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 the required rate of return, the relevant time horizon, or the information that must be taken into account at the time the investment is made.

On 14 September 2022, the General Court, in case T-597/19, Helsingin Kaupunki v European Commission, tackled what may be called the mirror image of the requirement to ignore state obligations: the requirement to ignore state powers.[1] In a handful of judgments, the Court of Justice has ruled that when comparing a public investment to a private investment, the taxation powers of the state or other prerogatives of the state may not be taken into account.

However, as will be seen later on in this article it is not so obvious how to apply these principles when the investment is made in a state-owned company that is legally protected from its creditors by the state.

Helsingin Kaupunki [the municipality of Helsinki] appealed against Commission decision 2020/1814, which found State aid granted to Helsingin Bussiliikenne [HB], a bus company owned by the municipality, to be incompatible with the internal market.

HB benefitted from several aid measures consisting of loans and lines of credit granted by the municipality. Because of its continuous financial problems, the “old” HB was restructured and all its assets were transferred to a new legal entity, the “new” HB. Eventually the new HB was sold to Viikin Linja in 2015.

The Commission quantified the total amount of aid granted to the old HB to be EUR 54.2 million which had to be recovered. Because there was continuity between the old and the new HB and because the transfer to the new HB had been made at a price below the market rate, recovery had to be enforced on the new HB as well.

In its pleas, the municipality did not dispute the Commission’s conclusions that the measures at issue involved the use of state resources, were imputable to the state and that they were selective. It contended, however, that they did not confer an advantage to the old or new HB.

The judgment is long and touches on many different issues and questions most of which are case specific. This articles, therefore, examines only those parts of the judgment that elaborate on principles that have wider application.

The private creditor test

The Commission had found that the municipality had not carried out any ex ante assessment of the risk associated with the granting of a loan for the purchase of equipment in 2002 and that the risk margin of 0.05% was below the rate that would have been charged by a private lender. Moreover, the loan was never fully repaid. The Commission also considered HB, which was then functioning as a department of the municipality, to be an undertaking. The municipality claimed that the Commission incorrectly applied the private creditor test.

The private creditor test which seeks to establish whether an undertaking could have obtained comparable credit from a private creditor in a situation as close as possible to that of the public creditor seeking payment of the sums owed to it by a debtor experiencing financial difficulties.

In examining the application of the private creditor test, the General Court, first, recalled that the burden of proof lies with the Commission as to whether or not the conditions for the application of that test are satisfied. When applying the private creditor test, it is for the Commission to carry out an overall assessment taking into account any factor relevant in enabling it to determine whether the recipient undertaking would clearly not have obtained comparable facilities from a prudent and diligent private creditor. [paragraphs 45-46 of the judgment]

The municipality claimed that the loan was granted not to a separate company, but a profit centre integrated into the municipality, so it was an inseparable part of its administration.

The General Court reiterated that whether or not a body carrying out economic activities has legal personality distinct from that of the state has no influence on the existence of financial relations between the state and that body or whether it would receive State aid in the meaning of Article 107(1) TFEU. [para 51]

In other words, the legal status of the beneficiary is irrelevant as long as it carries out economic activities. If it does, then any state resource it receives falls within the scope of Article 107(1).

Then the General Court recalled that the Commission had rejected the Finnish argument that HB would probably have been able to obtain a loan with a similar margin from a private financial institution since, as an internal entity of the municipality, it had the same degree of solvency as the municipality itself. According to the Commission, from the point of view of a private creditor, a loan granted to the municipality as a public authority would always have involved a lower risk than a credit granted to HB, a bus transport operator in a market open to competition, even if the latter was an entity forming part of the municipality’s organisational structure. This is because the rate of a loan granted to the municipality could not be regarded as an appropriate market benchmark, given that public debts are guaranteed as a last resort by the state and that a debtor on the market does not benefit from such support. [para 57]

Then the Court noted that HB, as a municipal undertaking benefited, at the time the loan was granted, from bankruptcy protection provided by law under which the municipality was ultimately liable for the HB’s debts which it could repay by levying municipal taxes. Moreover, that protection against bankruptcy fell within the scope of an existing aid scheme. [para 60]

The law providing bankruptcy protection predated Finland’s entry into the EU in 1995. Finland has since amended its legislation so that municipal bodies engaged in economic activities no longer benefit from such bankruptcy protection which normally constitutes State aid.

The Court agreed with the Commission that a private creditor would take into consideration the fact that, unlike the municipality, HB operated on a market open to competition and that, by its activity, it was exposed to risks which did not necessarily fall within the functioning and role of a public authority. Therefore, the creditworthiness of HB had to be assessed independently. [para 61]

The municipality counter-argued that it had the right of taxation and that it was a member of a municipal guarantee fund which would have supported it in case it would need to raise funds to bail out HB. Moreover, the protection against bankruptcy available to HB at the time of the 2002 loan was provided by national legislation because of its status as a municipal undertaking.

Since the behaviour of a public creditor must be compared to that of the hypothetical private creditor who, by its very status, does not enjoy the privileges of a public authority, the Court rejected the argument of the municipality. A private creditor does not have the right to tax or the possibility of being part of a municipal guarantee fund. The Court added that those privileges, relied on by the municipality for the purpose of demonstrating the solvency of HB resulted exclusively from its status as a public authority. A private creditor could not therefore rely on such privileges. Even if a private creditor were to be regarded as having granted similar protection against bankruptcy to an undertaking linked to it, that protection would be financed by funds from activities carried out under normal market conditions and not from sources of financing linked to a privilege emanating from the status of public authority. [paras 63-64]

Moreover, relying by analogy on the Danish FIH banking case [C-579/16 P, European Commission v FIH], the General Court held that the protection against bankruptcy enjoyed by HB in 2002 fell within an existing aid scheme, with the result that that protection could not, in any event, be taken into account in the application of the private creditor test. This is because in the FIH case, the Court of Justice held that the obligations arising from loans and guarantees granted in the form of State aid would not be taken into account by a private operator. [para 65]

I am not sure that the General Court at this point interprets the FIH judgment correctly. What the Court of Justice ruled in the FIH case was that a public authority may not take into account its liability or obligations arising from previous State aid that itself had granted in order to prove that the provision of new funds at a lower than the market rate of return conforms with the private investor principle on the grounds that the lower return is compensated by the avoidance of that liability or the cost of those obligations. To put it simply, a public authority cannot rely on its obligations as a public authority to justify a rate of return below the market rate. This is because a private operator is not encumbered by the obligations of the state. In the present case, however, the municipality, acting as investor, charged a lower risk margin because HB’s debt was covered by the municipality acting as a public authority. To me that appears as a legitimate separation of the distinct roles of the municipality. A private investor would indeed have taken into account the protection afforded to HB by law.

However, I think that the confusion was caused by the line of argumentation of the municipality itself when it contended that it could levy taxes to pay off the debts of HB if it would go bankrupt. This is indeed a false line of reasoning because a private creditor cannot tax. The municipality should have only referred to the factors it would have taken into account as a private lender and creditor, not whether it could easily meet its obligations as a public guarantor by levying taxes.

But, the General Court went on to state that an examination of the private creditor test implied disregarding the advantages which a debtor might enjoy by reason of its public status. Nor, can the advantages which HB might claim by reason of its links with the municipality correspond to normal market conditions, since a private debtor cannot in principle have such advantages. HB’s bankruptcy protection under national legislation was granted to it by reason of its status as a municipal undertaking. Therefore, an application of the private creditor test in order to establish whether the loan received by HB constituted State aid could not take into consideration an advantage arising from its links with the municipality. [para 66]

I think the reasoning of the General Court in paragraph 66 above is wrong. Many companies receive State aid in the form of state guarantees which are granted for free or for a premium below the relevant market rate. Such guarantees are made available by public authorities in the pursuit of their public policy objectives and by relying on their prerogatives of taxation. The banks that provide the loans to companies do take these guarantees into account and charge a lower rate of interest as a result. The General Court mixed the concepts of private creditor and private debtor. Again, I see no reason why a private lender would have disregarded the fact that HB was a municipal company enjoying bankruptcy protection not available to other companies, just as a bank would take into account state guarantees protecting only certain companies.

Private investor and restructuring

At another point in the judgment, the municipality claimed that the Commission failed to take into account the prospects of HB to return to financial viability after restructuring.

The General Court, first, recalled that the conduct of the private investor, which must be compared to that of the public investor, is not necessarily that of the ordinary investor placing capital with a view to making profit in the short term, but must be that of a private holding company or a private group of undertakings pursuing a structural policy and which is guided by longer-term profitability prospects. [para 161]

A private investor could reasonably contribute the necessary capital to ensure the survival of an undertaking which was experiencing temporary difficulties but which after a restructuring, would be able to regain its profitability. [para 162]

The Court concluded that there was no foreseeable return to viability, even in the long-term, when the funds were granted to HB. [para 65]


Social responsibility

Then the General Court turned its attention to the claim put forth by the municipality that a private investor would also take into account its social responsibilities, not just profitability.

Interestingly, the General Court acknowledged that, in a social market economy, a prudent private investor cannot disregard, first, its responsibility towards the undertaking’s stakeholders and, second, the evolution of the social, economic and environmental context in which it pursues its activities. The issues arising from social responsibility and the entrepreneurial context are likely to have a major influence on the concrete decisions and strategic orientations of a prudent private entrepreneur. The long-term economic rationality of the conduct of a prudent private entrepreneur cannot therefore be assessed without taking such concerns into consideration. [para 182] [At this point the General Court cited the judgment in T-565/08, Corsica Ferries France v Commission].

Nonetheless, the General Court went on to rule that the preservation of the proper functioning of public transport services is not an issue that would be taken into consideration by a private investor test. [para 183]

Indeed, a private investor would not assume responsibility for an issue that is far wider than its own operations.

In any event, the Court added, the protection of the image of a Member State – and, therefore, of its constituent public entities – as an overall investor in the market economy cannot constitute, outside particular circumstances and without a particularly convincing statement of reasons, sufficient justification to demonstrate the long-term economic rationality of bearing additional costs. [para 185]

Existence of economic continuity between the old and the new HB

The municipality also appealed against the recovery order in Commission decision 2020/1814 with respect to aid that had flowed from the old HB to the new HB. Please recall that when the assets of the old HB were transferred to the new HB, which was a new legal person, a price was paid by the new HB. The Commission concluded that that price was not a market price.

The General Court, first, reiterated that the main purpose of repaying incompatible State aid paid is to eliminate the distortion of competition caused by the competitive advantage provided by the aid. The restoration of the situation prior to the payment of unlawful or incompatible aid with the internal market is a requirement necessary to preserve the effectiveness of the prohibition of State aid in the Treaty. [para 239]

Then the Court noted that although Regulation 2015/1589 does not expressly provide for the possibility of a Commission decision finding the existence of economic continuity between the initial beneficiary of the aid and another entity, that principle was developed by the courts of the European Union in order to enable the Commission to extend the obligation to recover aid to the buyer of the assets of the initial beneficiary of the aid and to ensure the effectiveness of recovery decisions. [para 240]

Thus, unlawful aid must be recovered from the company which pursues the economic activity of the undertaking which received that aid where it is established that that company retains the competitive advantage linked to that aid. [para 241]

Such continuity between the companies involved in a transfer of assets is assessed in the light of the purpose of the transfer, namely the assets and liabilities, the maintenance of the workforce, the price of the transfer, the identity of the shareholders or owners of the acquiring undertaking and the acquired undertaking, the time when the transfer takes place, possibly after the start of the investigation, the opening of the procedure or the final decision, or the economic logic of the transaction. However, the Commission is not under an obligation to take all those factors into account. [para 242]

According to settled case-law, where an undertaking which has benefited from unlawful State aid is acquired at market price, that is to say, at the highest price that a private investor acting under normal conditions of competition is prepared to pay for that company, in particular after having benefited from state aid, the aid element is valued at market prices and included in the purchase price. In such circumstances, the buyer cannot be regarded as having enjoyed an advantage over other operators on the market. [para 243]

The Commission had concluded that there was economic continuity between the old and the new HB. It found that the only change brought about by the sale of the business of the old HB concerned the legal entity to which the new HB belonged. For the rest, the new HB continued the activity of the old HB and used the latter’s assets in the same way. The price paid for the old HB did not correctly reflect its market value. The old HB had been sold without a call for tenders. The Commission also found that the assessment carried out by an independent expert had not taken into account an indemnification clause, which nevertheless conferred an additional advantage on the purchaser. [para 244]

That “indemnification clause” was a commitment by the municipality to compensate the new HB for any incompatible State aid that may have benefitted the old HB. Such a clause constitutes State aid in itself.

Rather importantly, the General Court ruled that the Commission was not required either to determine itself the correct market price of the old HB. It could thus confine itself to showing that the correct market had not been established. [para 247]

The General Court explained that for the purposes of verifying the market price, account may be taken, inter alia, of the form used for the sale of a company, for example that of public tender, which is supposed to guarantee a sale on market terms. It follows that, where an undertaking is sold by means of an open, transparent and unconditional tender procedure, it may be presumed that the market price corresponds to the highest offer. [para 253]

The General Court concluded that the link made by the municipality between the amount to be recovered and the selling price of the old HB or the derived market price stemmed from confusion as to the nature of the aid at issue. The aid to be recovered was not in the sale of the old HB at a price lower than that of the market, but in the granting of various loans to the former HB. The Commission’s examination of the selling price of the old HB was carried out not for the purpose of establishing the possible existence of State aid, but for the purpose of assessing the existence of economic continuity between the old and the new HB. [para 297]

Since none of the pleas of the municipality was successful, the appeal was dismissed in its entirety.

[1] The full text of the judgment, in languages other than English, can be accessed at:



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.

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