Exclusive rights, State aid and lottery: a winning ticket worth an extended monopoly? (T-58/13)

In its Judgment in Club Hotel Loutraki and Others v Commission, T-58/13, EU:T:2015:1, the General Court (GC) has confirmed the previous Decision of the European Commission and considered that Greece had not granted illegal State aid to Organismos Prognostikon Agonon Podosfairou AE (OPAP) through the simultaneous extension of its existing exclusive right to operate certain games of chance and the granting of a new exclusive right to exploit 35,000 Video Lottery Terminals (‘VLTs’) for a period of 10 years in Greece. 

The key to the analysis conducted by the Commission and now upheld by the GC is that by overpaying for the extension of the existing exclusive right, OPAP has been able to secure a much larger exclusive right to operate VLTs in Greece. As the GC summarises:

10 As regards, first, the Addendum [which extended the existing exclusive rights for the period 2020-2030], the Commission observed that the study provided by the Greek authorities was based on sales projections elaborated by an independent company specialised in the gambling sector. The net present value of the Addendum was calculated on the basis of those projections, which were considered by the Commission to be reliable.
11 Following that calculation, the Commission found that the amount paid by OPAP in exchange for the Addendum, including the levy imposed by the Greek State corresponding to 5% of the gross gaming revenues generated by the games concerned for the period from 13 October 2020 to 12 October 2030 (see paragraph 4 above), was higher than the net present value of the Addendum.
12 As regards, secondly, the VLT Agreement, the Commission also calculated its net present value on the basis of the study commissioned by the Greek authorities.
13 On the basis of that calculation, the Commission stated that the net present value of the VLT Agreement was significantly higher than the amount of EUR 560 million provided for in the VLT Agreement, which would economically advantage OPAP.
14 However, the Commission stated that it was logical for the conformity of the VLT Agreement and the Addendum with Article 107(1) TFEU to be assessed jointly. In that way, the overpayment by OPAP for the Addendum was taken into account in order to assess the conformity of the VLT Agreement with that article. The Commission stated that the overpayment reduced the gap between the net present value of the VLT Agreement and the amount of EUR 560 million owed by OPAP [...] (T-58/13, paras 10-14, emphasis added).

Even if it is true that the Commission managed to impose an additional payment on VLT revenues to further close the economic gap as an amendment to the State aid scheme, the crucial point remains:

17 [...] Referring to the amendment introduced by the Greek authorities, and taking account of the overpayment for the Addendum, the Commission found, on average, OPAP would pay more than the value of the VLT Agreement.
18 In other words, the Commission took the view that, following the amendments to the initial notification, OPAP would pay the Greek State a higher amount than the cumulated values of the exclusive rights granted by the VLT Agreement and the Addendum (including a reasonable return for OPAP) (T-58/13, paras 17-18, emphasis added).

Hence, as mentioned, the crucial point for the legality of the (conflated) scheme is still the fact that the overpayment for the extension of an existing exclusive right is used to secure the approval of the underpayment in the granting of a new exclusive right. Moreover, the final finding of the European Commission simply makes no sense, as no market agent would pay a higher price for those exclusive rights than their accumulated value, as this would not be a rational investment decision. Consequently, there are many issues that would require some deeper scrutiny.

More importantly, in my view, the general acceptance of the 'cross-overpayment' amounts to allowing dominant undertakings with exclusive rights to buy their way into an extended monopoly (in a rather evident economic leverage) and, consequently, the case should be criticised--and quashed by the Court of Justice upon appeal (if it gets further appealed). Not least because it follows an emerging trend of improper assessment of two-part State aid measures (in favour of former State companies) that I find worrying and potentially dangerous for a credible and effective State aid control regime (see a previous instance here). The reasoning followed by the Commission and the GC, then, deserves some analysis.

Some of the arguments presented by the applicants have (willfully?) not been properly understood, nor analysed by the GC. Amongst other important arguments, the applicants clearly referred to the problem of the extension of the existing exclusive rights by cross-subsidisation in the following terms (in the words of the GC):

79 The applicants claim first of all that the Commission recognised, in paragraph 37 of the contested decision, that the Addendum and the VLT Agreement refer to distinct markets. Nevertheless, the Commission assessed them jointly. The applicants submit that the existence of an advantage for the purpose of Article 107(1) TFEU must be assessed for each market and not on the basis of joint consideration of similar measures concerning different markets, even though the measures examined concern the same recipient. If it were otherwise, the protection of competition would be incomplete because measures constituting an anti-competitive advantage for the purpose of Article 107(1) TFEU in a given market might escape the prohibition laid down in that provision on the basis of a joint assessment. Conversely, measures which grant no economic advantage in a given market might nevertheless be covered by that provision on the basis of a joint assessment with a measure affecting another market. [...]
81 The applicants claim that the VLT and slot machine market cannot be assessed jointly with the 13 games of chance covered by the Addendum since they have no relation to the market of the 13 games of chance on which OPAP has an absolute legal monopoly. By virtue of that monopoly, OPAP could carry out cross-subsidisation practices allowing OPAP to undercut the applicants’ prices on the VLT and slot machine market, by financing that operation by a price increase on the market for the 13 games of chance. However, the joint assessment of the notified measures does not take into account the possibility of such practices (T-58/13, paras 79 and 81, emphasis added).

To be fair, if the arguments were presented in this way (but this seems open to debate), it takes some digging to see that there are two layers of potential cross-subsidy. The first one, which is the one criticised above, is that the overpayment in one leg of the measure (extension of monopoly) secures State aid compatibility of the other leg of the measure (creation of an additional monopoly over VLTs). The second one concerns the operation of the rights in case they had been assigned to different operators, as it would concern a situation in which both OPAP and third parties had been granted licences for the operation of VLTs. The second argument is, in my view, moot or improperly addressed, as it refers to a hypothetical, counterfactual scenario. However, the first argument should have been enough to quash the Commission's Decision. Nonetheless, the GC decided differently.

In its analysis of the fourth plea submitted by the appellants of the Commission's Decision (the other three are basically procedural, so I am skipping them for now), the GC found that:

94 As regards [...] the applicants’ argument relating to subsidisation practices made possible by OPAP’s monopoly over the 13 games of chance covered by the Addendum, it should be noted, first, that it is based on the assumption that OPAP is free to increase prices at will on those 13 games in order to compensate for lower prices on the VLT market. The applicants accordingly submit that OPAP will not sustain competitive pressures in its pricing policy. That argument is not, however, substantiated. In fact, the applicants do not support or demonstrate that the 13 games in question are not subject to competition from other games of chance.
95 Next, the applicants do not explain why the alleged practices of cross-subsidies between the lower prices on the VLT market and the higher prices on the market of the 13 games covered by the Addendum preclude the two notified measures being jointly assessed. Indeed, if such practices were to exist, they would create a link between the VLTs and the 13 games of chance, which instead supports the two measures being jointly assessed.
96 It follows from all the foregoing that the applicants have not demonstrated the existence of an error of law when the Commission carried out a joint assessment of the VLT Agreement and of the Addendum (T-58/13, paras 94-96, emphasis added).

This is troubling because the GC inverts the order of the arguments on cross-subsidisation and dismisses them in the wrong way. Firstly, it is hard to see how the GC can rely on a theoretical competitive pressure on OPAP when the situation is that it holds basically exclusive rights on all relevant games of chance in Greece. Secondly, it is unacceptable that the GC buys a justification for the joint analysis of the measures precisely because OPAP engages in cross-subsidisation. If this is not a clear deductive fallacy, there is none. Overall, then, the arguments of the GC are disappointingly thin, or simply incongruous.  Consequently, for all the above, I hope the CJEU will receive better economic advice and will reverse the Hotel Loutraki Judgment. Otherwise, the game will be over for the analysis of two-part or leveraged instances of clear State aid.

... and Cut! Lights Out for the €274mn Spanish "Ciudad de la Luz" Film Studios (T-319/12)

In its Judgment of 3 July 2014 in Spain v Commission (Ciudad de la Luz), joined cases T-319/12 and T-321/12, EU:T:2014:604 (not available in English), the General Court (GC) reviewed Commission's Decision (2012) 3025 final and assessed the compatibility of a Spanish support scheme for the development of the Ciudad de la Luz film studios (a project initially promoted by the late Luis Garcia Berlanga) with the rules on State aid in Articles 107-109 TFEU.

The GC found the aid to be incompatible with the internal market and confirmed the obligation of the Valencia Regional Government to divest its €274mn stake in the film studios, where it originally invested in 2000. The Judgment raises some interesting points on the application of the market investor test to the development of this sort of culture-related facilities.

 

Firstly, at paras 38 to 45, the GC rejects any obligation of the European Commission to take into consideration average returns in a given sector, particularly where they are affected by a lack of data or there are concerns about their reliability. The GC clarifies, following the Judgment in Westdeutsche Landesbank Girozentrale v Commission [joined cases T-228/99 and T-233/99, EU:T:2003:57] that the average return is one amongst many factors that the Commission may take into account when assessing the likelihood that a private investor would undertake a given publicly-sponsored project. 

 

Nonetheless, the Commission is not bound to use it and, in any case, its assessments could not be limited to such an average return analysis. Indeed, the "utilization of the average rate of return in the sector concerned does not relieve the Commission of the obligation to make a complete analysis of all relevant elements of the transaction and its context, including the situation of the company and the market, in trying to check whether the recipient undertaking has benefitted from an economic advantage which it would not have obtained under normal market conditions" (para 45, own translation from Spanish).

 

Secondly, at paras 48 to 50, the GC grants very low probative value to the existence of independent consulting studies and viability plans commissioned by the public authority prior to its investment. The GC acknowledges that the existence of independent reports may serve as an indication of the public investment having been made in comparable terms to those of a private transaction.

However, the GC also clarifies that the "jurisprudence does not in any way support that the existence of such reports is in itself sufficient to consider that the beneficiary of that measure has not benefited from an economic advantage within the meaning of Article 107, paragraph 1 (...) the Member State concerned can not rely on the findings of reports of independent consultancy firms without offering itself an adequate response to the issues that a prudent investor would have considered in the context of the case" (para 50, own translation from Spanish, emphasis added).

 

Thirdly, the GC clearly upholds the method followed by the European Commission to estimate the cost of capital and the expected internal rate of return. Strikingly, although maybe not suprising for a country and a region that undertook too many loss-making infrastructure projects in the last decade (shamefully, for instance, the Castellon Airport), the Commission rightly found that "the net present value was negative for any cost of capital of between 5% and 6%. For all costs of capital higher than 10%, the net present value was sharply negative and relatively stable. In view of the results [and the information available to the public authority], according to which the cost of capital was of 16.66% in 2000 and 14.9% in 2004, it could have effectively concluded with a high degree of certainty that the project was not profitable" (para 61, own translation from Spanish).

 

Fourthly and  in a rather colourful way, in paras 87 to 95, the GC engages in an assessment of the economic data included in the works of a Spanish university professor [not named by the GC, but the works are those of P Fernandez, and mainly its paper: The Equity Premium in 150 Textbooks (Date posted: September 14, 2009; Last revised: November 26, 2013)]. In my view, the detailed discussion that the GC entertains about the use of those equity premium estimates is an example of the degree of financial sofistication that the Court can reach--but, equally, of the possible excess in the detail of the review, if compared with the literal tenor of Art 263(2) TFEU.

 

Fifthly, the GC also engages in a largely useless exercise concerned with the incorporation or not of additional sources of revenue in the Commission's assessments. In its Decision, the Commission had only taken into account the revenue from film making activities. Spanish authorities wanted to add the expected revenue from hotel and commercial exploitation of the premises. The GC, in paras 125 to 139, sorts out the issue in a Solomonic way. First, it finds that the Commission should have incorporated the additional revenue in its assessment. However, it then rejects the arguments of the appellants on the basis that, even with those additional revenues, the project would not have been viable.

 

In my view, the important factual point to stress is that the public call for developers launched by the Spanish region in 2005 was deserted and the developments never took place (para 135). If listening to the market is of any value, it seems that the Commission made the right call by not including the expected additional revenue.

Anyway, the case law is now more open to the inclusion of alternative sources of revenue in the public investment in complex infrastructure projects as a result of the Ciudad de la Luz Judgment.

 

Finally, in paras 152 to 159, the GC assesses the requirements applicable to private investments and their continuity in order to make the infrastructure project that receives public finance susceptible of a declaration of compatibility under the applicable block exemption regulations. In short, the GC takes a pragmatic approach and clearly determines that an initial investment of 25% of the equity that, due to subsequent increases in capital in which the private investor does not participate, is reduced to around 1.6% in under a year falls short from the requirement of substantial private investment in the project (paras 155-156). In my view, this is a strong point in the Judgment and definitely one oriented to prevent circumvention strategies such as the one clearly seen in the Ciudad de la Luz case.

 

All in all, the case is interesting (or depressing...) if one reads it from the perspective of the massive legal and financial arguments that can be created to cover a simple and worrying truth: that certain infrastructure projects are anti-economical and a brutal waste of public resources, probably only driven by politicans' interests. In that regard, the insights of the study by Flyvbjerg, Garbuio and Lovallo "Delusion and Deception in Large Infrastructure Projects: Two Models for Explaining and Preventing Executive Disaster" (2009) California Management Review 51(2): 170-193 will be worth re-reading (over and over). Now, in the short-term, the difficulty will be in trying to find a private buyer for such inviable film studios...