The Market Economy Investor Principle Applies also to Avoidance of Losses

The Market Economy Investor Principle Applies also to Avoidance of Losses - m 11 2
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.

The Market Economy Investor Principle Applies also to Avoidance of Losses - Banner EssentialsBerlin Hub

—————————————————————–

[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

20. Feb 2024
State Aid Uncovered by Phedon Nicolaides
Another Case of Indirect State Aid - State Aid Uncovered photos 4

Another Case of Indirect State Aid

Introduction On 19 May 2021, the General Court, in case T-643/20, Ryanair v Commission, annulled Commission decision SA.57116 by which it authorised State aid in favour of KLM in the context of the measures implemented by the Dutch government to address the covid-19 pandemic. In July 2021, the Commission re-adopted its original decision without the errors that had been identified […]
13. Feb 2024
State Aid Uncovered by Phedon Nicolaides
State Resources, Control and Imputability - State Aid Uncovered photos 1

State Resources, Control and Imputability

Introduction A public measure can be classified as State aid only when it is funded from state resources. Measures funded from the budgets of public authorities are always considered to be supported by state resources. However, measures not funded from state budgets may still be supported by state resources. This is because, rather counterintuitively, the concept of state resources covers […]
19. Dec 2023
State Aid Uncovered by Phedon Nicolaides
Indirect Advantage - Untitled design 30

Indirect Advantage

Introduction It is an established principle in the State aid case law that Article 107(1) TFEU applies both to direct and possibly indirect aid beneficiaries. Yet, it is not always easy to identify any indirect beneficiaries. On 15 November 2023, the General Court, in case T-167/21, European Gaming and Betting Association v European Commission, faulted the latter for failing to […]
20. Nov 2023
State Aid Uncovered by Phedon Nicolaides
State Guarantees - Untitled design 14

State Guarantees

Introduction Public authorities often grant guarantees to undertakings so that the latter can borrow commercial loans at lower rates of interest. The 2008 Commission Notice on guarantees sets out four cumulative conditions that create a presumption that a state guarantee is free of State aid: 1. The borrower is not in financial difficulty. 2. The guarantee must be linked to […]
17. Oct 2023
State Aid Uncovered by Phedon Nicolaides
Compensation for Damage - Untitled design 10

Compensation for Damage

Introduction On 28 September 2023, the Court of Justice, in case C-320/21 P, Ryanair v European Commission, delivered its first judgment in a series of appeals brought by Ryanair challenging the dismissal by the General Court of its action in multiple cases seeking the annulment of various Commission decisions authorising aid to airlines during the covid-19 pandemic. Both before the […]
10. Oct 2023
State Aid Uncovered by Phedon Nicolaides
Advance Tax Rulings - Untitled design 26

Advance Tax Rulings

Introduction In 2016, the Commission found, in decision 2016/1699, that advance tax rulings [ATRs] that had been provided by Belgium to multi-national companies [MNCs] with establishments in Belgium constituted State aid because the ATRs set the taxable income of those companies according to a hypothetical average income rather than their actual income. The profit that exceeded that hypothetical average was […]
26. Sep 2023
State Aid Uncovered by Phedon Nicolaides
Non-imposition of Fines on Non-illegal Behaviour - Untitled design 9

Non-imposition of Fines on Non-illegal Behaviour

Introduction Advantage is any benefit that an undertaking obtains from the intervention of the state. In some situations, however, an undertaking may derive an advantage the non-intervention of the state or, more broadly, from the failure of the state to act. This would be the case where the state does not charge a fee to a user of a state […]
03. Jul 2023
State Aid Uncovered by Phedon Nicolaides
Transactions at Market Rates Can still Confer an Advantage that Constitutes State aid (PART II) - Untitled design 17

Transactions at Market Rates Can still Confer an Advantage that Constitutes State aid (PART II)

Introduction When public authorities buy goods and services for themselves, they have to pay a market price, otherwise they confer an abnormal advantage to the sellers. On 14 June 2023, the General Court, in case T‑79/21, Ryanair & Airport Marketing Services v European Commission, ruled that public authorities still confer an abnormal advantage by buying good and services that they […]
27. Jun 2023
State Aid Uncovered by Phedon Nicolaides
Transactions at Market Rates Can still Confer an Advantage that Constitutes State aid (PART I) - Untitled design 3 1

Transactions at Market Rates Can still Confer an Advantage that Constitutes State aid (PART I)

Introduction When public authorities buy goods and services for themselves, they have to pay a market price, otherwise they confer an abnormal advantage to the sellers. On 14 June 2023, the General Court, in case T-79/21, Ryanair & Airport Marketing Services v European Commission, ruled that public authorities still confer an abnormal advantage by buying good and services that they […]
20. Jun 2023
State Aid Uncovered by Phedon Nicolaides
Regulatory Measures Are not State aid & Trade Unions Are not “Interested Party” - Untitled design 3

Regulatory Measures Are not State aid & Trade Unions Are not “Interested Party”

Introduction This article reviews two recent judgments dealing with the concept of state resources and the meaning of “interested party”, respectively. State resources On 8 June 2023, the Court of Justice clarified, by its judgment in case C-50/21, Prestige and Limousine SL, that purely regulatory measures may confer and advantage without, however, granting State aid.1 The Court was responding to […]