... 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...