The EU Market Economy Investor Principle: A Good Paradigm?

Abstract

The Market Economy Investor Principle (MEIP) is one of the most fundamental precepts of European state aid law. It is a useful tool at the disposal of the European Commission to assess whether in any given situation state aid might exist. Member states also use it to ensure compliance in funding commercial firms, whether public or private. With continuous clarifications and refinement by numerous Commission text, decisions and the European Court's judgments, it captures the center-spot of state aid assessment practices. But the doctrine has also been severely criticized for its inherent theoretical incoherence as well as complex practical application which sometimes resulted in inconsistent and unpredictable decisions. While government actions are always influenced by public policy objectives and other political factors, is it really practical or effective to compare those with that of private investors on pure commercial criteria? How far is it acceptable to hypothesize the existence of a model 'private investor‘ that may never exist? Lack of a proper market benchmark sometimes results in providing wider discretion in the hands of the Commission. Is it good for a legal principle to empower an executive body to use it as a political tool? The MEIP would certainly be a better paradigm when it could provide solution to many of such questions. Given the legal uncertainty, inconsistency and unpredictability related with the test, considerable care need to be exercised to ensure that 'not every characteristics of the state is imputed to the private investor, otherwise the MEIP is liable to act as a distorting mirror that flatters the image of the States as an investor.'

Full text

The EU Market Economy Investor Principle: A Good Paradigm?
Md. Rezaul Karim

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Table of Contents
1. Introduction .............................................................................................................................................. 4
2. The MEIP ................................................................................................................................................... 4
2.1 Meaning of MEIP ................................................................................................................................. 4
2.2 Emergence of MEIP ............................................................................................................................. 6
2.3 Legal Basis of the Principle .................................................................................................................. 6
2.4 Requirements ...................................................................................................................................... 7
2.4.1 Expectation for Return ................................................................................................................. 7
2.4.2 Effect important, not Profit of Beneficiary, State Motive or Means ........................................... 7
2.4.3 State must Act as an ‘Economic Operator’ .................................................................................. 8
2.4.4 Ex-ante Assessment ..................................................................................................................... 8
2.5 Application of the Principle ................................................................................................................. 8
2.5.1 When Specific Market Data Available .......................................................................................... 8
2.5.1.1 Pari-passu Transactions ........................................................................................................ 8
2.5.1.2 Tender Procedure ................................................................................................................. 9
2.5.2 When specific Market Data not Available.................................................................................... 9
2.5.2.1 Benchmarking ....................................................................................................................... 9
2.5.2.2 Other Assessment Methods .................................................................................................. 9
2.6 Derivatives of MEIP ........................................................................................................................... 10
2.6.1 Market Economy Lender Principle ............................................................................................. 10
2.6.2 Market Economy Creditor Principle ........................................................................................... 10
2.6.3 Market Economy Vendor Principle ............................................................................................ 10
3. MEIP in the World Trade Organization (WTO) Law ................................................................................ 11
4. Strengths of the Principle........................................................................................................................ 12
4.1 Primary Tool to Determine State Aid ................................................................................................ 12
4.2 Sufficiently Developed ...................................................................................................................... 13
4.3 Widely Recognised ............................................................................................................................ 13
4.4 Wider Area of Application ................................................................................................................. 13
4.5 Tool for Assessment of Aid Element ................................................................................................. 14
4.6 Balance between Art 345 and 107(1) TFEU ...................................................................................... 14
4.7 Flexibility ........................................................................................................................................... 15

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4.8 Level Playing Field for all Undertaking .............................................................................................. 15
4.9 Self Regulation of State Aid by States ............................................................................................... 16
4.10 Anti-formalistic Extension- Journey towards a General Principle?................................................. 16
5. Problems with the Principle .................................................................................................................... 16
5.1 No ‘Typical Private Investor’ ............................................................................................................. 16
5.2 No Accurate Benchmark ................................................................................................................... 17
5.3 Problem of Legitimacy ...................................................................................................................... 18
5.4 Private Investors also have Social and Sectoral Considerations ....................................................... 19
5.5 Fictional Comparison between the States and Private Undertakings .............................................. 19
5.6 Incompatible with the Proposition of ‘Mixed Economy’ .................................................................. 20
5.7 Public and Private Investments are Inherently Different ................................................................. 20
5.8 Expansion beyond Recognition? ....................................................................................................... 20
5.9 Uncertainty, Difficulty and Complexity in Application ...................................................................... 21
5.10 Discrimination against Public Entity? .............................................................................................. 22
5.11 Tool for Arbitrary Power and Political Compromise? ..................................................................... 23
6. Are there any Alternative? ...................................................................................................................... 23
6.1 Substitution by ‘Public Investor Principle’ ........................................................................................ 24
6.2 Reintroduction of ‘Market’ in MEIP .................................................................................................. 24
6.3 Reformulation of MEIP ...................................................................................................................... 24
7. Conclusion ............................................................................................................................................... 25
Bibliography ................................................................................................................................................ 27

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1. Introduction
The Market Economy Investor Principle (MEIP) is one of the most fundamental precepts of
European state aid law (SAL). It is a useful tool at the disposal of the European Commission to
assess whether in any given situation State aid (SA) might exist. Member states also use it to
ensure compliance with SAL in funding commercial firms, whether public or private. The
concept has been developed and refined by numerous Commission text, decisions and the courts
judgments.1 With wider recognition throughout the spectrum, it captures the center-spot of SA
assessment practice. But it has also been severely criticized for its inherent theoretical
incoherence as well as complex practical application which sometimes resulted in ‗inconsistent
and unpredictable‘ decisions.2 Some even questions the justification of the test and suggested for
immediate alterations or modifications. Recent anti-formalistic expansion of the principle has
added momentum to the debate. This essay will scrutinize the rationales underlying the debate
by focusing on the meaning, scope and derivatives of the principle, looking into its strength and
weakness, and considering different suggestions as alternative to it to ultimately find out whether
it is a good paradigm for the ever-evolving European Union (EU) SAL.
2. The MEIP
2.1 Meaning of MEIP
Article 107(1) of the Treaty on the Functioning of the European Union (TFEU) has prohibited
‗any aid granted by a Member State or through State resources in any form whatsoever which
1 Anestis and Mavroghenis, ‗The Market Investor Test‘ in Rydelski (ed), The EC State Aid Regime: Distortive
effects of State Aid on Competition and Trade (Cameron May 2006)
2 ibid

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distorts or threatens to distort competition by favouring certain undertakings....‘ State aid, as a
‗transfer of State resources conferring a benefit or advantage‘, occurs only when the recipient
firm, whether public or privately-owned, could not have obtained the funding by going to a bank,
private investor or capital markets.3 A prime question in SAL is how to assess whether the terms
of the State intervention are in fact compatible with those acceptable to a commercial investor.
Here comes the MEIP.
It is an interpretation of Article 107(1) TFEU and, more specifically, of the first and second
criteria (state origin and advantage) proposed for determining presence of SA.4 Public authorities
may give loans, guarantees, inject capital and otherwise be involved in commercial ventures, but
at the same time their actions must be market-compliant. So there is aid when, for example, the
government invests in a company that has suffered financial losses and which cannot survive
without public money.5 In applying MEIP, the Commission and the Courts assess whether, from
the standpoint of the alleged SA grantor, a private investor in similar circumstances would have
provided the assistance in question6 or whether, from the standpoint of the alleged SA recipient,
the recipient received a benefit it would not have obtained under normal market conditions.7 The
purpose of the MEIP test is to assess whether government action can be justified on objective
commercial criteria.8
3 James Kavanagh, Gunnar Niels and Simon Pilsbury, 'The market economy investor: an economic role model for
assessing State aid' in Erika Szyszczak, Research Handbook on European State Aid Law (Elgar 2011)
4 ibid
5 Ben Slocock, The Market Economy Investor Principle (2002) 2 CPN 23
6 Case 234/84 Belgium v Commission (Meura)[1986] ECR 2263; Case C-305/89 Italy v. Commission (Alfa
Romeo)[1991] ECR I-1603; Joined Cases C-278/92, C-279/92 and C-280/92 Spain v. Commission[1994] ECR 1-
4103; Case T-16/96 Cityflyer Express v Commission[1998] ECR II-757, para 51; Joined Cases T- 129/95, T-2/96
and T-97/96 Neue Maxhütte v Commission[1999] ECR II-17; Joined Cases T-228/99 and T-233/99 West LB v
Commission[2003] ECR II-435
7 Case C-39/94 SFEI v La Poste [1996] ECR 1-3547 para 60
8 Slocock(n5)

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2.2 Emergence of MEIP
The precise origins of the principle are difficult to identify. The earliest iterations can be found in
a Council Directive on aid to shipbuilding9 and a Commission Decision establishing Community
rules on aids to steel industry.10 The Commission has clearly articulated the principle in a 1984
communication11 which is still valid.12 The MEIP proved highly controversial and it was indeed
challenged in the landmark case of Belgium v Commission.13 The Commission, employing the
MEIP, declared a capital subscription granted by a Belgian regional investment authority to a
financially threatened firm. 14 The Belgian government argued that the Commission had
misapplied Article 107(1) by interpreting it in light of the MEIP. The European Court of Justice
(ECJ) rejected the Belgian government‘s argument and endorsed the MEIP as ‗an appropriate
way‘ to determine the existence of aid.15 Now it is has now become a ‗yardstick for the
determination‘ of SA.16
2.3 Legal Basis of the Principle
The MEIP has no legal basis in the Rome Treaty or TFEU. Rather it is a construct developed by
the Commission using the discretion it enjoyed under Article 108 TFEU.17 The principle is
9 Council Directive 81/363/EEC, OJ 1981 L 137
10 Commission Decision 2320/81/ECSC [7 August 1981]OJ 1981 L 228
11 Commission Communication Concerning the Application of Article [107] and [108] of the EEC Treaty to Public
Authorities Holdings(Bulletin EC 9-1984)
12 Anestis and Mavroghenis(n1)
13 ‗Meura‘(n6)
14 Commission Decision 84/496/EEC, OJ L 276(1984)
15 ‗Meura‘(n13)
16 Martin Köhler, ‗New Trends Concerning the Application of the Private Investor Test‘(2011) 1 EStAL 21
17 TJ Doleys, ‗Fifty Years of Molding Article 87: The European Commission and the Development of EU State Aid
Policy (1958-2008)‘(2009)<http://aei.pitt.edu/33052/>accessed 10 April 2014

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founded in Article 345 TFEU which stipulates equality between public and private ownership.18
In such a mixed economic landscape, it makes sense to ask whether a particular State action does
indeed qualify as commercial action, or whether an element of aid is involved.19 The MEIP
serves the purpose by ensuring equality of treatment between State-owned or controlled
companies and private sector competitors pursuant to Article 345 TFEU.20
2.4 Requirements
2.4.1 Expectation for Return
A private investor always tries to maximize profit. If the investment by the State disregards any
prospect of profitability, even in the long term, it must be regarded as SA.21
2.4.2 Effect important, not Profit of Beneficiary, State Motive or Means
The assessment of whether a transaction is in line with market conditions must be carried out
taking into account the effects of the transaction on the undertaking concerned.22 State motive for
the transaction,23 means or forms used for it24 or the profitability or unprofitability of the
beneficiary are not decisive indicator.25
18 Martin Nettesheim, ‗Market Economic Investor Principle and Taxation: A Comment on Case T-
156/04‘<http://www.jura.uni-tuebingen.de/professoren_und_dozenten/nettesheim/projekte/market-economy-
investor-test/at_download/file>accessed 10 April 2014
19 Kavanagh, Niels and Pilsbury(n2)
20 Dennis Oswell and Esfandiar Vahida, ‗EU State Aid Developments in 2003: More Complexity, Less Certainty'
(2004) 24 Northwestern Journal of ILB 755
21 Italy (n6)
22 Commission Communication, ‗Draft Commission Notice on the notion of State aid pursuant to Article 107(1)
TFEU‘(2014)<http://ec.europa.eu/competition/consultations/2014_state_aid_notion/draft_guidance_en.pdf>accesse
d 10 April 2014
23 West LB(n6)
24 Case C-124/10 P Commission v EDF [2012] ECR I-0000, para 88
25 Commission(n22)

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2.4.3 State must Act as an ‘Economic Operator’
The MEIP test is not applicable if the State acts as a ‗public authority‘ rather than as an
‗economic operator‘.26 Accordingly, the MEIP test should be applied leaving aside all social,
regional policy and sectoral considerations which relate to a Member State‘s role as a public
authority.27
2.4.4 Ex-ante Assessment
The market compliance of a public intervention must be examined on an ex-ante basis, having
regard to the information available at the time the intervention was decided upon not on a
retrospective finding or subsequent justifications.28
2.5 Application of the Principle
2.5.1 When Specific Market Data Available
2.5.1.1 Pari-passu Transactions
When a transaction is carried out under the same terms and conditions (such as in a joint
investment) by public bodies and private operators who are in a comparable situation (a 'pari-
passu' transaction), it is market-compliant.29
26 Commission v EDF(n24), paras 79 to 81; ‗Meura’ (n16), para14; Case 40/85 Belgium v Commission[1986]ECR
2321, para 13; Spain v Commission(n6), para 22; and Case C-334/99 Germany v Commission[2003] ECR I-
1139,para134
27 Commission(n22)
28 Commission v EDF(n24) paras 83-85 and 105; Case C-482/99 France v Commission[2002] ECR I-4397, paras 71
and 72 and Cityflyer Express (n6) paragraph 76
29 Case T-296/97 Alitalia v Commission [2000] ECR II-3871, para 81; C-53/2006 Citynet Amsterdam [2008]OJ L
247, p. 27 recitals 96-100

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2.5.1.2 Tender Procedure
If open and participatory, tender is a prima facie market-compliant procedure.30
2.5.2 When specific Market Data not Available
2.5.2.1 Benchmarking
It refers to the assessment of a public transaction in light of the terms and conditions under which
comparable transactions could have been carried out by comparable hypothetical private
operators in comparable situations.31 Identifying an appropriate benchmark is a very complex
procedure and needs particular attention to the kind of operator concerned (eg a group holding,
an operative company or a speculative fund), the type of transaction at stake (eg equity
participation or debt transaction), the market(s) concerned (eg financial markets, fast-growing
technology markets, utility or infrastructure markets), the timing of the transactions and all other
specific features of the State transaction.32
2.5.2.2 Other Assessment Methods
If none of the above assessment criteria apply, any generally-accepted, standard assessment
methodology such as evaluation in terms of the internal rate of return (IRR) or the Net Present
30 Article 1(11)(a), Council Directive 2004/18/EC, OJ L 134/114; Article 1(9)(a),Council Directive 2004/17/EC OJ
L134/1
31 Commission (n22)
32 Ibid, para 102

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Value (NPV) may apply depending on the market situation, data availability or type of
transaction.33
2.6 Derivatives of MEIP
2.6.1 Market Economy Lender Principle
The first and most obvious extension of the MEIP is to the provision of loan finance: a loan
contains no aid if it is provided on terms which a commercial lender would accept. The
Commission has developed reference interest rates for this purpose.34
2.6.2 Market Economy Creditor Principle
The failure or unwillingness of a public authority to demand money owed to it with the same
vigour as that of a private creditor is also a form of SA.35
2.6.3 Market Economy Vendor Principle
A sale carried out by a public body involves no aid if a private vendor, under normal market
conditions, would accept the same price.36
33 Commission (n22), para 104; Case T-366/00 Scott v Commission [2007] ECR II-797, para 134
34 Slocock(n5)
35 Case C-342/96[1999]ECR I-02459; Case C-525/04P Spain v. Commission [2007]ECR I-9947; Case C-73/11P
Frucona v Commission [2013]ECR I-0000; Case C-256/97 DM Transport[1999] ECR I-3913; Case T-36/99
Lenzing [2004]ECR II-3597; Case C-276/02 Spain v. Commission [2004]ECR I-8091
36 Joined Cases T-268/08 and T-281/08 Land Burgenland and Austria v Commission[2012] ECR II-0000

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The MEIP has also got a wide diversity of names such as private investor principle, informed
investor test, prudent investor principle, informed investor principle, etc.37 As all the names and
variations represent the same concept, Commission refers to it as the 'market economy operator'
(MEO) test.38
3. MEIP in the World Trade Organization (WTO) Law
EU SA regime is very closely comparable with WTO subsidy law.39 Both systems almost
similarly use MEIP to assess ‗benefit‘ or ‗advantage‘ to the recipient of SA/subsidy.40 Subsidy is
deemed to exist by Article 1.1(b) of Agreement on Subsidies and Countervailing Measures
(ASCM) 1994, if a ‗financial contribution‘ or a ‗form of income or price support‘ confers a
‗benefit‘. MEIP has been described as the best benchmark to assess the ‗trade-distorting
potential‘ of a ‗financial contribution‘. It works ―by determining whether the recipient has
received a ‗financial contribution‘ on terms more favourable than those available to the recipient
in the market.‖ 41 It ‗captures any action mentioned under Art 1.1 ASCM that might even
potentially and indirectly‘ distort trade.42 It also focuses on ‗whether the intervention derogates
from the commercial practice otherwise applicable in similar circumstances.‘ 43 Thus the
37 Magnus Schmauch, EU Law on State Aid to Airlines: Law, Economics and Policy (Lexxion 2012)
38 Commission(n22) para 78
39 Luca Rubini, The Definition of Subsidy and State Aid: WTO and EC Law in Comparative Perspective (Oxford
2009)7
40 PW Jessen, ‗Rules on state aid and subsidies in SE Gaines, BE Olsen, KE Sørensen (eds) Liberalising Trade in
the EU and the WTO: A Legal Comparison (CUP 2012)
41 Canada-Aircraft, AB Report, WT/DS70/AB/R, adopted on 20 August 1999, para157;Panel Report, WT/DS70/R
para 9.112, adopted on 20 August 1999
42 Henrik Horn and PC Mavroidis, ‗United States: Continued Dumping and Subsidy Offset Act of 2000‘ in Henrik
Horn and PC Mavroidis (eds) The WTO Case Law Of 2003, The American Law Institute Reporters’ Studies (CUP
2005)
43 Luca Rubini, ‗The International Context of EC State Aid Law and Policy: The Regulation of Subsidies in the
WTO‘ in Andrea Biondi, Piet Eeckhout, and James Flynn (eds) The Law of State Aid in the European Union (OUP
2004)

12
Appellate Body (AB) held that equity injection to Aerospatiale by the French government ‗were
inconsistent with the usual investment practice of private investors in France and conferred a
benefit on Aerospatiale.‘44 The MEIP has been consistently used in many other cases.45 However
several cases of ‗horizontal‘, ‗sectoral‘ and ‗regional‘ aid, which will not qualify for MEIP
benchmark in WTO, can be justified in EU.46 Unlike EU, ‗cost to government‘ is not a condition
for application of MEIP in WTO.47 As opposed to the EC ban on any SA with an actual or
hypothetical distorting effect on competition, the WTO law ‗does not necessarily embrace a full
competition analysis.‘48
4. Strengths of the Principle
4.1 Primary Tool to Determine State Aid
The SAL turns on the fulcrum of the MEIP.49 It is one of the entry points for economic analysis
in SA cases.50 Any measure that satisfies MEIP is not considered SA. In that case, the other
criteria (eg selectivity or trade distortive effect) no longer need to be assessed.51
44 EC and certain Member States- Large civil aircraft, AB Report, WT/DS316/AB/R, adopted on 18 May 2010
45 eg US-Lead and Bismath II, Panel Report, WT/DS/138/R, adopted on 7 January 2000, para 6.64; US-
Countervailing Measures, Panel Report, WT/DS212/R, adopted on 8 January 2003
46 Rubini(n42)188
47 Case C-379/98 PreussenElektra AG V Schleswag AG [2001]ECR 1-2099, para 58; Canada-Aircraft, (n41) Panel
Report para 9.111- 9.120; AB Report, para 149-161
48 Rubini(n43)187
49 Parish, ‗On the private investor principle‘(2003) 28 ELR 70
50 HW Friederiszick and Michael Tröge, ‗Applying the Market Economy Investor Principle to State Owned
Companies — Lessons Learned from the German Landesbanken Cases‘ (2006) 1 CPN 105
51 Kavanagh, Niels and Pilsbury(n3)

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4.2 Sufficiently Developed
MEIP has ‗already shown itself to be both an appropriate and practical yardstick for determining
which public funds constitute aid in numerous individual cases.‘52 Literature shows that the
Commission's approach in applying MEIP is becoming increasingly developed, in particular as
regards the financial appraisal of the transaction.53 The sheer breadth and sophistications of the
test can be seen by its various derivatives which continue to expand.
4.3 Widely Recognised
Devised by the Commission54, endorse by the Council55 repeatedly confirmed by the Union
Courts in many cases and continuously practiced by the member States in their SA assessment, it
is certainly the most recognised principle of SAL.56
4.4 Wider Area of Application
The test was originally applied in the context of recapitalization measures for public
undertakings but has been extended in its scope of application and has been applied in different
situations as a ‗general criterion‘.57 It now applies in principle to any kind of transaction between
a Member State and an undertaking such as equity capital injections, debt write-off, tax
52 Commission Communication: Application of Articles 92 and 93 of the EEC Treaty and of Article-5 of
Commission Directive 80/723EEC to public undertakings in the manufacturing sector, OJ C 307/1993, p 314, para
27
53 GB Abbamonte, ‗Market economy investor principle: a legal analysis of an economic problem‘(1996) 4 ECLR
258
54 Commission(n10)
55 Council Directive(n9)
56 Anestis and Mavroghenis (n1)
57 Köhler(n16)

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exemption,58 conversion of debts into shares, loans, guarantees, disposal of assets, including sale
of assets, lease and privatization and so on.59
4.5 Tool for Assessment of Aid Element
The aid element involved in the transaction is assessed by use of MEIP. It refers to the difference
between the terms under which the funds were made available by the State to the undertaking
and the terms which a private investor would find acceptable.60 For example, the aid element of
equity capital injections consists of the cost of the investment less the value of the investment,
appropriately discounted.61 The same is true for guarantees, for which the premium paid for the
guarantee is deducted from the difference between the market rate and the rate obtained because
of the guarantee.62
4.6 Balance between Art 345 and 107(1) TFEU
The MEIP strikes a very necessary balance between Article 345 TFEU which requires neutrality
in the treatment of public and private undertakings and article 107(1) TFEU which prevent trade
between member States from being affected by advantages granted by public authorities.
Member States are free to create public undertakings, acquire shareholdings and nationalize
existing undertakings operating in all sectors of the economy. Unlimited freedom could translate
into unrestricted power to grant financial support to the national industry leading to distortion of
58 EDF(n24)
59 Abbamonte(n53)
60 Commission Communication(52)
61 RA Brealey and SC Myers, Principles of Corporate Finance (McGraw-Hill 1991)161
62 Commission Decision 94/696/EC [1994] OJ L273/22 (on aid granted by Greece to Olympic Airways)

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competition in the Common Market.63 So it is necessary to have a criterion to determine whether
public investments contain SA. The MEIP strikes a balance between the Member States' interest
in owning and running individual firms or entire economic sectors and the common interest in
safeguarding a system of undistorted competition.64 Shorn of the principle, the prohibition on SA
turns out to be a qualified prohibition on a mixed economy.65
4.7 Flexibility
Greater European integration is the ultimate objective of the Commission. As the entire SA
jurisprudence is going through an evolutionary phase, it has been a necessary tool in the hands of
the Commission to act in accordance with the need of time and face complexities arising out of
the interplay of law, economics and policy affairs.
4.8 Level Playing Field for all Undertaking
It has been argued that the MEIP is a very blunt test; political, social or philanthropic
considerations are extraneous to the principle. In treating the State as a venture capital investor
and assessing the aid element as the difference between the preferential conditions and market
ones, it puts the public and private firms on an equal footing66 and helps maintain an arms-length
relationship between them. The ECJ has observed that the MEIP is applied to ensure ‗identical
treatment to public and private‘ undertaking.67
63 Abbamonte(n53)
64 Abbamonte(n53)
65 Parish(n49)
66 Abbamonte(n53)
67 Alfa Romeo(n6) para 24

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4.9 Self Regulation of State Aid by States
The MEIP is a form of self-regulation of SA. The risk of its applicability lies with the Member
States. The reason such self-regulation is a practical necessity because the notification regime is
too cumbersome.
4.10 Anti-formalistic Extension- Journey towards a General Principle?
In a recent Judgment,68 the ECJ has endorsed the General Court in a significant push for an
extended and anti-formalistic use of the MEIP in State aid control procedures to cover every
state intervention including tax-exemption.69 The case clearly supports the use of MEIP as the
general standard for the material appraisal of SA measures and contributes to the development of
more homogeneous substantive standards in this area of EU Law.70
5. Problems with the Principle
5.1 No ‘Typical Private Investor’
One of the major problems with MEIP is the gap between what a private investor would do and
what a rational private investor should do.71 It is not always possible to identify a ‗typical‘
investor. This has become clear in recent cases concerning recovery of debt, rescheduling of debt
68 EDF(n24)
69 AS Graells, ‗Bringing the ―Market Economy Agent‖ Principle to Full Power‘ (2012) ECLR
(Forthcoming)<http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2084786>accessed 11 April 2014
70 ibid
71 W Sauter & H Schepel, State and Market in European Union Law: The Public and Private Spheres of the Internal
Market before the EU Courts, Studies in European Law and Policy (CUP 2009)

17
or closure of factories.72 Private investors' behaviour can vary as wildly as, or even more wildly
than, the sorts of behavior one might ascribe to a ‗public service‘ motivation.73
One person prefers to take big risks which, if they pay off, may result in potentially huge profits.
Another shuns risk and goes for a steady, reliable return. There is nothing to say one's approach
is superior to that of others.74 Even discounting differing perceptions of risk, different investors
may allow themselves to be motivated by a variety of different factors which are not strictly
financial.75 The ECJ itself has expressed doubts about the concept of a ‗model‘ private investor.76
5.2 No Accurate Benchmark
The complexity of business decisions cannot be fully captured by the legal provisions set forth
the relevant benchmark.77 This is just not a matter of inadequate drafting; the process underlying
commercial decisions itself is so multifaceted and variable that it is only a case-by-case analysis
that eventually allows to determine whether the actual decision is commercially sound.78 Every
debt rescheduling, every bankruptcy and every factory closure is different and depends on
numerous visible and invisible factors. It is not a case of comparing agreed rates with market
rates.79 Finance is not a science; it is not even an imprecise one, as it is based on predicting
72 T-152/99 Molina v Commission [2002]ECR II 3049; Germany v Commission (n25); Spain v Commission(n34);
DM Transport(n34)
73 Matthew Parish, ‗Brief notes for the hearing on 11 June 2003 before the Committee on Economic and Monetary
Affairs at the European Parliament, Brussels‘(2003)
<http://www.europarl.europa.eu/hearings/20030611/econ/lowell.pdf>accessed 11 April 2014
74 Parish(n49)
75 ibid
76 Alfa Romeo(n6) Opinion of AG Van Gerven, 1640
77 Rubini(n39)
78 Commission Communication, ‗Application of Article 92 and 93 of the EEC Treaty and of Article 5 of
Commission Directive 80/723/EEC to public undertakings in the manufacturing sector‘ [1993] OJ C307, para 37
79 P Nicolaides, ‗Re-Introducing the Market in the ―Market Economy Investor‖ Principle‘, European State Aid Law
Quarterly (2003)

18
events whose occurrence depends upon people, whose conduct can never be formalized in a set
of rules no matter how much data one has.80 There are no actual market benchmarks for these
factors. It is not enough to hypothesize what private investors could potentially do.81
5.3 Problem of Legitimacy
As per the MEIP, there must be no difference between public and private investments. It is not
relevant whether the intervention constitutes a rational means for the public authorities in order
to pursue public policy (eg creating employment, boosting revenue) considerations.82 But is it
legitimate to compare public investor to private investor? The danger of comparing the state with
a private investor on similar terms is that because the state is not subject to the same constraints
that inhibit the real private investor or the state is bound by the obligations that a private investor
may never have, ‗the test may cease to be realistic‘.83 The Commission itself admitted that not to
treat State participation motivated by social, regional and sectoral considerations as aid ‗would
amount to emptying the market economy private investor principle of its meaning.‘84 Such a
statement just highlights the absurdity of the principle. Virtually everything States do is in their
national interest; that is why States exist.85
80 Parish(n49)
81 Nicolaides(n79)
82 Commission Communication(n22) para 79
83 Nicholas Khan and KD Borchardt, ‗The Private Market Investor Principle: Reality Check or Distorting Mirror?‘
in James Flett (ed) EC State Aid Law (Kluwer 2008)113
84 Commission Decision 92/317 [1992] OJ L171/54
85 Parish(n49)

19
5.4 Private Investors also have Social and Sectoral Considerations
MEIP requires blunt consideration of any investment, leaving aside all social, regional and
sectoral policy considerations.86 But Advocate General (AG) Van Gervenand rightly observed
that a ‗reasonable investor‘ particularly if it is a large holding company, would not be wholly
uninfluenced by considerations of a social nature or of regional or sectoral policy. This would, a
fortiori, apply to public holdings.87 Moreover, an investor (eg arms companies, tobacco
companies) who acts only for profit without regard to the universally recognised principles of
ethical business and investment falls to be condemned by modern European systems of moral
thinking. Why then judge Member States by such a morally offensive standard, condemning
them unless they stoop to the depths of corporate greed?88
5.5 Fictional Comparison between the States and Private Undertakings
Public authorities in general can do things which no private investor has the power to do. The
state has almost unlimited funds at its disposal.89 A private investor with mammoth resources
comparable to those of a Member State might have a sharply different attitude towards risk
aversion. To make the private investor test a workable one, ‗the hypothetical private investor
must be such a distortion of any actual private investor that imagining its behaviour would be an
exercise in creative fiction.‘90 This is not the way legal tests should work. Practical and effective
laws do not have their grounding in theoretical abstract models.91
86 Case T-20/03 Kahla v Commission [2008] ECR II-2305
87 C-350/93 ENI Lanerossi[1995]ECR I-699; Alfa Romeo(n6)
88 Parish(n49)
89 Khan and Borchardt(n83)
90 Parish(n49)
91 ibid

20
5.6 Incompatible with the Proposition of ‘Mixed Economy’
The proponents of a mixed economy want State intervention to curb the worst excesses of
unregulated market forces, not so that the State will just do what the market or self-interested
private investor tells it to do, but so that it will use its influences in business for higher policy
purposes. But MEIP ‗presupposes a classical liberal economic fallacy‘ that ‗State exist, or can
exist, with the same modus vivendi as a private company.‘92
5.7 Public and Private Investments are Inherently Different
To an economist, there is at first sight something inherently paradoxical in the MEIP. Does not
the mere fact that the State spends money imply that no private party would do so?93 So if public
and private investments are indistinguishable, why do certain companies ask for injections of
public money? Alternatively, why can they not find private money?94 In reality private money is
not the same as public money. Even when the initial terms of investment are identical, there are
still significant differences in the subsequent management of the investments, where private
investor would be more demanding, less patient and would apply more pressure for profit.95
5.8 Expansion beyond Recognition?
The Union Courts set a new trend in EDF case stating that the ‗exercise of regulatory power‘
does not exclude the application of the private investor test.96 In 1997 France revaluate the assets
92 Parish(n49)
93 Kavanagh, Niels and Pilsbury(n3)
94 Nicolaides(n79)
95 ibid
96 Köhler(n16)

21
of EDF, a state-owned company and in the process write-off its corporate tax liability. The
Commission found that to be SA but abstain from applying MEIP arguing that a private investor
does not have such powers. The General Court and ECJ decided for application of MEIP. It is
important to consider that tax authorities do not act as investors. Ministries make investments.
The functions of the State must be separated. Moreover, funds drawn from general budget faces
many competing uses and demands. In contrast, tax write-offs are economically and politically
cheaper as the money does not even enter the budget. It certainly placed the recipient in a
competitive advantage.97 It is indeed a genuine case of state aid complexity; but how far is it
right to expand MEIP test so far98, almost beyond recognition?
5.9 Uncertainty, Difficulty and Complexity in Application
In theory, the MEIP is a rather straight forward test. But ensuring that ‗the conditions of the
MEIP are fulfilled in a given case is one of the hardest tasks imaginable in this field of EU
competition law.‘99 It is argued that the logic and presuppositions underlying the concept are
incoherent, and cannot satisfy the principle of legal certainty.100 Presence of innumerable types
of investors with huge diversity of objectives, evaluation of the risk of investment and of its
remuneration, ambivalence of the market indicators and numerous other external factors have a
snowball effect on the complexities and difficulties faced by the application of MEIP.101 Thus
97 Phedon Nicolaides and lE Rusu, ‗Private Investor Principle: What Benchmark and Whose Money?‘ (2011)2
EStAL 237
98 ibid
99 Andreas Bartosch, ‗The EdF Ruling – an electrifying Enlightening‘(2010) 2 EStAL 267
100 Parish(n49)
101 Rubini(n39)

22
there can be situations when purchase by public authority, even made at market prices, may not
be in line with MEIP.102
Again, the difference between the Commission and Courts‘ approach in EDF case exemplifies
the uncertainty related with the principle.103 The solution ‗advocated by the Commission might
probably have sounded too rigid‘ but the solution proposed by the Court ‗might come at the
expense of legal certainty.‘104
5.10 Discrimination against Public Entity?
It is argued that governments‘ behavior is fundamentally different from that of commercial entity
and assessment of governments conduct against commercial criteria means to discriminate
against them.105 Though the ECJ insists that ‗there is no discrimination against the public
investor‘,106 in some cases, the discrimination may be more visible, such as in a ‗reserved
market‘ (ie, one which lacks a private sector analogue). In Chronopost I, La Poste (a French
government-owned postal service) had no equivalent in the private sector as it possessed a
comprehensive, nation-wide postal delivery network that ‗would never have been created by a
private undertaking.‘107 Is it fair to require it to imitate a private entity only to satisfy the MEIP,
even though no comparable private sector entity existed?
102 Case T-14/96 BAI v Commission[1999] ECR II-139; Commission (n22) para 85
103 Erika Szyszczak, 'The Survival of the Market Economic Investor Principle in Liberalised Markets'(2011)1 EStAL
35
104 Sébastien Thomas, 'The EDF judgment of the CJEU in case C-124/10 P: towards a public investor test in EU
State aid law?' (European Law Blog, 18 September 2012)<europeanlawblog.eu/?p=827>accessed 11 April 2014
105 Rubini(n43)
106 West LB(n6)para 27
107 Joined Cases C-83/01 P, C-93/01 P and C-94/01 P Chronopost I [2003]ECR I-6993 Para 38-41

23
5.11 Tool for Arbitrary Power and Political Compromise?
Parish argued that the MEIP was originally a political compromise, allowing the Commission to
carve out a set of exceptions to the SA principle where State intervention could not otherwise be
justified on the grounds set out in Article 107(2).108 But the practical consequence is that the
Commission ends up with a wide margin of discretion109 allowing it to excuse State intervention
in private economies on an ad hoc basis in accordance with political expediency.110 It is not
desirable for any public authority to hold arbitrary power as it may breed incompetence and at
worst, abuse. 111 To make things worse, the Courts are often reluctant to interfere in the
Commission's exercise of its discretion, taking the view that the test is an economic one which is
not particularly within the sphere of the Court's expertise.112
6. Are there any Alternative?
Since it is easy to be critical, one also has to ask whether there are any solutions to these
problems. The scarce literature on the MEIP mostly indicates that it is here to stay with
continuous clarification and enrichment 113 while only very few have suggested some
alternative.114
108 Parish(n49)
109 Rubini(n43)
110 Parish(n49)
111 Parish(n73)
112 Case C-56/93 Belgium v Commission [1996]ECR 723
113 eg Friederiszick and Tröge(n50), Kohler(n16), Szyszczak(n103), Thomas(104) Kavanagh, Niels and Pilsbury(n3)
114 eg Parish(n49), Nicolaides(n79)

24
6.1 Substitution by ‘Public Investor Principle’
It is argued that, by definition, governments intervene in the economy, not for commercial
consideration, but in the pursuit of public interest. Measurement of governments‘ behavior
against commercial criteria is an unfair treatment and ―should therefore be substituted by a
‗public investor criteria‘, modeled on the public role of governments.‖115
6.2 Reintroduction of ‘Market’ in MEIP
Nicolaides calls MEIP a misnomer, as it is no longer looking to the ‗market‘ for guidance. The
solution is to re-introduce the market. He suggested introduction of different methods for that
such as certification by independent experts on market-compliance of all public capital injections
or write-offs, use of private intermediatory in the negotiation of such transactions or fixing a
certain percentage higher rate of return than the comparable market return for all such
transactions considering the less demanding nature of public authorities. 116 Anestis and
Mavroghenis also call for involvement of ‗independent third party‘ experts in public
transactions.117
6.3 Reformulation of MEIP
Perish suggested for reformulating it as sets of transparent rules detailing distinction between
legitimate and illegitimate State economic activity and defining when State economic activity
can, and cannot, be exercised without Community supervision. Referring to the Opinion of AG
115 Rubini(n43)168
116 Nicolaides(n79)
117 Anestis and Mavroghenis(n1)

25
Jacobs in Stardust Marine118 he maintained that ‗a publicly owned undertaking's behaviour will
be attributable to the State only if it is not acting in accordance with the standards of a private
investor.‘119 The MEIP returns by the back door.
7. Conclusion
Though not directly mentioned in the treaty, the MEIP has been used to assess SA by comparing
the behavior of private and public undertaking for the last thirty years. It has been sufficiently
developed by the joint efforts and practices of the Commission, the Community courts, the
member States and legal thinkers on EU jurisprudence. But this rapidly growing and dynamic
principle of SAL is becoming increasingly complex and nuanced resulting in a great deal of
uncertainty for both the governments and recipients alike as to the legality of actual and
contemplated intervention.
While government actions are always influenced by public policy objectives and other political
factors, is it really practical or effective to compare those with that of private investors on pure
commercial criteria? How far is it acceptable to hypothesize the existence of a model ‗private
investor‘ that may never exist? Lack of a proper market benchmark sometimes results in
providing wider discretion in the hands of the Commission. Is it good for a legal principle to
empower an executive body to use it as a political tool? Although the principle has been
clarified and redefined from time to time, a number of important questions remain largely
118 Case C-482/99 France v Commission [2002]2 CMLR 1069, Opinion of AG Jacob, para 67
119 Parish(49) 87

26
unresolved.120 The MEIP would certainly be a better paradigm when it could provide solution to
many of such questions. Alternatives suggested by the legal literature may provide some
guidance. Given the legal uncertainty, inconsistency and unpredictability related with the test,
considerable care need to be exercised to ensure that ‗not every characteristics of the state is
imputed to the private investor, otherwise the MEIP is liable to act as a distorting mirror that
flatters the image of the States as an investor.‘121
120 Khan and Borchardt(n83)
121 ibid

27
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