A market investor carries out a thorough ex ante analysis of the prospects of an investment before it commits any money.


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In 2004, the European Commission concluded, in decision 2005/145, that France granted incompatible aid to Electricite de France [EDF]. The French government had converted tax liability into share capital in EDF. The Commission was of the opinion that, by not collecting tax due to it and by using instead the amount of tax to increase the capital of EDF, France was not acting as a private investor. The fresh capital was classified as operating aid and consequently found to be incompatible with the internal market.

EDF appealed against the Commission decision and the General Court, in 2009 in its judgment in case T-156/04, EDF v Commission, annulled decision 2005/145. Then it was the turn of the Commission to appeal. Unfortunately for the Commission, the Court of Justice, in 2012 in its judgment in case C‑124/10 P, Commission v EDF, upheld the ruling of the General Court. Consequently, the Commission had to re-open the case and re-assess the merits capital injection. It concluded again, in the new decision 2016/154, which is examined in this article, that EDF did receive incompatible State aid.[1] This time, however, the Commission examined in much more detail the arguments of the French government that it had acted as a private investor.

Once more, we see that a Member State that does not explicitly invest for the purpose of obtaining a return will certainly fail to prove afterwards that its investment made commercial sense. This is because the investment will leave behind a trail of evidence showing the opposite: that the investment was made for public policy purposes.



Since its establishment, EDF has been responsible for both electricity generation and transmission. Although, EDF operated and maintained the transmission network, its legal ownership was not clarified until 1997. Then it legally acquired ownership of the network and the value of the network was recorded on its balance sheet. Under French accounting rules, EDF became liable for tax that had to be paid on the value of the assets that were added to its balance sheet. Tax was levied on FRF 14.1 billion which resulted in tax due amounting to FRF 5.8 billion which is equivalent to about EUR 0.9 billion. Then the French government waived the payment of the tax by EDF and converted it into an equivalent increase of the capital of EDF.

The Commission considered that the conversion could not have been the act of a private investor because private investors cannot legally adjust anyone’s tax liability. For this reason, it omitted to examine whether a private investor, considering the profitability of EDF at that time, could have injected capital of EUR 0.9 billion into EDF.

In its appeal, EDF argued successfully that the Commission committed an error of law. According to EDF, the Commission focused on the form of the aid, which was an irrelevant issue, and ignored its effects. The General Court agreed with EDF and annulled the Commission decision. The subsequent appeal of Commission before the Court of Justice was unsuccessful. The Court of Justice pointed out that the main source of money for public authorities is taxation. When they invest, they unavoidably use resources raised from taxes. But preventing them from using the money they raise from taxes would not only result in adverse discrimination, in violation of Article 345 TEFU, but it would also be contrary to the established principle that whether a measure constitutes State aid is determined solely on its effects; i.e. whether it satisfies the four criteria of Article 107(1) TFEU.

The Commission argued before both Courts that by using tax revenue, a state has an advantage over other investors because its cost of capital is lower. By definition, a state relies on its coercive powers when it levies taxes. This implies that it does not have to pay a “fee” for the money it collects. By contrast, a private investor would incur financial costs such as interest on a loan or dividends on equity capital. Both Courts dismissed this argument and pointed out that if there were any differences in costs, they ought to have been taken into account by the MEIP. However, they did not elaborate further how precisely such costs would have to be accounted.

After two successive legal setbacks, the Commission re-launched the formal investigation procedure. This time it analysed in considerable detail the economic rationality of the conversion of tax into share capital.

A preliminary comment on the logic of MEIP

The state acts as a private investor when it does not provide any gratuitous advantage to an undertaking. Such an undertaking obtains no advantage when it cannot get a better deal from the state than those offered by the market. This means that regardless of whether a public authority can raise funding at zero cost, it must still charge to the undertaking that eventually receives that funding the same fee as anyone else on the market. Just because the state can raise money from taxes, it does not follow that it will voluntarily pass on to the undertaking in which it invests the advantage of not having to pay for the money it raised.

It is irrelevant that the state may have an advantage over other investors. The issue here is not about who will win in an investment contest but whether the advantage of cheaper finance will be given away. Indeed, if investors were competing for the right to finance a project, the more efficient investor or the investor with access to cheaper money would win. But this is not the case here. An example can illuminate this important distinction. Let’s assume that the market demands a risk premium of 10% in order to invest in a particular project. Further assume that a public authority can raise money at zero cost and that a private investor can raise money at a cost of 3%. Naturally, the private investor would demand a return of at least 13% in order to invest in that project. If the public authority and the private investor were competing for the right to finance that project, the public authority would win by accepting a return of 12.9%. However, it would never demand 10% because it would wilfully forgo a profit of 2.9%.

It is then very difficult to understand what the Commission and the two EU Courts could have meant by referring to the zero or low cost incurred by the state in raising money. As explained above, any difference in costs is irrelevant. The state would or should demand the minimum acceptable return to the most efficient private investor. In fact, as will be seen later on, in its second decision, the Commission interpreted the issue of cost difference exactly in the way it is explained in the previous paragraph.

The new Commission decision (2016/154)

The analysis of the Commission focused on the existence or not of an advantage for EDF [although it also had to prove that the other criteria of Article 107(1) were satisfied as well, but this is not reviewed here because its analysis was fairly standard]. The issues that had to be taken into account were those identified by the Court of Justice and were summarised in paragraph 127 of the Commission decision. They were a bit more specific than the general approach of determining whether MEIP holds because they referred to the particular situation of EDF:

  1. The Member State must establish on the basis of objective evidence that the measure was implemented by it acting as a shareholder.
  2. The evidence must show that the Member State concerned took the decision to make an investment at the time the measure was implemented.
  3. The decision must be based on economic evaluations comparable to those which a rational private investor would have had carried out, before making the investment, in order to determine its future profitability.
  4. The Commission may refuse to examine evidence established after the investment was made.
  5. The nature of the measure is relevant in that regard.
  6. The application of the private investor test must make it possible to determine whether a private shareholder would have injected a similar amount.

The Commission did not find any evidence that the French government acted as a shareholder [paragraphs 128-130] or that any ex ante studies had been carried out that showed the profitability of the investment [paragraphs 140-142]. However, the Commission proceeded to examine whether the French government could expect to be remunerated on its investment. Indeed EDF was obliged to pay a fixed dividend of 3%. In addition, the Commission considered other aspects of the investment in EDF that could translate into larger income for the French state such as reduction in the amount of debt of EDF, leading to cheaper access to finance from the markets and therefore more profit for EDF. The reduction in debt had no significant impact on the cost of EDF for accessing market funding.


The Commission also dismissed a study produced by EDF to prove that the investment by the French state was economically rational. EDF asked Oxera to assess the business prospects of its operations at the time the investment was made. The Commission thought that the study was based on a credible methodology but still rejected it. The reasoning of the Commission on this point is instructive. The Commission thought that the study had little significance for the case at hand on the grounds that it was so complex that in fact it proved that the French government failed to carry out the necessary ex ante analysis before it made the investment. [Paragraph 144]

These considerations led the Commission to the conclusion that “(154) the vast majority of the evidence described above clearly shows that France did not, either before or at the same time as conferring the economic advantage resulting from the non-payment of the corporation tax, take a decision to make an investment in EDF by way of the tax exemption. Accordingly, the prudent private investor in a market economy principle does not appear to be applicable to this measure. The considerations set out below on the application of the private investor test are therefore provided in the alternative.”

MEIP benchmarks

The Commission first calculated the return that the investment could realistically achieve. This was done by estimating EDF’s future net revenue. Then it expressed that net revenue as a percentage of capital or equity to derive a rate of return. The result was in the range of 2.94% to 4.64%. This result had to be compared to a benchmark rate; i.e. the rate demanded by a hypothetical investor. The Commission used two benchmarks.

The risk-free benchmark

The first benchmark that was established by the Commission in order to determine whether the investment was sufficiently profitable was the return on long-term French government bonds, which was 6.35%. Certainly this was higher than the return from the income of EDF, which was more risky. A “prudent” private investor would have found that the expected rate of return was “insufficient” to justify the investment.

The Commission also took into account differences in costs between the state and a private investor by deducting from the higher estimate of the rate of return of 4.64% a tax of 42%. This would reduce the return to 2.7% which was much lower than the 6.35% paid by French government bonds. [Paragraphs 162-163]

Then it broadened its analysis by examining “(164) […] whether the evidence and information dating from the time of the decision to reclassify the provisions without levying the tax submitted by France contain additional information which would have convinced a prudent private investor to make the alleged investment notwithstanding the apparent very low rate of return. These details may relate in particular to the capacity of EDF

(i) to increase its long-term operating income;

(ii) to improve its operating results through efficiency gains;

(iii) to increase the net value of the productive assets of the undertaking; or

(iv) to provide a steady and adequate remuneration for its shareholder.

These are factors which have the potential to create long-term value for the shareholder with a positive outlook, but destructive of value with a negative outlook.”

There was no evidence to corroborate that any of the above possibilities was likely to materialise. In fact, the Commission found evidence that the policy objectives of the French government undermined the credibility of the claim that it acted as a private investor. There were several policy statements at the time that indicated that the French government supported the supply of cheaper electricity to boost the competitiveness of French industry and French regions. This was not consistent with the aim of maximising profits from the sale of electricity. [Paragraph 166]

The benchmark with risk margin

This benchmark was derived from the Capital Asset Pricing Model [CAPM]. The model is encapsulated in this formula: R* = Rf + β×(Rm – Rf). The model estimates the rate of return required by an investor, R*, which is given by the sum of the risk-free rate [of a safe asset such as a sovereign bond], Rf, and the risk premium. The risk premium is the difference between the market rate, Rm, and the risk-free rate, multiplied by a parameter, β, which varies with the level of risk of the undertaking invested in. If β is 1, then the undertaking is as risky as the market. If it is less than 1, then it is less risky than the market. This normally applies to utilities like EDF whose β varied between 0.45 and 0.62 at the time. If β is higher than 1, then it is more risky than the market, as for example an internet company.

Using the CAPM formula, the Commission arrived at a rate of return that ranged between 11.7% and 13.4% with a median of 12%. The Commission also produced several estimates of the return that EDF could generate with its income over different periods of time and under different assumptions. The internal rate of return [IRR] for the base scenario was -13%. This meant that the investment in EDF would break even only if the discount rate was negative. [A negative discount rate is the result when future values are much smaller than today’s values. It is as if investment destroys future value.] This value of IRR was far below the 12% expected by private investors and was even lower than the 6.35% that could be earned by simply investing in government bonds which were considerably more secure than EDF.

The Commission inevitably concluded that the conversion of the tax liability in new capital was State aid. It also concluded that the aid was incompatible with the internal market and instructed France to recover it.


This is a textbook case of how to carry out a meticulous analysis of the possible application of the MEIP. It indicates all of the questions that should be asked and the methodologies that can be used to calculate the expected return of a hypothetical investor.

But the essence of the MEIP is simple. It asks whether the investment can generate a reasonable profit that covers both the opportunity cost of the investment and the risk it bears? This requires a thorough ex ante analysis.


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

[Picture by Yann Gar from]



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Phedon Nicolaides

Professor at the College of Europe, Bruges, and at the University of Maastricht, and Academic Director at lexxion training

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