zones in which companies enjoy preferential tax treatment. These zones can be divided into two categories: those that can be found mostly in the new Member States […]
05. Jul 2022
State Aid Uncovered by Phedon Nicolaides

Why Grant a Loan to an Undertaking in Difficulty?

When a market operator invests in an undertaking in difficulty it also considers the possibility of restructuring, sale or closure. Introduction The answer to the question posed in the title of this article is “because the loan enables the undertaking to become viable again and repay the loan with interest”. It is now well established in the case law that […]
21. Jun 2022
State Aid Uncovered by Phedon Nicolaides

The Date on which State Aid is Deemed to be Granted Is not necessarily the Date on which the Actual Benefit Materialises

State aid is deemed to be granted even if the benefit cannot be quantified in advance and even if state resources are transferred at a future point in time. Introduction The precise date on which State aid is granted can be important such as, for example, when calculating the present value of aid granted in tranches at different points in […]
14. Jun 2022
State Aid Uncovered by Phedon Nicolaides

Territoriality and the Tax Treatment of Intra-group Transactions

A special tax rule can constitute the reference or normal system of taxation if it is “severable” from other tax rules and has its own legal logic. Introduction The application of State aid rules to the tax treatment of transactions between companies that belong to the same multinational group is contentious. During the past three years or so, the Commission […]
19. Apr 2022
State Aid Uncovered by Phedon Nicolaides

Injection of Capital in a Postal Operator

The resources of a public undertaking necessarily count as “state resources”, regardless of the degree of autonomy of the public undertaking. However, not every decision of a public undertaking can necessarily be “imputed” to the state. A prudent investor may take into account authorised State aid. A prudent investor may tolerate short-term losses if it can realise sufficient profits in […]
12. Apr 2022
State Aid Uncovered by Phedon Nicolaides

A First Commission Decision on Natural Gas Storage

Compensation that guarantees a normal or fair rate of return eliminates risk that is inherent in market transactions and therefore confers an advantage in the meaning of Article 107(1) TFEU. Introduction On 23 March 2022, the European Commission announced plans to mitigate the spike in energy prices caused by the war in Ukraine. Chief among those plans were proposals for […]
05. Apr 2022
State Aid Uncovered by Phedon Nicolaides

Intra-State Transfers and the Discretion of Public Authorities

Resources transferred from one public authority to another for the purpose of being used to subsidise undertakings do not fall within the scope of Article 107(1) TFEU if the recipient authority has discretion in their disbursement. Introduction A public authority that carries out economic activities becomes an undertaking that is subject to the prohibition of Article 107(1) TFEU. When the […]
22. Mar 2022
State Aid Uncovered by Phedon Nicolaides

I. Vouchers for SMEs II. Funding of Aid with Revenue from Levies Imposed on the Aid Beneficiaries

State aid rules apply both to direct and indirect beneficiaries of aid. Introduction This week’s article reviews a Commission decision and a judgment of the Court of Justice. The Commission decision concerns Italian vouchers for SMEs to pay for the use of fast broadband services. The judgment deals with a German measure supporting milk quality tests. In both cases an […]
01. Mar 2022
State Aid Uncovered by Phedon Nicolaides

Security of Energy Supply

Guaranteed supply of electricity at fixed prices to a state-owned network operator involves a transfer of state resources to the supplier. Guaranteed supply of electricity at fixed prices confers an advantage to the supplier. Introduction Member States are allowed to take measures to ensure the security of energy supplies. There is a variety of such measures: imposition of obligations on […]