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23.3.2013 Official
Journal
of
the
European
Union
L
85/1
II
(Non-legislative acts)
DECISIONS
COMMISSION DECISION
of 8 May 2012
on State aid SA.22668 (C 8/08 (ex NN 4/08))
(notified under document C(2012) 3025)
(Only the Spanish text is authentic)
(Text with EEA relevance)
(2013/126/EU)
THE EUROPEAN COMMISSION,
(4) On
30
April
2007,
Complainant
A
provided
links
to
articles published in Variety allegedly setting out the
production subsidies offered for filming in Valencia and
Having regard to the Treaty on the Functioning of the European
confirming that Ciudad de la Luz was attracting large
Union, and in particular the first subparagraph of Article 108(2)
budget film productions ( 3 ).
thereof,
Having regard to the Agreement on the European Economic
(5) The
Commission
requested
additional
information
from
Area, and in particular Article 62(1)(a) thereof,
the Spanish authorities on 13 July 2007. After requesting
an extension of deadline on 18 July 2007 (granted on
Having called on interested parties to submit their comments
19 July), the Spanish authorities replied to the Commis
pursuant to the provisions cited above (
sion’s request for information on 8 October 2007.

1 ) and having regard to
their comments,
(6) On
15
July
2007,
the
Commission
received
a
complaint
Whereas:
from Complainant B ( 4 ). After having obtained the
agreement of the complainant, the Commission
I. PROCEDURE
forwarded its complaint to the Spanish authorities on
2 August 2007.
(1) On
22
February
2007,
the
Commission
received
a
State
aid complaint from Complainant A
( 2 ) concerning
support allegedly given by the Region of Valencia to
(7) By
letter
dated
13
February
2008,
the
Commission
the Ciudad de la Luz film studios. Complainant A
informed the Spanish authorities that it had decided to
confirmed on 15 March 2007 that its complaint could
initiate the procedure laid down in Article 108(2) of the
be forwarded to the Spanish authorities.
Treaty on the Functioning of the European Union in
respect of the aid. Spain replied to this on 28 April
(2)
On 10 April 2007, the Commission forwarded the full
2008.
complaint to the Spanish authorities, requesting
information about the alleged aid. The Commission had
not previously been notified of any film support
(8) The
Commission
decision
to
initiate
the
procedure
was
measures in Valencia for State aid approval.
published in the Official Journal of the European Union ( 5 ).
The Commission invited interested parties to submit their
(3) After
requesting
an
extension
of
deadline
on
18
April
comments on the aid.
2007 (granted on 24 April), the Spanish authorities
replied to the Commission’s request for information on
( 3 ) ‘New Valencia studio offers film rebates’ http://www.variety.com/
15 June 2007.
article/VR1117958591.html?categoryid=19&cs=1; ‘Polanski’s
Pompeii takes shape’ http://www.variety.com/article/
VR1117963040?refcatid=19&printerfriendly=true
( 1 ) OJ C 134, 31.5.2008, p. 21.
( 4 ) Complainant B is a major player in the European film sector. It too
( 2 ) Complainant A is a major European film studio. It has asked that its
has asked that its identity is not made public.
identity is not made public.
( 5 ) See footnote 1.

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L 85/2
EN
Official Journal of the European Union
23.3.2013
(9) The
Commission
received
comments
from
interested (17) In November 2001, the share capital was increased to
parties, and forwarded them to Spain on 3 October
EUR 9 million, with SPTCV purchasing all the additional
2008. The Spanish authorities’ comments were received
shares, taking its holding to 98,4 %. SPTCV increased its
on 21 November 2008 and on 29 December 2008.
holding further in February 2003 and May 2004 through
similar purchases of new share capital. Producciones
Aguamarga sold its 0,2 % share of Ciudad de la Luz
SA ( 6 ) to SPTCV in July 2004 (for EUR 139 059).
(10) After a meeting between the Commission and the
Since then, the Valencia Regional Government has held
Spanish authorities on 11 February 2009, Spain
100 % of the share capital of Ciudad de la Luz SAU via
provided additional information on 30 March 2009.
SPTCV. Since that time, Ciudad de la Luz SAU has been a
public undertaking entirely owned by SPTCV and subject
to public law as to tendering and financial supervision.
However, Producciones Aguamarga continued to manage
(11) The
Commission
sent
a
further
request
for
information
Ciudad de la Luz.
to Spain on 26 August 2009 to which the Spanish auth
orities replied on 20 October 2009, providing additional
information on 1 February 2010.
(18) The
film
studio
complex
opened
for
filming
in
August
2005. Designed to accommodate the largest film produc
(12) The
Commission
sent
a
further
request
for
information
tions, construction began in 2002 and has been divided
to Spain on 24 May 2011, informing Spain of the
into three phases:
appointment of an independent economic consultant,
Ecorys. Spain replied on 7 June 2011. The Commission
replied to Spain on 22 July 2011.
— Phase 1 (completed): 6 air-conditioned sound stages
with a combined area of 11 000 m 2 , production
(13) The Commission sent Spain its final request for
support buildings, 15 050 m 2 of workshops/storage,
information, including the report from Ecorys, on
and 2 external filming areas (back lots) of a total of
1 August 2011. Spain provided its comments on the
14 hectares.
Ecorys report on 3 October 2011. Spain provided
further data on the public investment in Ciudad de la
Luz SAU on 11 April 2012.
— Phase 2 (completed after the formal investigation
opened): catering facilities, an administrative
II. DETAILED DESCRIPTION
building, a post-production laboratory and a third
external filming area (back lot) of 5 hectares with
(14) Ciudad de la Luz is a major film studio complex just
an aquatic filming tank.
outside Alicante (Valencia). The Valencia Regional
Government (Generalitat Valenciana) took its initial
decision to invest in the Ciudad de la Luz project on
24 October 2000.
— Phase 2B (work not started): a large, deep natural-
horizon water tank.
(15) Ciudad
de
la
Luz
SA
was
incorporated
on
2
November
2000. Its objective was to carry out the necessary
activities for the promotion, organisation and
— Phase 3 (work not started) a 5 000 m
management of the ‘Ciudad de la Luz’ site, including

2 sound stage
(intended to be the world’s largest), another back lot
the construction, management and operation of audio
and 4 TV studios.
visual and cinematographic facilities, as well as other

related leisure and accommodation activities.
(19) The
studio complex
also houses
a university
school
(16) 75
% of the
original
EUR 600
000 share
capital
of
dedicated to audiovisual production (cinema, TV, radio,
Ciudad de la Luz SA was owned by Parque Temático
internet) which offers master’s degrees covering all
de Alicante SAU, which later became Sociedad
aspects of production (artistic, technical marketing,
Proyectos Temáticos de la Comunidad Valenciana SAU
communication). The initial plans in 2000 included
(SPTCV). SPTCV is a public entity which carries out
other additional investments in adjacent malls, hotels
investment activities on behalf of the Valencia Regional
and a sports complex which were to generate positive
Government. The remaining 25 % belonged to Produc
ciones Aguamarga SL, a private company which was
responsible for the remaining construction work, for
( 6 ) With the capital transfer of 7 October 2004, Ciudad de la Luz SA
became Ciudad de la Luz SAU, a company with a single shareholder
promoting Ciudad de la Luz and for managing the
(sociedad anónima unipersonal) with all of its share capital owned
studios.
by SPTCV.

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EN
23.3.2013 Official
Journal
of
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European
Union
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cash inflows for the project, but which have not been
informed the Commission was carried out in 2002.
developed to date. Although the necessary land was
However, after the opening decision, Spain subsequently
provided by the Generalitat in 2004 and invitations to
informed the Commission that this study had been
tender for operation of these businesses under concession
carried out in 2004.
were launched in 2005, the bids were not attractive
enough and the additional investments have not been
followed up.
(24) The
conclusions
of
the
2000
business
plan
developed
by
Arthur Andersen ( 12 ) were positive, including its profit
(20) Certain
aspects
of
the
‘state-of-the-art’
facilities
at
Ciudad
ability prospects in the medium to long term. The
de la Luz put it well ahead of the limited number of
positive cash flows of the film studio project were docu
competing major film studios in Europe in terms of
mented for a five-year period (2002-2006) after
capacity for large-budget films. For instance, the
completion of the construction of the studio buildings,
5 000 m
a conference hall and school for film and television tech

2 sound stage in the original plans for Ciudad
de la Luz would have been the largest in the world (
niques.

7 ).
The Commission notes that large sound stages are only
of interest to major film productions.
(25) The cost of construction of these phases was estimated to
be 16,9 billion pesetas (EUR 101,7 million). The land
(21) Until
recently,
the
studio
was
managed
by
Aguamarga
cost was not included and the business plan indicated
Gestión de Estudios SL, which acted as agent for the
that the costings could vary by +/– 30 %. Subsequent
film studio in return for remuneration on the basis of
phases to complete the project were not costed.
a multi-annual management contract with the share
holder.
(26) On
the
basis
of
this
business
plan,
between
2000
and
Public investments by SPTCV and business plans of
2004, SPTCV carried out or committed investments in
Ciudad de la Luz
Ciudad de la Luz through share capital increases and land
totalling EUR 104 259 759. See details in recital 53.
(22) Prior to the start of the construction works, in 1999-
2000, the feasibility, scope and strategic guidelines of the
development of Ciudad de la Luz were analysed by third
party consultants in four studies submitted by Spain in
the course of the formal investigation procedure.
(27) Since the construction took two years more than
expected and the investment schedule was modified to
be increased significantly, in 2004 Ciudad de la
Luz/SPTCV commissioned a new study and business
(23) These
studies explored the growth prospects of the
plan from Consultia ( 13 ). The Consultia study also
number of film productions ( 8 ), compared alternative
concluded positively on the profitability of the project,
locations in the Region of Valencia for the construction
with a business plan for the period 2004-2014 showing
of film studios ( 9 ) and provided a preliminary analysis ( 10 )
a positive return for the investment by SPTCV until 2014
and business plan ( 11 ) for a film studio complex. They
and in the longer term.
had not been submitted by the Spanish authorities before
the Commission’s decision to open a formal State aid
investigation concerning the project. The data in the
opening decision of 22 February 2008 were from a
study (by Consultia) which the Spanish authorities had
(28) The
share
of
Ciudad
de
la
Luz
SA
held
by
Producciones
Aguamarga SL was bought out by SPTCV in July 2004
( 7 ) Source: Hollywood Reporter article ‘Let there be light’ — 31 October,
for EUR 139
059. Unlike SPTCV, Producciones
2006: http://www.hollywoodreporter.com/news/let-be-light-141371
Aguamarga SL had made no further investment in
( 8 ) Annex I to reply from Spain of 28 April 2008: ‘La Industria
Ciudad de la Luz SA after its initial EUR 150 000
Audiovisual: Continuo crecimiento’ (Estudios e Investigationes Audio
investment in November 2000. So the share of Ciudad
visuales — January 1999).
de la Luz SA held by Producciones Aguamarga SL had
( 9 ) Annex IV to reply from Spain of 28 April 2008: ‘Estudio de Alter
nativas de Ubicación de un Centro de Producción Audiovisual de
fallen to 0,2 % by the time this was acquired by SPTCV.
Alta Tecnología en la Comunidad Valenciana — Executive
After this transaction, the company became wholly
Summary’ (PriceWaterhouseCoopers — 30 January 2000).
publicly-owned and hence became Ciudad de la Luz
( 10 ) Annex II to reply from Spain of 28 April 2008: ‘Ciudad Audio
SAU.
visual de la Comunidad Valenciana — Análisis Preliminar de la
Viabilidad del Proyecto’ (Arthur Andersen — undated).
( 11 ) Annex III to reply from Spain of 28 April 2008: ‘Plan de negocio y
( 12 ) See footnote 10.
viabilidad de la ciudad audiovisual de la Comunidad Valenciana’
( 13 ) Annex VI to reply from Spain of 28 April 2008: ‘Líneas Estratégicas
(Arthur Andersen — undated).
y Plan de Negocio 2004-2014’ (Consultia IT — 7 May 2004).

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(29) On
the
basis
of
the
modified
work
schedule
and
business
are EU co-productions (Greece, France). Apart from occa
plan, SPTCV, as sole shareholder, granted two partici
sional highlights provided by major European co-
pating loans of EUR 95 million in 2005 and EUR
productions such as Asterix at the Olympic Games and
20 million in 2007. The accounts of Ciudad de la Luz
most recently a US-Spanish coproduction, in practice
SAU to 31 December 2010, provided by the Spanish
the films shot at Ciudad de la Luz since it opened in
authorities in April 2012, show that SPTCV went on
August 2005 have been mainly Spanish national produc
to invest a total of EUR 45 829 840 in convertible
tions.
loan stock between 2008 and 2010. These accounts
also show that SPTCV was owed interest on the 2005
and 2009 participating loans totalling EUR 7 222 160
for 2009 and 2010, In addition, EUR 1 814 187 of
unpaid interest on the convertible loan stock had
accumulated by 31 December 2010. Therefore, the
investment of public funds by SPTCV in Ciudad de la
(34) Despite
the
prospects
shown
by
the
2004
business
plan
Luz, including the interest pending on the loans
setting 2010 as the first year of (modest) positive
provided, totalled EUR 274 125 946 by the end of 2010.
operating results, the commercial operation of Ciudad
de la Luz has been loss-making to date. Ciudad de la
Luz had cumulative losses of EUR 84 million by the
end of 2010, compared to the cumulative profits of
EUR 12 million by the same date forecast by the 2004
Commercial strategy and business results of Ciudad
business plan. In comparison to the studios mentioned
de la Luz
above, Ciudad de la Luz has failed to attract the planned
amount of non-Spanish productions so far and, even for
(30) In
the
2000
business
plan,
Ciudad
de
la
Luz
was
aiming
Spanish demand, the results are below expectations.
to become the studio complex with the second largest
Operating losses are also bigger than expected.
capacity in Europe (after Pinewood) and to attract
Spanish productions (cinema, TV and commercials)
supplemented with a target of sixteen foreign (EU and
US) film productions per year. The 2004 revised business
plan considered that one of the strategic objectives of
Ciudad de la Luz should be to make large film and TV
productions its main clients.
Grounds for initiating the procedure
(35) The
Commission’s
investigation
was
prompted
in
2007
by a complaint from Complainant A, as well as a
subsequent complaint from Complainant B, both of
(31) The
2004
business
plan
regarded
the
main
international
which are prominent players in the film sector in
competitors of Ciudad de la Luz to be large studios
different Member States. The complaints alleged illegal
outside the US, particularly those which have similar
State aid in the public funding of Ciudad de la Luz
characteristics to Ciudad de la Luz, namely Pinewood-
and, especially, in the system of film-specific incentives
Shepperton (UK), Cinecitta (Italy), Barrandov (Czech
put in place by Ciudad de la Luz.
Republic), Babelsberg (Germany), Cinecite Montreal &
Lions Gate (Canada) and Warner Roadshow & Fox (Aus
tralia).
(36) As noted above, at the time the Commission opened the
(32) In the initial 2000 business plan, the planned tariffs for
formal investigation procedure in February 2008, the
studio services (e.g. back lot rental, workshop) were
only basis for the investment decision that had been
envisaged within a range of the tariffs applied by
provided by the Spanish authorities was the Consultia
comparable studios in the EU (i.e. Shepperton and
business plan, purportedly carried out in 2002. After a
Elstree in the UK, Babelsberg in Germany). The 2004
preliminary assessment, the Commission had serious
revised business plan also presents a strategic pricing
doubts that a market investor would have invested on
model with reference to the tariffs applied by studios
the same terms and on the same scale as the Valencia
with international reputation, roughly 15-20 % cheaper
Regional Government.
than established leaders (USA and Pinewood UK) but
50 %-100 % more expensive than EU studios (Barrandov
in the Czech Republic and Babelsberg in Germany).
(37) As to the possible compatibility of the aid, the
(33) In practice, the national and international targets of the
Commission had no information enabling it to verify
business strategy of Ciudad de la Luz have not materi
whether the conditions of the Regional Aid Guidelines
alised. Out of 33 films shot in Ciudad de la Luz between
applicable to the Region of Valencia at the time (2000-
2005 and 2009, 28 are Spanish productions and only 5
2004) were met. The Commission also doubted that the

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European
Union
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cultural exception referred to in Article 107(3)(d) of the
is likely to be high, which makes profit difficult to
Treaty could be applied, since Ciudad de la Luz was not
forecast. Further uncertainty is introduced by factors
promoting culture or heritage conservation, could be
such as the cyclical nature of the film production sector.’
used for all sorts of audiovisual works, including
commercials, and was competing with other operators
to attract commercial productions.
(42) According to Complainant A, a weighted average cost of
capital (WACC) of about 15 % might be appropriate for
(38) The
Commission
also
noted
possible
State
aid
in
the
an established studio business, although ‘the return
incentive system for shooting at Ciudad de la Luz and
expected by [Complainant A’s] private equity investors
identified the relevant film producers as beneficiaries. The
was higher than that’. A start-up studio business would
film-specific incentives were targeting specific activities in
be viewed by a private investor as ‘a medium to high risk
a specific location on the basis of unknown criteria and
venture and would therefore expect materially higher
thus appeared not to meet the rules laid down in the
returns from its investment (albeit that some lead time
Commission’s ‘Cinema Communication’.
to profitability would be tolerated). Given that there is
usually limited (if any) capacity for start-ups to borrow
from conventional sources, the WACC for a start-up
business is generally increased by both the higher
equity returns that are required and the lack of lower
cost debt.’
III. COMMENTS FROM INTERESTED PARTIES
(39) The
Commission
received
comments
from
ten
interested
parties in total. Four of these are active in the exploi
tation of film studio business in Member States other
than Spain (Complainant A, Complainant B, Barrandov
Studio and Mediterranean Film Studios Limited); five are
(43) As
to
the
final
disposal
value
of
Ciudad
de
la
Luz
active in the Spanish film sector (the Federación de
indicated in the opening decision, Complainant A
Asociaciones de Productores Audiovisuales Espaoles –
considers it unrealistic. It also claims that a private
FAPAE, the Associacio de directors de cinema valencians,
investor would generally find it unusual for a multiple
the Empreses audiovisuals valencianes federades — EAVf,
of earnings before interest and tax of more than 12-15
the association Productors audiovisuals valencians and
to be a good proxy for valuation.
the Sociedad Proyectos Tematicos de la Comunidad
Valenciana — SPTCV SAU); and one was a national
film funding and policy body (UK Film Council).
(44) Finally, as to the incentives granted to attract produc
tions, Complainant A alleged that they appear to have
effectively subsidised the cost to film production
Observations by active film studios
companies of bringing in qualified technical and
support staff, which are allegedly lacking in the
(40) In its confidential submission of 25 June 2008,
Valencia region. Complainant A considers that the
Complainant B expresses its concerns about the aid
incentives have a serious adverse effect on competition
through which Ciudad de la Luz developed and
as the studios would have found it more difficult to
operates at present. It claims that the measures taken
attract film productions without such incentives.
by the Commission in opening the procedure are
essential for its company and the sector.
(45) In
their
initial
submission
of
25
June
2008,
Barrandov
(41) In
its confidential submission dated 30 June 2008,
Studio stressed that the alleged aid distorts the relevant
Complainant A confines its comments on the in-depth
market and disadvantages other competitors and
investigation to four issues: (i) the costs of financing the
requested an additional time period to submit further
studios, (ii) the approach to financing a ‘start-up busi
comments, given the complexity of the case. Those
ness’, (iii) the final disposal valuation and (iv) the other
comments reached the Commission on 15 September
incentives granted by Ciudad de la Luz. In its view, ‘a
2008. Barrandov Studio subscribe to the grounds of
private investor would regard even an established and
the complaint alleged by Complainant A and stress that
profit-making studio business as at least a medium risk
the size and number of sound stages indicate that Ciudad
investment …. This is based on the fact that, although a
de la Luz is focused on high budget US films rather than
studio business is asset backed …, its operational gearing
on Spanish ones. The low density of film professionals

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and infrastructure in Alicante compared to Madrid or
particular, Ciudad de la Luz allegedly provides the
Barcelona does not indicate a logical choice of location.
Spanish production industry with sophisticated and
In terms of strategy, an investor in the studio business
state-of-the-art services in Spain which would otherwise
would split their clientele into local clients providing
need to be obtained abroad at higher cost. Against the
stable income and foreign clients focused on large
allegation that Ciudad de la Luz targets super-produc
foreign productions. Ciudad de la Luz adopts the
tions, the FAPAE alleges that Ciudad de la Luz greatly
opposite strategy, based on the provision of studio
benefits low-budget Spanish productions and focuses on
services at extremely low prices which disregard the
national or local culture, thereby contributing to cultural
establishment costs. Moreover, given the uncertainty
objectives set out in the former Article 87(3)(d) (now
caused by the difficulty of forecasting revenues beyond
Article 107(3)(d)). The observations dated 21 May
3-5 years in the industry, a private investor would have
2008 of the Empreses audiovisuals valencianes
requested a much faster return. In Barrandov’s opinion,
federades (EAVf) and those dated 16 May 2008 of the
this assertion is corroborated by a confidential business
association of Productors audiovisuals valencians largely
plan illustrating its recent investment in new studios,
echo, sometimes verbatim, the comments of FAPAE.
which was undertaken on the assumption of having
net earnings from the second year of operation and a
pay-back period of less than 8 years. Nor does Barrandov
see any rational explanation for the amount of profits
(EUR 341 million) expected by the Spanish Authorities
by 2014.
(48) In
their
comments
of
5
June
2008,
the
Associaciò
de
directors de cinema valencians stresses that the
dominance of the US cinema industry marginalises
European productions through a variety of allegedly
abusive practices. In their view, corrective measures are
necessary for European cultural creations to compete on
a level playing field. This association alleges that the
(46) In
its
submission
of
27
June
2008,
Mediterranean
Film
public intervention in Ciudad de la Luz is fully instru
Studios Limited confines its comments to the water tanks
mental in that respect, to the benefit of European,
that Ciudad de la Luz announced. They claim that their
Spanish and Valencian production and with a view to
own water tanks are unique in Europe and comparable
defending their cultural identities.
only to those of Fox in Baja California (Mexico). Given
the low occupancy rate per year of their tanks, they
allege that in their view and the industry consensus
view, there is already enough capacity in the Mediter
ranean area or in Europe for filming water tanks.
(49) The
observations
of
Sociedad
Proyectos
Temáticos
de
la
Comunidad Valenciana SAU (the 100 % owner of Ciudad
de la Luz SAU, itself owned by the Comunidad
Valenciana) dated 23 June 2008, in essence reproduce
the same subsidiary arguments and rely on the
evidence adduced by Spain. Some aspects on which
Observations by parties active in the Spanish film
their observations place particular emphasis are the
sector
following. Firstly, the fact that a private investor partly
funded the project at its inception in 2000 based on the
(47) In
its
comments
dated
30
June
2008,
the
Federacion
de
studies available shows that the investment by public
asociaciones de productores audiovisuales espanoles
authorities followed the logic of a private investor.
(FAPAE) considers that Ciudad de la Luz has introduced
Both studies in 2000 and 2004 concluded without any
more competition in the market for big production
reservation that the project was profitable. Secondly, the
facilities and that the complainants simply wish to
incentives provided to specific films are commercially
maintain their market position and bar the entry of
justified for a new business and granted as a ‘sponsoring
competitors which propose credible alternative service
contract’ in exchange for promotion activities which
and price-wise to their studios which dominate the
generate a return on the reputation of the studios
European market. The FAPAE also claims that studios
whilst triggering advertising costs for the recipients. A
such as Barrandov, Cinecittà, Babelsberg or Mafilms
study carried out in this respect estimates the economic
have built up their market position and reputation
return of sponsoring contracts for Ciudad de la Luz to be
around public support in different forms, including
to EUR […] (*) million.
public participation in share capital. More generally, the
FAPAE stresses that the maintenance of cultural diversity
(*) Data omitted on grounds of confidentiality has been replaced by
justifies strong public intervention in the industry. In
[…].

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Observations by national film funding bodies
and not in 2002, as the Spanish authorities had
previously informed the Commission.
(50) The
UK
Film
Council
asserts
in
its
letter
of
25
June
2008
that there is a case to answer in the decision opening the
formal investigation procedure.
(52) By the time of the 2004 study, more than EUR
90 million had already been invested in the project.
Consequently, the Spanish authorities claim that two
investment decisions were taken: one in 2000 for the
IV. COMMENTS FROM SPAIN
first phase of the project and one in 2004 for the
planned extension.
(51) After the formal investigation was opened, the Spanish
authorities revealed that the initial investment decision
was based on a business plan prepared in 2000, and
(53) The timetable for investments in the Ciudad de la Luz, as
not on the one which they had submitted previously.
last updated by the Spanish authorities in April 2012,
This business plan was in a study carried out in 2004,
was as follows:
Date Description
Public investment
(in EUR)
24.10.2000 Valencia
Region
decides
to
develop
Ciudad
de
la
Luz
—
2.11.2000 Ciudad
de
la
Luz
SA
is
created
(75
%
owned
by
Parque
Temático
de
450 000
Alicante SAU, 25 % owned by Producciones Aguamarga SL)
[75 % of 600 000]
21.11.2001 Parque
Temático
de
Alicante
SAU
invests
unilaterally
for
a
capital
9 000 000
increase of EUR 9 million in Ciudad de la Luz SA (increasing its
share to 98,4 %)
6.2.2003 Proyectos
Temáticos
de
la
Comunidad
Valenciana
SAU
( 1 ) invests 30 000 000
unilaterally in a capital increase of EUR 30 million in Ciudad de
la Luz SA (increasing its share to 99,6 %)
4.5.2004 Proyectos
Temáticos
de
la
Comunidad
Valenciana
SAU
invests
54 870 660
unilaterally in a capital increase of EUR 54 870 660 in Ciudad de
la Luz SA (increasing its share to 99,8 %)
23.7.2004 Proyectos
Temáticos
de
la
Comunidad
Valenciana
SAU
acquires
the
139 059
0,2 % share of Ciudad de la Luz SA owned by Producciones
Aguamarga SL (with a nominal value of EUR 150 000) for EUR
139 059 (increasing its share in Ciudad de la Luz SA to 100 %)
9.3.2005 Proyectos
Temáticos
de
la
Comunidad
Valenciana
SAU
ceded
the
9 800 040
land on which the studios were built to Ciudad de la Luz SA,
thereby increasing its equity by EUR 9 800 040 (even though the
land had been valued at EUR 1 030 856 in the accounts of
Proyectos Temáticos de la Comunidad Valenciana SAU). Before
this date, the project had already received permission from the
Valencian Government to build the studios on the site.
Summer 2005 Ciudad
de
la
Luz
SA
starts
its
activities
as
a
film
studio
—
28.4.2005 Participating
loan
of
EUR
95
million 95
000
000
26.12.2007 Participating
loan
of
EUR
20
million 20
000
000
30.6.2008
Convertible loan stock issued with an option to convert the loan to 10 000 000
shares before 31 December 2008

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L 85/8
EN
Official Journal of the European Union
23.3.2013
Date Description
Public investment
(in EUR)
2.1.2009
Convertible loan stock issued with an option to convert the loan to 10 000 000
shares before 30 June 2009.
17.3.2009 Convertible
loan
stock
authorised
up
to
EUR
30
million
with
an
25 829 840
option to convert the loan to shares before 30 December 2009.
31.12.2010
Unpaid interest on participative loans in 2009 & 2010 7
222
160
31.12.2010
Unpaid interest on unconverted loans in 2009 and 2010 1
814
187
Total
274 125 946
( 1 ) Previously known as Sociedad Parque Temático de Alicante, SAU.
(54) The Spanish authorities focused their responses on
additional conditions introduced later in the 2002 Multi-
attempting to demonstrate that the investment is not
sectoral framework for large investment projects with
State aid as a market investor would have invested in
less than 25 % market share and 5 % capacity increase
the project on the same terms and conditions (applying
on the market would also be met.
the market economy investor principle). They have
provided reports from economic consultancy LECG to
support this.
(58) Spain
provided
a
second
LECG
report
which
criticised
the
analysis of the 2004 business plan by the Commission
services. LECG criticised the analysis of the Commission
(55) Even
if
the
Commission
considered
that
at
least
part
of
the investment was State aid, Spain alleged that all the
services and provided alternative values for the data and
films shot in Ciudad de la Luz met the cultural criteria of
risk factors, as well as providing retrospective valuations
the Valencia film incentives, which were approved by the
of the land on which Ciudad de la Luz was constructed.
Commission in April 2008, December 2008 and July
2009 ( 14 ). According to Spain, the cultural exception
provided in Article 107(3)(d) TFEU can be applied to
investment aid upstream or downstream of the
production of films.
(59) A
second
economic
analysis
by
the
Commission
services
examined the 2000 business plan and the retrospective
land valuations provided by Spain. In addition, an inde
pendent economic assessment of the market economy
investor principle test was carried out by an independent
(56) Spain
also
notes
that
any
aid
contained
in
the
public
consultancy at the request of the Commission. The inde
funding of Ciudad de la Luz and in the incentives
pendent report was sent to the Spanish authorities on
offered to films should be viewed in the perspective of
30 September 2011.
the distorting effects of national film support schemes
approved by the Commission in other Member States
which attract major film productions to competitors of
Ciudad de la Luz ( 15 ).
(60) The
Spanish
authorities
reiterated
their
view,
as
in
their
observations to the opening decision, that the profit
ability prospects of Ciudad de la Luz should be bench
marked against its main EU competitors in the film
(57) Spain
also
contends
that
the
Regional
aid
guidelines
applicable at the time (1998) would have allowed an
studio business (e.g. Babelsberg, Pinewood) and not, as
aid intensity of 36 % for the investment project. The
Ecorys ( 16 ) does, with diversified US audiovisual conglom
erates (Time Warner, Disney) ( 17 ). The Spanish authorities
maintain that this benchmarking should be based on
( 14 ) State aid decisions N379/07 (2.4.2008), N309/08 (15.12.2008) and
publicly available information (e.g. Bloomberg) from the
N108/09 (30.7.2009).
( 15 ) The national subsidy can be as high as 24 % of the production
costs in the UK and 20 % in Germany. The subsidy race between
( 16 ) The economic consultancy Ecorys prepared an independent study
national film support schemes to attract inward investment from
on this case. See in detail section V.
major film productions is being addressed by the Commission in its
( 17 ) However, Ecorys also includes the European studios Babelsberg in
review of the Cinema Communication.
the benchmarking, aggregated to the other worldwide companies.

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EN
23.3.2013 Official
Journal
of
the
European
Union
L
85/9
time of their investment decision (i.e. 2000 and 2004,
(64) The
fact
that
the
only
available
private
investor
had
only
not 2008). Finally, they also claim that a number of
committed a marginal amount while withdrawing at the
misunderstandings or technical flaws invalidate the
moment where the bulk of the investment had to be
conclusions of the Ecorys study ( 18 ). The Spanish auth
committed may be considered as prima facie evidence
orities claimed that, if these were corrected and the
that a private investor would not have carried out such
appropriate benchmarking with competitors carried out,
a project under the conditions available at the time.
the profitability of the prospects of the investment
Furthermore, the situation of this private investor was
decision based on the evidence available at the time
very specific (and therefore not in line with the market
would meet the requirements of the MEIP test.
investor considered by case law), since it was also
responsible for initiating the project, for overseeing the
construction work and for managing and promoting the
studios in return for a management fee. This means that
its initial investment could be rational for other reasons
V.
than its mere profitability, when considered in isolation.
ASSESSMENT OF THE AID
(61) According to Article 107(1) of the TFEU, ‘any aid granted
by a Member State or through State resources in any
form whatsoever which distorts or threatens to distort
competition by favouring certain undertakings or the
production of certain goods shall, in so far as it affects
(65) In the absence of any private shareholder, the regional
trade between Member States, be incompatible with the
authority based its investment decision on the results of
internal market’. It follows that in order to be qualified as
the consultancy studies. However, the mere existence of
State aid, the following cumulative conditions have to be
such studies is not sufficient for fulfilling the MEIP test.
met: (1) the measure has to be granted out of State
Before committing funds on the scale invested into
resources, (2) it has to confer an economic advantage
Ciudad de la Luz, one would expect a private investor
to undertakings, (3) the advantage has to be selective
to examine thoroughly the business plan and the
and distort or threaten to distort competition, (4) the
assumptions on which such studies are based. A private
measure has to affect intra-Community trade.
investor would have to come to his own judgement
whether the specific assumptions used to justify the
business plan are appropriate in this particular case.
Furthermore, a private investor can be expected to
compare the expected return of the Ciudad de la Luz
project with the expected return of alternative projects.
Economic advantage
Such an analysis had not been done at the time. Further,
it was even not feasible to carry out such a comparison
(62) As
pointed out above, the Spanish authorities have
on the basis of the estimated positive cash flows
argued that the measure does not constitute State aid,
provided in these studies.
as it fulfils the market economy investor principle
(‘MEIP’) test. This test considers whether a market
investor would have invested in the project on the
same terms and conditions as the public investor at the
time when the decision to make public investment was
taken. In this respect it is relevant that initially there had
(66) In
the
context
of
a
State
aid
investigation,
jurisprudence
been a private investor in the project ( 19 ) and that the
requires the Commission to carry out its own assessment
Spanish authorities had commissioned several studies
of the facts ( 20 ). It is therefore necessary to judge the
which concluded that the project would generate a
validity of reports carried out at the time of the trans
positive cash flow (see recital 22).
action.
(63) As pointed out in recital 17, in the case of Ciudad de la
Luz, initially a private investor (the managing company)
(67) In
view
of
the
reports
submitted
by
the
Spanish
auth
orities since the opening decision, there appear to have
held 25 % of the project (i.e. EUR 150 000 of the initial
been two investment decisions concerning the project.
share capital of EUR 600 000). However, this private
The first of these was in 2000 based on the Arthur
investor withdrew before it had committed any further
Andersen business plan of 2000 (covering investments
funds itself (it was bought out by SPTCV in 2004).
Subsequently, no other private investor invested in the
project.
( 20 ) In Valmont, the CFI considered that the Commission should not
have simply relied on the existence of an independent expert’s
assessment to determine whether a sale of land involved the
( 18 ) Study on applying the market economy investor principle to the
granting of State aid. The CFI required that the Commission
public investment in Ciudad de la Luz — Final report (Ecorys —
should also have verified its evidential value, something which
19 July 2011).
the CFI then did itself (Case T-274-01). In Hamsa (Case
( 19 ) For instance, in Citynet Amsterdam, the Commission considered
C-316/02) and Lenzing (Case C-525/04), the Court of Justice
that the MEIP was fulfilled, as the public investor invested on
recognised that the Commission has a margin of discretion with
terms comparable to those of the private investor in the project.
regard to economic matters, but that it ‘must establish whether the
Decision of 11 December 2007, C 53/2006.
evidence relied on is factually accurate, reliable and consistent …’.

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L 85/10
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Official Journal of the European Union
23.3.2013
in the period 2002-2006). In 2004, potentially to review
(or similar) business and financial risk as the one under
whether further investment in the project was appro
consideration. According to the Capital Asset Pricing
priate, the Consultia report was commissioned
Model (CAPM), the cost of equity capital, K e should be
(covering actual investments in the period 2002-2004
estimated by the following formula:
and forecast investments in 2004-2014). Consequently,
the MEIP should be assessed for both investment deci
sions.
K e = R f + (R m – R f )
(68) The
Commission
has
assessed
whether
a
hypothetical
private investor would have invested in the project
where R f is the risk-free rate, (R m – R f ) is the market risk
creating the company Ciudad de la Luz. According to
premium and is the ‘Beta’, a measure of the systematic
the market economy investor principle, the investment
(non-diversifiable) risk associated with the stock of
undertaken is considered to be State aid if the expected
Ciudad de la Luz, which reflects both the business and
compensation to be received by the State is lower than
financial risk.
what a private investor would have requested under the
circumstances of that particular project.
(72) For
the
risk
free
rate, R f , market practice ( 23 ) suggests to
take the long-term (typically 10 years) government bond
rate in the country of operation (these are considered the
least risky investments). The average annual return on 10
(69) In
order
to
finance
a
project,
investors
need
to
invest
year government bonds in Spain was 4,1 % in 2004 (
some capital. Such capital has a cost, the cost of

24 ).
For the market risk premium, one should take the
capital. Typically, there are two broad sources of
historical market risk premium over a reasonably long
capital: equity capital and (financial) debt capital. The
time period. It is common market practice to take the
total cost of capital is the weighted average cost of
difference between the historical return on a diversified
capital (WACC), taking into account the proportion of
equity index in the country of operations, and the risk
equity capital and the proportion of debt capital. The
free rate. According to Fernández (2004)
(
cost of debt capital and cost of equity capital are

25 ), the
historical market risk premium over government bonds
expected costs and not historical costs. In the particular
in Spain (during the period 1991-2003) was between
case of Ciudad de la Luz, the business plan envisaged that
6,8 %-9,3 %. The Commission took a conservative
the project would be fully financed with equity capital.
approach in the estimation of the market risk premium
Therefore, the total cost of capital is the equity capital.
and considered the lower bound of this interval, namely
6,8 %. A subsequent and more recent paper by the same
author ( 26 ) comes to reinforce the validity of this value,
by presenting the required equity premium during the
period 2000-2004 in the range of 6-7 %.
(70) A
private
equity
investor
would
have
been
willing
to
invest in Ciudad de la Luz if the expected internal rate
of return ( 21 ) was higher than or equal to the opportunity
cost of equity capital ( 22 ) (i.e. the return that he could
(73) For
the
estimate
of
beta,
the
Commission
used
publicly
have obtained in a similar project).
available information pertaining to companies that have
been identified as direct competitors to Ciudad de la Luz
by Spanish authorities, namely Carrere Group ( 27 ) and
Babelsberg. These figures were reported by financial
analysts that carried an in-depth analysis of the two
companies. An average of the two betas, adjusted to
match the financial risk profile of Ciudad de la Luz,
(71) The Commission has calibrated the Capital Asset Pricing
gives a value around 1,5. This is a conservative
Model to obtain the cost of equity capital. The cost of
equity capital reflects the opportunity cost of investment
( 23 ) See for e.g. Brealey and Myers, 2000, Principles of Corporate
for shareholders in companies or projects with the same
Finance, Sixth Edition (Chapter 8).
( 24 ) http://www.tradingeconomics.com/spain/government-bond-yield
( 25 ) Pablo Fernández 2004, ‘Market risk premium: required, historical
( 21 ) By definition, the internal rate of return corresponds to the discount
and expected’, Working paper IESE Business School.
rate which makes the net present value of the investment equal to
( 26 ) Pablo Fernández (2009): ‘The equity premium in 150 textbooks’,
zero.
Working paper IESE Business School.
( 22 ) Brealey and Myers, 2000, Principles of Corporate Finance, Sixth
( 27 ) http://www.carreregroup.com/fr/documents/financials/Etude_
Edition (Chapter 5, p. 100).
Financiere_13062001.pdf

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23.3.2013 Official
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European
Union L
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approach, since the investment in Ciudad de la Luz is
expected cash flows presented in the 2004 business plan
likely to involve a higher degree of idiosyncratic risk as
represented an upper bound ( 29 ). The stream of cash
the other two established studios. Ciudad de la Luz it is a
flows determines its expected return. The Commission
green-field investment in a region which does not host
also takes at face value the expected return of Ciudad
either Spanish or international film producers. In other
de la Luz. However, it calibrates the cost of raising
words, Ciudad de la Luz’s beta is probably higher than
capital. This would have to be done by any rational
that of its competitors.
private investor.
(78) On the basis of the 2004 business plan proposed by
(74) Applying the formula above (see recital 71), the
Ciudad de la Luz, the internal rate of return of this
Commission obtained that the expected cost of equity
project is 5,74 % (see Annex I). A private investor in
capital should be approximately 14,9 %.
Ciudad de la Luz, facing an opportunity cost of capital
of at least 14 % (as computed above, see recital 73),
would not have undertaken this investment, since its
internal rate of return is lower than the opportunity
cost of capital.
(75) By
way
of
comparison,
as
discussed
in
Annex
I,
Spain
submitted that the application the CAPM Model would
show that a private investor ‘would require’ a risk
premium, not a return, of 3,75 % in 2000 and 2,07 %
in 2004.’ This calculation is based on a beta of =
(79) Furthermore,
the
Commission
computed
the
Net
Present
0,395. A beta of 1 represents the portfolio of all
Value (NPV) of the investment in Ciudad de la Luz in
stocks, so the ‘average’ stock. A beta significantly below
order to give the magnitude of how much the project
1 would therefore imply a particular low-risk investment.
would be worth for the private investor. The object of
Spain did not substantiate such assumption and did not
any investment decision is to find real assets that are
back it up with any hard and verifiable data.
worth more than they cost, in other words, investments
that have an expected return higher than the opportunity
cost of capital. If this is not the case, as for Ciudad de la
Luz, the value of the project is negative and consequently
the investment is not viable for any rational private
investor. The NPV of any project quantifies how much
the investment is worth at the moment of taking a
(76) As
stated
above
(see
recital
70),
a
private
investor
would
decision, and is computed by discounting the stream of
only invest in a project with an internal rate of return
cash flows forecasted in the business plan using the
larger than the opportunity cost of capital. The
discount factor, which is the cost of capital. Intuitively,
Commission notes that the 2000 business plan
the higher the cost of capital, the lower the NPV.
evaluated only the initial phases of the project in detail.
The Commission’s analysis (see Annex II) arrived at a
negative net present value, based on the 2000 business
plan and taking the cash flows presented in the business
plan at face value. On this basis, a private investor would
not have invested in the project.
(80) For
Ciudad
de
la
Luz,
using
the
opportunity
cost
of
capital of 14 % and the cash flows provided in the
Consultia business plan of 2004 (which are taken at
face value by the Commission as explained in recital
( 29 ) The independent Ecorys report goes further, looking also at the
assumptions of the business plan and criticising several of them.
(77) When establishing the internal rate of return, the
For instance, it points out that ‘the choice of its location does not
Commission again takes a conservative approach by
seem strategically obvious as no synergies with surrounding film
not questioning the assumptions of the business plan,
industry could be identified. And there are other regions in Spain
in particular the stream of cash flows forecasted for the
with similar geographical locations nearer to existing film industry
proposed project. However, it should be noted that the
cluster’ (p. 30). Further: ‘Note in this respect that especially in the
first years of operation of the studio and the school, there will be
cash flows forecasted in the 2004 business plans appear
no locally trained and graduated resources locally available.
to be unduly optimistic, especially taking into account
Therefore a prudent private investor would probably have
the losses incurred by the company during the period
preferred another location to implement a similar film studio’ (p.
2002-2004 ( 28 ). Given the information at the Commis
31).With regard to the 2004 investment, it points out: ‘It can be
sion’s disposal, one can therefore consider that the
questioned if a private investor would choose to build a greenfield
film studio in an area where no adequate human resources were
available in the first years of operation of the studio and the school’
( 28 ) Source: ORBIS Company Report.
(p. 39).

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L 85/12
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Official Journal of the European Union
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76), the NPV of the investment is around minus EUR
the cost of capital do not alter the result. The graph
130 million (see Annex). Consequently, this investment
below plots the approximate values of the NPV against
opportunity is not worthwhile for a private investor.
different values of the cost of capital (WACC) from 5 %
to 20 %. The graph illustrates that the NPV becomes
negative for a WACC of between 5 % and 6 %. Hence,
if the cost of capital is higher than 6 %, a private investor
(81) The
Commission
has
also
undertaken
a
robustness
check
would not undertake the project. Moreover, for values of
showing that the result is very solid. Above a reasonable
WACC higher than 10 %, the value of the NPV is prac
threshold, the result is hardly sensitive to the value of the
tically unaffected. The Commission has estimated a
opportunity cost of capital, as estimated by the
WACC of around 14 %, hence in a range where it can
Commission. In other words, significant changes in the
be concluded with high degree of confidence that the
parameters calibrated by the Commission in calculating
project is not profitable.
(82) In response to the Commission’s assessment, on the basis
assessment. Annex II also explains why the Spanish auth
of a consultancy report ( 30 ), the Spanish authorities
orities’ request for lower ‘betas’ is mistaken. The
argued that the Commission’s assessment was flawed.
Commission uses values from public studies which
Firstly, while the CAPM analysis as such was considered
calculated betas for close competitors of Ciudad de la
to be the correct approach, the consultancy report ques
Luz. The Spanish authorities’ proposal to use historical
tioned the parameter values used by the Commission. In
betas is refuted by financial experts.
particular, the equity premium and the ‘betas’ should
have been lower. Secondly, to establish the relevant
benchmark, the Commission should not have used only
the Consultia IT’s business plan but also the Arthur
Andersen’s 2000 business plan. Thirdly, the Commission
(84) In reply to the Spanish authorities’ request to consider
did not use the appropriate financial ratios to estimate
the 2000 business plan, Annex II provides such a calcu
the expected profitability of the Ciudad de la Luz project.
lation. As can be seen, due to a higher risk premium and
Finally, the Commission did not take into account
to a higher risk-free rate, in that case the WACC would
expected revenues deriving from the development of
be even higher than in 2004. Also, this calculation leads
hotels and office space.
to a negative NPV. Finally, with regard to possible
revenues deriving from hotels and office space, the
assertions made by the Spanish authorities were based
on new evidence, namely six land valuation reports
drawn up subsequently. This evidence was not part of
the information available to a potential investor at the
(83) These
arguments
were
rebutted
by
the
Commission.
As
time. While the Andersen report mentions the possibility
regards the equity premium, Annex II explains in some
of developing a hotel complex, it does not contain
detail why the values in the range proposed by Spain
information about expected profitability and there was
cannot be valid. Most importantly, the values proposed
no business plan pertaining to the development of the
for the premium were estimated values for 2009 and not
land. Annex II nevertheless looks in detail at the
those which prevailed in 2000 and 2004. Clearly, the
proposed ex post reports on land development. They
parameters to be used for the estimation of the CAPM
are seriously flawed. For instance, benchmark prices
should be contemporaneous to the date of the business
proposed for office space in the Ciudad de la Luz
decision. In fact, for the relevant period, the author
complex are those of the most prestigious business
quoted by the Spanish authorities himself provides
streets in Alicante. Given that the Ciudad de la Luz
estimates which are in line with the Commission’s
complex is outside the city of Alicante and next to an
industrial complex, these benchmark prices are highly
( 30 ) Reference to second LECG report.
inflated. Similarly, the benchmark prices for hotels are

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EN
23.3.2013 Official
Journal
of
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European
Union L
85/13
based on 4 or 5 stars hotels. No indication is given that
would not have invested in 2000 and would not have
there would be sufficient demand for such hotels outside
continued to invest in the project on the basis of the
of Alicante (and located close to a highway and an
2004 business plan.
industrial complex).
(88) Consequently, the Commission considers that the
economic advantage is the whole value of the
investment. The loans granted to Ciudad de la Luz by
SPTCV were subordinated loans, which means that they
(85) Apart
from
its
own
internal
assessment,
the
Commission
also commissioned an independent study on whether a
were treated on the balance sheet as something similar to
private investor would have carried out such an
equity. As already noted by the Commission in the
investment in Ciudad de la Luz under the same
opening decision, the interest on the loans was calculated
terms (
with on a fixed and one variable part. The rate of the

31 ). The Ecorys report considers various scenarios
which estimate the cost of equity capital to be between
fixed part was very low, and would not be acceptable to
12,5 % and 21,4 % for the investment in 2000 and
a market economy lender. The unusually low fixed part
between 10,9 % and 15,9 % for the further investment
of the loan could be in principle compensated by the
in 2004. Thus, the result of the Commission’s study is
prospect of an adequate remuneration on the partici
within the range calculated by Ecorys. By way of
pating loan thanks to the variable part linked to the
contrast, the internal rate of return calculated on the
profitability of the project, but this could not be the
basis of the business plan is well below the minimum
case for the project under scrutiny (see the reasoning
cost of equity capital as estimated by Ecorys.
above about the market economy investor principle).

Furthermore, no financial costs were included in the
forecast profit and statement provided to the
Commission by the Spanish authorities for the period
2002-2014. Finally, in theory the loans were to be
paid back in April 2015, that is after the date of
termination of the project (and possibly its disposal),
planned for 2014, which a Market Economy Lender
would not have accepted. In their reply dated 20 April
(86) Ecorys’
overall
conclusion
is
therefore
that
it
does
not
2009 to the opening decision, the Spanish authorities
seem likely that the investments made in 2000 and 2004
explained that these loans should, from an economic
were congruent with the conduct of a diligent private
point of view, be considered as capital injection as the
investor in a market economy. With regard to the
lender and the shareholder are the same (i.e. SPTCV).
2000 investment plan, Ecorys finds that the recon
Indeed, as none of the loans paid in 2005, 2007,
structed business case shows a negative NPV of PTA
2008 and 2009 have been (even partially) repaid, and
9,3 billion. Investing in the stock market would have
the beneficiary has not paid any interest for these loans,
been a much more interesting investment for a prudent
they must be considered de facto as equity investment.
market investor. As regards the 2004 investment Ecorys
According to the information provided by the Spanish
concludes that ‘a diligent market investor would most
authorities in April 2012, this was a total of EUR
probably not have decided to complete the full CDL
265 089 599 by the end of 2010 ( 33 ).
project, but may have opted to operate the 6 sound
stages already invested in, or to close down the project
and take the loss’ ( 32 ). Finally, Ecorys considers that a
private lender would not have provided a participating
loan or any other debt to the project since the project
cash-flow was insufficient for debt service payments.
Selectivity
(89) The aid is also selective since the benefits arising from
the support confers an advantage only to the under
takings active in the sector, and in fact only to some
of them.
(87) It is therefore concluded that neither the investments
made in Ciudad de la Luz between 2000 and 2004,
nor those made since then fulfil the market economy
State resources
investor principle and therefore constitute an advantage
for the undertaking Ciudad de la Luz SAU. Since the
(90) The
Commission
notes
that
the
Generalitat
Valenciana
MEIP tests are not fulfilled, a market economy investor
has funded the investment through its fully-owned
investment arm SPTCV and that the studies which led
( 31 ) Ecorys, Study on applying the market economy investor principle to the
public investment in Ciudad de la Luz, 19 July 2011.
( 33 ) As set out in recitals 29 and 53. As the loans are considered equity
( 32 ) Pages 30 and 39 of the Ecorys report.
investment, interest charges are not taken into account.

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to the public investment in Ciudad de la Luz were carried
than State aid. In this case, the Commission’s assessment
out for the Generalitat Valenciana. Hence, these allo
is without prejudice to any further findings with regard
cations can be considered as State resources.
to the compatibility with EU public procurement legis
lation. The aid does not contain any other elements
which could present problems regarding the principle
of general legality of the aid.
Distortion of competition
(91) When
State
aid
strengthens
the
position
of
an
under
taking compared with other competing undertakings,
the latter must be regarded as affected by that aid. The
(95) As noted in the opening decision, as a subsidiary
support strengthens the position of Ciudad de la Luz
argument in the event that the Commission considered
compared with other competing undertakings by
that the measures at hand constitute State aid, the
allowing it to enter the market of film studios.
Spanish authorities have claimed, that such measures
Competition between undertakings profiting from the
would be compatible with Article 107(3) as regional
measure and those not profiting from it is distorted.
aid and as aid aimed at promoting culture.
Even assuming that film productions in other Member
States in which other film studios are located receive
subsidies, this is not a relevant argument to deny the
existence of a distortion of competition. A measure
does not escape the qualification as State aid merely
Regional aid
because other Member States may also have adopted
their own market-distorting measures. No such ‘bal
(96) Regional aid for the construction of Ciudad de la Luz
ancing’ takes place in assessing the condition related to
may be justified on the grounds that the investment is
the distortion of competition.
carried out in an assisted area. The Spanish authorities
have suggested that an aid intensity of 36 % would be
allowed by the regional aid rules applicable at the time of
the initial investment decision in 2000-2006.
Effect on trade
(92) Finally, the Commission considers that the measure in
question affects trade between Member States. Film
studios market their facilities on an international basis.
(97) As this is unnotified aid, the Regional Aid Guidelines for
Film producers regularly negotiate prices and conditions
2000-2006 ( 34 ) apply. Point 4.2 of the Guidelines states:
with a number of film studios based in different Member
‘To ensure that productive investment is viable and
States. The Commission has approved aid schemes in
sound, the recipient’s contribution to its financing must
Spain and other Member States which support the
be at least 25 %.’ Footnote 20 of the Guidelines clarifies
production of audiovisual works and, hence, indirectly
that this minimum contribution of 25 % must not
encourage the use of national technical facilities,
contain any aid. Although there was a private investor
including film studios. However, the fourth criterion of
for 25 % of the initial share capital of EUR 600 000, this
the 2001 Cinema Communication excludes aid
private investor was the management company for the
supplements for specific production activities, including
project in return for a fee and did not make any further
the use of film studios.
investment in the project to match the majority of the
public investment in the project. Consequently, this first
investment cannot be considered in isolation from the
public investment as it is not a standalone investment.
Moreover, the private investor was bought out by SPTCV
Conclusion
in July 2004, at which time its holding dropped to 0,2 %.
(93) In view of the above, the Commission considers that the
project grants a selective economic advantage to Ciudad
de la Luz. The project is publicly funded, distorts
competition and has an effect on trade between
Member States. Therefore the Commission regards the
(98) The Spanish authorities
have argued that the 25
%
notified measure as constituting State aid within the
investment from SPTCV itself could be regarded as the
meaning of Article 107(1) of the Treaty on the Func
recipient’s contribution. The Commission considers that
tioning of the European Union.
such an approach, in which 25 % of the investment is
covered by a publicly-owned body which does not
behave as a private investor (see above, section V,
subsection ‘economic advantage’) while the remaining
75 % of the investment is also provided from state
resources, cannot ensure that the productive investment
Compatibility
aided is viable and sound.
(94) The Commission must first ensure that the aid is not
contrary to the provisions of the TFEU in areas other
( 34 ) OJ C 74, 10.3.1998, p. 9.

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(99) As the investment in Ciudad de la Luz has been
(iii) Is the aid measure proportional, i.e. could the
completely financed through public funds from SPTCV,
same change in behaviour be obtained with
this condition is not met.
less aid?
Sectoral aid to the audiovisual sector
(c) Are the distortions of competition and the effect on
(100) In certain situations, the Commission has cleared aid to
trade limited, so that the overall balance is positive?
the audiovisual sector under Article 107(3)(c) taking into
account the cultural objectives of Article 167 TFEU. The
cultural exception can be used in combination with other
legal bases for compatibility, such as aid to certain
economic activities under Article 107(3)(c) TFEU ( 35 ).
Although it has not been proposed by the Spanish auth
Objective of the measure
orities, in the light of the comments from other parties,
that legal basis is considered in what follows.
(103) A ‘market failure’ is said to exist if the market outcome
does not lead to the highest total social welfare. A inef
ficient market outcome may arise in the case of so-called
public or merit goods ( 36 ). Such goods generate positive
external effects where the social benefit exceeds the
private benefit. As a result, the quantity supplied is
(101) An assessment under Article 107(3)(c) of the TFEU is
below the optimum — which in turn could justify
carried out under a three-step test balancing the
public intervention (and possibly public subsidies).
benefits and the negative effects of the measure in
question.
(104) In the EU there exists a highly competitive, commercial
(102) In applying this balancing test, the Commission assesses
market with a number of large film studios. In addition,
the following questions:
for large film productions, European film studios face
significant competition from studios outside the EU.
Prima facie evidence therefore does not support a
market failure on the basis of insufficient supply and
high entry costs. In their reply to the opening decision,
(a) Is the aid measure aimed at a well-defined objective
Spanish filmmakers claim that the Spanish market did
of common interest (i.e. does the proposed aid
not have similar high quality services prior to the
address a market failure or other objective)?
construction of Ciudad de la Luz. In particular,
Valencian filmmakers have pointed out that having
access to a local film studio would allow them to
reduce the cost of production (lower transportation
costs, proximity to other services which are necessary
for film production, etc.).
(b) Is the aid well designed to deliver the objective of

common interest? In particular:
(105) However, the fact that domestic film producers would
(i) Is the aid measure an appropriate instrument, i.e.
benefit from Ciudad de la Luz does not suffice to
are there other, better-placed instruments?
establish a ‘market failure’ as defined above. First, to
consider that Ciudad de la Luz addresses a market
failure with regard to local film production in Spain
would be contrary to the objective declared by the
Spanish authorities. The 2004 Consultia report
(ii) Is there an incentive effect, i.e. does the aid
considers only local studios as ‘indirect’ competitors, as
change the behaviour of firms?
Ciudad de la Luz would instead be directed towards large
film productions.
( 35 ) See in particular, NN 84/2004 of 22 March 2006 — France —
Régimes d’aide au cinéma et à l’audiovisuel. In this case, the
( 36 ) Public goods exist in cases where it is not possible to provide a
Commission cleared ex post on the basis of Articles 107(3)(c)
good or service to one person without excluding others or where
and/or (d) TFEU, aid measures to support, notably, film distribution,
there is non-rivalry in consumption (e.g. street lighting, roads).
creation, refurbishment or modernisation of cinemas, video-music
Goods of general interest or merit goods are those goods and
or video distribution, R & D and development of post-production
services that the government feels that people will under-consume
technologies. See also N 192/2008 of 11 April 2008 — Spain —
and which therefore ought to be subsidised or provided for free
Promotion of dubbing and subtitling of movies in Basque.
(e.g. education, public libraries).

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(106) Secondly, in order to show a market failure with regard
similar investments. Finally, given its modern facilities,
to Spanish film producers, one would have to assess
Ciudad de la Luz’s position in the market may change
whether the social benefit from a studio such as
in the future.
Ciudad de la Luz is higher than the cost. Among other
elements, this would require consideration of whether
existing facilities are not sufficient, i.e. that Spanish film
makers could not use the existing film studios in Spain
(such as Video Planning, Cartuja Producciones and Loasur
Audiovisual in Andalucía, Media Park in Catalua, Platós
Valencia in Valencia, and Estudios Barajas, Estudios El
(109) On the basis of the above, the measure cannot be
lamo, Estudios Los ngeles and Flash Estudio in
considered to be compatible under Article 107(3)(c), as
Madrid) or in other Member States. While Spanish film
it does not address a market failure of the sector and
producers pointed out some (unquantified) cost
risks adversely affecting competition and trade.
advantages from Ciudad de la Luz, they did not argue
that such local studios would be essential for domestic
film production.
Cultural aid — investment in film studio construction
(110) The Spanish authorities have not provided any arguments
to modify the Commission’s view expressed in the
opening decision that it ‘considers that there is no
element indicating that [the cultural] exception can be
Well-designed aid
applied to State aid that provides the construction and
operating costs of a new, large film studio complex.’ The
(107) In addition, as there is no well-defined market failure
opening decision discounted the possibility of treating
which would be addressed by the measure, the aid
the studios as ‘cultural infrastructure’ as they are highly
cannot be considered to be appropriate and propor
specialised and their use is limited to the audiovisual
tionate to address that market failure. If the purpose of
sector (for making films, TV productions and commer
the film studio was to support local film production, it
cials).
would have been necessary, among other issues, to
compare the investment carried out with other
measures which could have achieved comparable effi
ciencies from the point of view of film producers. Such
a comparison has not been provided by the Spanish
authorities.
(111) To apply the cultural exception provided for in
Article 107(3)(d) TFEU to funding not covered by the
Cinema Communication, the aid would need to have
been not only necessary, proportionate and adequate,
(as for the Article 107(3)(c) assessment above) but also
directed towards a cultural objective. As it is found that
these criteria are not under Article 107(3)(c), the same
applies with regard to Article 107(3)(d).
Distortion of competition and trade
(108) The balancing test further requires an assessment of the
negative effects in terms of distortion of competition and
trade. Given that production has fallen significantly
below original expectations and that it has attracted
mainly local film production, one may consider that
Cultural aid — incentives to film producers
until today the distortive effect of the Ciudad de la Luz
(112) In December 2008, the Commission approved the film
studios may have been limited. However, the number of
incentives offered by the Valencia region on the basis of
film productions made at Ciudad de la Luz is not a good
the Cinema Communication ( 37 ). Prior to this, any
indicator of its possible distortive effects. Ciudad de la
incentives granted by the Valencia regional government
Luz’s entry into the European film studio market has
in connection with filming at Ciudad de la Luz cannot be
increased overall studio capacity. Basic economic
considered compatible in cases where filming in Ciudad
reasoning implies that such an increase in supply will
de la Luz had been a condition of the aid (this is contrary
generate an overall price reduction irrespective of the
to the fourth criterion of the Cinema Communication,
amount of production Ciudad de la Luz is able to
which excludes aid supplements for specific film
attract. As it would affect the overall market price,
production activities).
such a price reduction could not be observed by
comparing Ciudad de la Luz’s price-setting with that of
( 37 ) The 2001 Cinema Communication sets out the criteria by which
its competitors. Furthermore, the building of Ciudad de la
the cultural derogation of Article 107(3)(d) could be applied to aid
Luz may encourage other Member States to carry out
schemes supporting the production of audiovisual works.

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(113) Finally, there is no need to examine further in the
producers under the condition that filming takes place at
framework of the present decision, whether aid was
Ciudad de la Luz, in breach of Article 108(3) of the Treaty,
granted to film producers.
constitute State aid incompatible with the internal market.
VI. CONCLUSION
Article 2
(114) The Commission finds that Spain has granted State aid to
1. Spain
shall
recover
the
incompatible
aid
granted
under
Ciudad de la Luz SA in breach of Article 108(3) of the
Article 1 from the beneficiary.
Treaty on the Functioning of the European Union. The
investment in Ciudad de la Luz made by the Valencia
region would not have been made by a private investor
on the same terms and conditions. As a result, the entire
2. The sums to be recovered shall bear interest from the date
public investment in the project is considered by the
on which they were put at the disposal of the beneficiary until
Commission to be illegal aid.
their actual recovery.

(115) Consequently, the aid amount up to December 2010 is
3. The
interest
shall
be
calculated
on
a
compound
basis
in
the total of EUR 265 089 599 of direct public
accordance with Chapter V of Council Regulation (EC) No
investment in Ciudad de la Luz SA and any incentive
794/2004 ( 42 ).
granted to film producers under the condition that
filming took place at Ciudad de la Luz.
4. Spain
shall
cancel
all
outstanding
payments
of
the
aid
referred to in Article 1 with effect from the date of adoption
(116) According to the Treaty on Functioning of the European
of this Decision.
Union and the established case law of the Court of
Justice, the Commission is competent to decide that the
State concerned must abolish or alter aid ( 38 ) when it has
Article 3
found that it is incompatible with the internal market.
The Court has also consistently held that the obligation
1. Recovery
of
the
aid
referred
to
in
Article
1
shall
be
on a State to abolish or alter aid regarded by the
immediate and effective.
Commission as being incompatible with the internal
market is designed to re-establish the previously
existing situation ( 39 ). In this context, the Court has estab
2. Spain
shall
ensure
that
this
Decision
is
implemented
lished that this objective is attained once the recipient has
within four months following the date of notification thereof.
repaid the amounts granted by way of unlawful aid, thus
forfeiting the advantage which it had enjoyed over its
competitors on the market, and the situation prior to
the payment of the aid is restored (
Article 4

40 ).
1. Within two months following notification of this
Decision, Spain shall submit the following information:
(117) In accordance with that case-law, Article 14 of Council
Regulation (EC) No 659/1999 ( 41 ) lays down that ‘where
negative decisions are taken in respect of unlawful aid,
the Commission shall decide that the Member State
(a) the total amount (principal and interest) to be recovered
concerned shall take all necessary measures to recover
from the beneficiary;
the aid from the beneficiary.’
(b) a detailed description of the measures already taken and
HAS ADOPTED THIS DECISION:
planned to comply with this Decision;
Article 1
(c) documents demonstrating that the beneficiary has been
ordered to repay the aid.
The initial share capital and the subsequent share capital
increases amounting to EUR 94 459 719, land allocated to
Ciudad de la Luz amounting to EUR 9 800 040, the partici
2.
Spain shall keep the Commission informed of the progress
pating loans amounting to EUR 115 million, the convertible
of the national measures taken to implement this Decision until
loan stock issued since 2008 totalling EUR 45 829 840
recovery of the aid referred to in Article 1 has been completed.
granted unlawfully to Spain by Ciudad de la Luz SA prior to
It shall immediately submit, at the request of the Commission,
31 December 2010, and any incentive granted to film
information on the measures already taken and planned to
comply with this Decision. It shall also provide detailed
( 38 ) Case C-70/72 Commission v Germany, paragraph 13.
information concerning the amounts of aid and interest
( 39 ) Joined Cases C-278/92, C-279/92 and C-280/92 Spain v
already recovered from the beneficiary.
Commission, paragraph 75.
( 40 ) Case C-75/97 Belgium v Commission, paragraphs 64-65.
( 41 ) OJ L 83, 27.3.1999, p. 1.
( 42 ) OJ L 125, 28.4.2004, p. 4.

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Article 5
This Decision is addressed to the Kingdom of Spain.
Done at Brussels, 8 May 2012.
For the Commission
Joaquín ALMUNIA
Vice-President

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ANNEX A
Information about the amounts of aid received, to be recovered and already recovered
Total amount of aid
Total amount of aid to be
Total amount already reimbursed (*)
Identity of the beneficiary
received under the
recovered (*)
scheme (*)
(Principal)
Principal Interest
(*) Millions of national currency.

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ANNEX I
Ciudad de la Luz (CDL) — Approach for the calculation of an appropriate cost of capital in capital budgeting
decisions — July 2009
Objective
The objective of this report is to establish whether the investment in the project creating the company Ciudad De la Luz
(CDL) can be qualified as State aid. According to the market economy investor principle, the investment undertaken is
considered to be State aid if the expected compensation to be received by the State is lower than what a private investor
would have requested under the circumstances of that particular project.
A private equity investor ( 1 ) would have been willing to invest in the CDL project if the expected internal rate of return ( 2 )
was higher than or equal to the opportunity cost of equity capital ( 3 ) (i.e. the return that he could have obtained in a
similar project).
In the analysis which follows, we calibrate the Capital Asset Pricing Model (CAPM) to obtain the cost of equity capital.
This is the relevant measure that determines whether a private investor would have undertaken the CDL project.
The resulting parameter range is then compared to the ex-post performance of a representative sample of CDL’s
competitors. This is the approach adopted by LECG in its submission, namely to use ex-post performance to establish
a benchmark for the opportunity cost of capital for this type of projects. As will be seen below, the measure of ex-post
performance chosen by LECG is not the correct one to establish a benchmark. More importantly, any ex-post performance
metric is an imperfect proxy for ex-ante required returns.
We find that the opportunity cost of capital for this project should be around 14,91 %. Hence, a private investor would
require an internal rate of return of more than 14,91 %. According to the business plan proposed by CDL in 2004 (which
is the most recent financial information on which the present project is based), the internal rate of return for the
investment in CDL was 5,74 % ( 4 ).
Consequently, a private investor would not have invested in the CDL project since its internal rate of return is lower than
the opportunity cost of capital.
The Cost of Equity Capital ( 5 )
The cost of equity capital is the minimum required rate of return CDL must offer to its shareholders to compensate them
for:
— the time value of money;
— the risk associated with investing in CDL.
It is important to stress that the relevant rate of return is an expected future return, not a historical return. The cost of
equity capital reflects the opportunity cost of investment for shareholders in companies or projects with the same (or
similar) business and financial risk as the one under consideration.
In what follows, we apply a widely accepted method of estimating the cost of equity capital, namely the Capital Asset
Pricing Model (CAPM):
K e = R f + β(R m – R f )
Where:
— K e the cost of equity capital, expressed in %;
— R f is the risk-free rate, expressed in %;
— (R m – R f ) is the market risk premium, expressed in %;
— β is the ‘Beta’, a measure of the systematic (non-diversifiable) risk associated with CDL’s stock, which reflects both the
business and financial risk.
( 1 ) In the absence of debt.
( 2 ) By definition, the internal rate of return corresponds to the discount rate which makes the net present value of the investment equal to
zero.
( 3 ) Brealey and Myers, 2000, Principles of Corporate Finance, Sixth Edition (Chapter 5, p. 100)
( 4 ) The use of this benchmark should not be interpreted as deeming that this figure is accurate. Cash flow forecasts are difficult to establish
with precision; therefore, 5,74 % probably represents at most an upper limit.
( 5 ) The appendix provides the general definition of the weighted average cost of capital (WACC), which includes both equity and debt.

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For the risk-free rate, market practice suggests taking the long-term (typically 10-year) government bond rate in the
country of operations.
For the market risk premium, one should take the historical market risk premium over a reasonably long time period. It is
common market practice to take the difference between the historical return on a diversified equity index in the country
of operations, and the risk-free rate.
Application to Ciudad De La Luz
The average annual return on 10 year government bonds in Spain was 4,1 % in 2004 ( 1 ).
R f = 4,1 %
According to Fernández (2004) ( 2 ), the historical market risk premium over government bonds in Spain (during the
period 1991-2003, which corresponds approximately to the period prior to our investment) is between 6,8 % and 9,3 %
(the difference lies in the method to calculate the average — arithmetic versus geometric). We consider the lower bound
of this interval for our estimation of the market risk premium.
(R m – R f ) = 6,8 %
Finally, for the estimate of beta, we use publicly available information pertaining to companies that have been identified
as direct competitors to CDL by the Spanish authorities.
In 2001, KBC Securities provided a report containing the necessary information to calculate the net present value of a 10-
year investment in the Carrere Group. Note that both the date and the investment’s maturity roughly coincide with the
case at hand. The discount rate used in the KBC report was 12 %, while the reported beta stood at 1,8. Taking into
account that the financial risk profile of Carrere is different from that of CDL (Carrere’s capital structure includes debt),
we have to adjust this beta and compute the unlevered beta in order to isolate the business risk profile. The formula to
obtain the unlevered beta is given by:
Beta Unlevered = Beta Levered /[1 + (1 – T) D/E]
where T is the applicable tax rate. The tax rate for France, where Carrere is established, is around 33 %, and the debt to
equity ratio data can be found in the original KBC report. At the time of the share issue, the debt to equity ratio stood at
10 %. This magnitude has been confirmed with Bloomberg data.
Using these parameter values, we obtain the following value for the unlevered beta:
Beta Unlevered = 1,68
A similar assessment was made in Germany in 2008 by Der Spezialist fur Finanzaktien for Studio Babelsberg, another
firm identified as a direct competitor to CDL by Spanish authorities. That report assumed a cost of equity of 12 %, and a
beta of 1,5. At the time the report was published, Studio Babelsberg was a debt-free company, meaning that its capital
structure was identical to CDL’s; hence there is no need to adjust the beta in this case.
This direct evidence obtained from detailed reports pertaining to two direct competitors indicates that the beta applicable
to CDL is (at least) in the 1,5-1,68 range. In addition, the investment in CDL is likely to involve a higher degree of
idiosyncratic risk for the reasons already expounded by the Commission. In other words, CDL’s beta is probably higher
than that of its competitors.
In what follows, we take the arithmetic average between these two figures and assign it to CDL (despite the fact that the
idiosyncratic risk associated with CDL is probably higher). It should be noted that these figures were provided by financial
analysts who carried an in-depth analysis of Carrere and Studio Babelsberg.
Thus, the lower bound of the expected return on equity for a private investor would be:
K e = 4,1 + 1,59 * 6,8 = 14,91 %
Obtaining this number is useful, as it implies that a value for the WACC substantially below 14,91 % can be dismissed
out of hand.
Pitfalls in the Methodology of LECG
The estimation made by the LECG study, leading to a discount factor of 5,15 %, is methodologically flawed. LECG
claimed that the right proxy for the weighted average cost of capital (WACC) is the realised Return on Assets (ROA) of
one, or possibly two, competitors (Pinewood and Babelsberg).
( 1 ) Global Insight.
( 2 ) Pablo Fernández (2004), Market risk premium: required, historical and expected. Working paper IESE Business School.

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First of all, the accounting returns, such as ROA, should in general not be considered as a correct measure for an
investor’s expected average return for at least three reasons ( 1 ). Accounting returns are calculated on an annual basis,
whereas a rational investor will consider the return over the entire life time of the project. Secondly, accounting
information is historical information about the company and therefore better adapted to evaluate ex post performance
of the firm than ex ante expected performance on the investments. Finally, investors are not really interested in accounting
earnings but rather in monetary gains, i.e. the cash flows they receive from their investment.
Furthermore, LECG should have compared the WACC measure with the ROCE (Return on Capital Employed), and not
with ROA. The WACC measure refers to the total capital, i.e. equity and financial debt. However, in the liabilities side of a
typical balance sheet, you find not only equity and financial debt but also current liabilities, i.e. payables to suppliers.
Therefore, total assets are equal to or higher than total capital and for a given return, ROA is lower than or equal to
ROCE ( 2 ). Hence, it is the ROCE that should be compared with the WACC and not the ROA. A project realises positive
value if and only if the realised return on capital employed is equal to or greater than the WACC.
Competitors data
Before turning to market data, we would emphasise again that the relevant benchmark is the ex-ante cost of equity capital.
Ex-post observed returns are only an imperfect proxy for ex-ante expectations, as ex-post realised returns are not necessarily
equal to ex-ante required returns. If investors are interested in the past performance of an industry, they should look at the
ROCE, an ex-post return relatively neutral to the capital structure of different firms, since it includes both debt and equity.
As the level of leverage in a company increases, the return on equity for shareholders increases, as compared to the
ROCE.
In what follows, we analyse data on the ROCE of a representative group of competitors from various sources and observe
that results are not out of line with our calibration exercise.
1. Amadeus data
Amadeus is a comprehensive, pan-European database containing financial information on over 11 million public and
private companies in 41 European countries provided by Bureau van Dijk (BvD) Electronic Publishing. BvD is one of the
world’s leading providers of firm level balance sheet data, with Europe being most extensively covered.
The median is the number separating the higher half of a sample from the lower half. If the observed values are arranged
in either ascending or descending order, the median is the value in the middle.
The arithmetic mean (average) is the sum of all the observations divided by the number of observations.
For many distributions, the median and mean coincide. Empirically, the two may differ substantially if, despite large
sample size, the observed distribution is skewed (e.g. because it contains a number of outliers, i.e. extreme observations).
The data we present below is characterised by values for the mean that are higher that the median (positive skewness).
Since the mean is sensitive to outliers, we focus on the median instead. Note that this choice leads to a finding of lower
returns as compared to using the sample average.
P e e r g r o u p a n a l y s i s
If we consider a very broad sample comprising all NACE 921 (Motion picture and video activities), this yields more than
11 000 observations for the period 1994-2008.
Median
Return on capital employed (ROCE) 13,56
%
( 1 ) Hans W. Friederiszick and Michael Troge, DG COMP, CET, ‘Applying the MEIP to State Owned Companies — Lessons learned from the
German Landesbanken Cases’, Competition Policy Newsletter, No 1, Spring 2006.
( 2 ) This confusion frequently arises because in the textbook finance literature, some authors assume a simplified balance sheet, with only
equity and financial debt, and no current liabilities. In such cases, indeed, ROA is equal to ROCE. But in the real world this is not
usually the case.

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Pinewood-Shepperton, Carrere Group and Barrandov Studio belong to the narrower four-digit NACE code 9211 (Motion
picture and video production). In addition to the NACE classifications, Amadeus provides a finer definition of peers by
grouping firms within the same NACE code according to their size. Pinewood-Shepperton, Carrere Group and Barrandov
Studio belong to the group of ‘very large companies’ in NACE 9211 (‘very large’ is not an absolute measure, but relative
to other firms belonging to NACE 9211). The median ( 1 ) for this peer group of 45 companies over the period 2000-
2006, in the cases where data were available, is as follows:
Median
ROCE
10,1 %
Studio Babelsberg is listed in Amadeus under the same NACE code as the previous three companies, but is considered
only as ‘a large company’. The ‘large company’ peer group for NACE 9211 is formed by 133 companies. The median of
the group over the same period (2000-2006) is:
Median
ROCE
10,1 %
Cinecitta Studios is listed under the ‘advertising’ NACE code meaning that the peer group is inadequate for comparison
purposes. CDL, too, has been assigned to a peer group with NACE code 7413 (Market research and public opinion
pooling), in our opinion not relevant for our assessment.
2. ORBIS data ( 2 )
In order to obtain information on firms mentioned in the submission provided by the Spanish authorities, it was
necessary to turn to ORBIS. In ORBIS, information was available for the following companies:
— Pinewood Shepperton
— Studio Babelsberg
— Carrere Group
— Cinecitta
— Ealing Studios
— Barrandov
— Prime Focus
— Ray Corp
— Europacorp
The median over these companies and over the period 2002-2007 is:
Median
ROCE
10,82 %
Since this group of companies is made-up of clearly identified competitors, there is no risk of including an ‘outlier’ that is
not really active in the same segment as CDL (which may be the case for the peer groups that have been constructed in
Amadeus). We therefore also report the average for that group over the 2000-2007 period.
Average
ROCE
12,26 %
( 1 ) As mentioned above, the median for this group is lower than the arithmetic average. For this peer group analysis, Amadeus provides
the yearly median ROCE pertaining to the entire peer group. In order to aggregate over time (the figure reported in the text), we
computed the ‘median of the yearly medians’.
( 2 ) ORBIS is a global database which has information on over 50 million companies worldwide (Bureau van Dijk Electronic Publishing).

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Conclusion
Our calibrated opportunity cost of capital for the investment in CDL stands at 14,91 %. If we accept at face value the
2004 business plan proposed by CDL and LECG’s analysis, the internal rate of return of this project is 5,74 %. However,
we stress that the cash flows forecasted in the 2004 business plans appear as unduly optimistic, especially taking into
account the actual losses incurred by the company during the period 2002-2004 ( 1 ). Given the information at our
disposal, we can conjecture that the expected cash flows presented in the 2004 business plan represented an upper
bound.
As stated in the introduction, an investor would only invest in a project with an internal rate of return larger than the
opportunity cost of capital. Consequently, an investor in CDL would have required a much higher internal rate of return
(i.e. at least 14,91 %) in order to invest in this project. We can conclude that the investment made in CDL did not fulfil
the market economy investor principle.
With a WACC = 14,91 %, and assuming that the 2004 cash flow forecasts represent an upper limit, we computed the
NPV of the project as the sum of discounted cash flows. On the basis of the submission provided by the Spanish
authorities, it emerges that the 199 million investment is the sum of the cash flows in the period 2005-2007. The cash
flow of the last period includes the residual value, computed using the dividend discount model:
D
V

t
t
1 g
r – g
Where D t stands for the dividend to pay in year t, g is the dividend growth rate and r the discount rate.
This expression is highly sensitive to the parameters D t and g. Obtaining accurate estimates for D t and g is beyond the
purpose of this note. For this reason, we use as a benchmark the values proposed by the Spanish authorities, namely D t =
8 651 (last period cash flow) and g = 2,553 % (the inflation rate). However, we apply our estimated discount rate of
14,91 %. On the basis of these parameter values, the project yields a negative net present value of- NPV = – 131,65 mil.
2002 2003 2004 2005 2006 2007 2008
Cash flow –
884 –
1
792 –
2
601 –
118
177 –
55
813 –
25
088 4
462
Discount (1
+
WACC)^2
1 + WACC
1 1/(1
+
WACC) 1/(1
+
WACC)^2 1/(1 + WACC)^3 1/(1
+
WACC)^4
14,91 % 1,3204 1,1491 1,0000 0,8702 0,7573 0,6591 0,5735
DCF –
1
167,26 –
2
059,19 –
2
601,00 –
102
843,09 –
42
268,78 –
16
534,56 2
559,16
2009 2010 2011 2012 2013 2014 NPV
Cash flow 5
526 6
561 6
842 8
057 8
307 80
447
Discount 1/(1
+
WACC)^5 1/(1 + WACC)^6 1/(1 + WACC)^7 1/(
+
WACC)^8 1/(1
+
/WACC)^9 1/(1 + WACC)^10
14,91 % 0,4991 0,4344 0,3780 0,3290 0,2863 0,2491
DCF 2
758,17 2
849,86 2
586,30 2
650,40 2
378,07 20
041,62 –
131,65
Comments on the last submission (25 March)
The 25 March submission lacks methodological rigour and makes some central claims that are at best unsubstantiated. It
states that:
( 1 ) Source: ORBIS Company Report.

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…‘To quantify this return and above all the risk premium that a private investor would require from a project, different
models are used, the most common of which is the Capital Asset Pricing Model (CAPM). For example, if this model is
applied to the case in hand, a private investor ‘would require’ a risk premium, not a return, of 3,75 % in 2000 and 2,07 %
in 2004.’
and further presents the following table:
Table 1
Estimate of the risk premium required from CDL according to the CAPM model
Market risk premium Beta
of
Ciudad
de
la
Luz
Risk premium required from
Ciudad de la Luz
2000 9,49
% 0,395 3,75
%
2004 5,25
% 0,395 2,07
%
In other words, the submission claims that CDL’s Beta is = 0,395. This is an unsubstantiated conjecture that is not
backed up with any hard and verifiable data. In addition, it is hard to reconcile it with common sense.
Below, we provide direct quotes from Brealey and Myers, the central reference in LECG’s submission.
‘…beta measures how sensitive a security is to market movements. Stocks with betas greater than 1,0 tend to amplify the
overall movements of the market. Stocks with beta between 0 and 1,0 tend to move in the same direction as the market,
but not as far. Of course, the market is the ‘portfolio of all stocks’, so the ‘average’ stock has a beta of 1,0.’ (Chapter
Seven, pg. 174).
In other words, higher-beta stocks mean greater volatility and are therefore riskier.
Investment in CDL is at least as risky as investment in its established competitors whose betas are substantially above 1
(see evaluations made by KBC Securities and Spezialist für Finanzaktien).
Finally, in terms of the risk-free rate, it seems highly opportunistic to refer to the present temporary financial crisis in
order to rebut the value chosen by the Commission, which corresponds to the risk-free rate in the period of the
investment in CDL.

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Appendix
In order to finance a project, investors need to invest some capital. Such capital has a cost. This is the cost of capital.
Typically, there are 2 broad sources of capital:
— Equity capital (E)
— Financial capital/debt) (D)
The sum of equity capital and debt capital gives us the total capital (C), expressed in EUR. Each of these 2 sources of
capital has a certain cost. We note:
— K e the cost of equity capital, expressed in %;
— K d the cost of financial capital (debt), expressed in %.
The total cost of capital is therefore the weighted average cost of capital (WACC), taking into account the proportion of
equity capital and the proportion of debt capital. We have therefore:
E
D
WACC K e C K d C
Note also that K d and K e are the expected cost of financial capital and of equity capital, and not the historical cost.
Taking into account the tax advantages of debt financing, and assuming T is the tax rate applicable to CDL, we have:
E
D
WACC K e C K d C 1 – T
In the particular case of CDL, no mention of debt is made in the 2000 business plan. Since the project is fully financed
with equity capital we have the following:
WACC = K e

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ANNEX II
[adapted from the document of March 2010]
Reply to the submission of 19 October 2009 prepared by LECG
The reply of the consulting company LECG to the Commission’s analysis focuses on four issues:
(1) Alleged erroneous use of the CAPM model.
While LECG accepts that a CAPM-based analysis is the correct avenue to pursue, it questions the parameter values
that have been used by DG COMP. More precisely, LECG asserts that:
— the equity premium should have been lower
— the ‘betas’ should also have been lower
(2) The Commission should not have limited itself to Consultia IT’s business plan, but should also have used Arthur
Andersen’s 2000 business plan to establish the relevant benchmark.
(3) The Commission did not use the appropriate financial ratios to estimate the expected profitability of the CDL project.
(4) Furthermore, the Commission did not take into account the expected revenues deriving from the development of
hotels and office space.
1. The
parameters
of
the
CAPM
1.1. Equity
premium
LECG questions our choice of using historical data relating to the premiums, based on Fernández (2004), to
estimate the market risk premium in Spain for the years 2000 and 2004. Instead, LECG suggests using the
information found in a later paper by the same author ( 1 ).
As will be seen below, the LECG report quotes this paper very selectively.
The LECG report argues that the required equity premium should be used instead of the historical equity premium.
However, Fernández (2009) states the following:
‘It is easy to conclude that there is not a generally accepted equity premium point estimate or a common method
to estimate it. […]
The recommendations regarding the equity premium, taken from 150 finance and valuation textbooks published
between 1979 and 2009, range from 3 % to 10 %. Several books use different equity premiums in different pages
and most books do not distinguish among the four different concepts that the phrase ‘equity premium’ designates:
historical equity premium, expected equity premium, required equity premium and implied equity premium. […]
129 of the books consider expected and required equity premium to be synonymous terms and 82 do not
distinguish between expected and historical equity premium.’
Furthermore, as regards its concrete value, the LECG study proposes using an equity premium recently presented
by Fernández (2009). Fernández suggests using a Required Equity Premium (REP) ranging from, 3,8 % to 4,3 %.
There are at least two reasons for which this range is not valid for our purposes. First, it suffers from intrinsic
limitations, since it is a subjective valuation by a single individual. It should be noted that Fernández also presents
an average value obtained from 150 textbooks (see graph below). Secondly, and most importantly, the suggestion
to use a value of 3,8 %-4,3 % is an estimation of the current equity premium, not the one prevailing in 2000 and
2004. The values of the parameters to plug in the CAPM should be contemporaneous to the date of the business
( 1 ) Pablo Fernández (2009): The Equity Premium in 150 Textbooks. Working paper IESE Business School.

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decision (i.e. ex-ante and not ex-post). In other words, the relevant equity premium is the one that was prevailing in
2000 (or 2004), not 2009. With respect to that point, Fernández’s paper (2009) does provide consensus estimates
of the REP in 2000 and 2004. In particular, the 2004 value of the REP is above 6 %, whereas its value for 2000 is
around 7 %. Our estimation before this paper was made public was correct, and was in this range, i.e. 6,8 %.
‘The figure below shows the evolution of the Required Equity Premium (REP) moving average (last 5 years) used or
recommended in 150 finance and valuation textbooks.’
1.2. Beta
As far as the beta is concerned, the LECG report casts doubts on the use of estimations provided by private
companies specialised in valuations. Below, we provide the links to the studies we refer to:
Carrere (the information we used can be found on p. 5 of the report below):
http://www.carreregroup.com/fr/documents/financials/Etude_Financiere_13062001.pdf
Studio Babelsberg (see p. 10):
http://www.studiobabelsberg.com/uploads/media/Studio_Babelsberg__14May08.pdf
In our view, this is precisely the place where a private investor would look for information to establish a beta ex-
ante. These analysts have specific skills to assess ex-ante valuations.
The two studies provide betas for certain close competitors of Ciudad de la Luz.
Pablo Fernández, the author extensively, but selectively, quoted in the LECG study, has written widely to show that
historical betas (as the ones proposed by LECG) are next to meaningless.
In his paper ‘Are calculated betas worth for anything?’ (Working paper IESE Business School), Pablo Fernández
(2008) presents strong arguments against the use of calculated beta in valuations:
‘We show that, in general, it is an enormous error to use the historical beta as a proxy for the expected beta. First,
because it is almost impossible to calculate a meaningful beta as historical betas change dramatically from one day
to the next; second, because very often we cannot say with a relevant statistical confidence that the beta of one
company is smaller or bigger than the beta of another; third, because historical betas do not make much sense in
many cases: high-risk companies very often have smaller historical betas than low-risk companies; fourth, because
historical betas depend very much on which index we use to calculate them. […] ( 1 )’ (our emphasis)
The third argument above put forward by Fernández (2008) also serves to illustrate that the betas presented by
LECG cannot be right. Indeed, Fernández makes the assertion that high-risk companies are high beta. This is very
intuitive: the required return for a high-risk project (such as CDL) ought to be above the return of a diversified
portfolio (e.g. the IBEX 35).
( 1 ) Damodaran (Damodaran, Aswath (1994), Damodaran on Valuation. New York: John Wiley and Sons) also makes this point by
calculating the beta of Disney. With daily data, he gets 1,33; 1,38 with weekly data; 1,13 with monthly data; 0,44 with quarterly
data; and 0,77 with annual data. With a 3-year period, he gets 1,04; 1,13 with 5 years; and 1,18 with 10 years. Also, the beta depends
on the index taken as the benchmark; thus, the beta with respect to the Dow 30 is 0,99; with respect to the S&P 500, it is 1,13, and
with respect to the Wilshire 5000, it is 1,05.

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In another paper, focused on Spain (‘On the instability of betas: the case of Spain’, 2008, Working paper IESE
Business School) Pablo Fernández shows again that it is a serious error to use betas calculated from historical data
to compute the required return to equity.
‘It is a mistake for seven reasons:
1. because betas calculated from historical data change considerably from one day to the next.
2. because calculated betas depend very much on which stock index is used as the market reference.
3. because calculated betas depend very much on which historical period (5 years, 3 years,…) is used to calculate
them.
4. because calculated betas depend on what returns (monthly, yearly,…) are used to calculate them.
5. because very often we do not know if the beta of one company is lower or higher than the beta of another.
6. because calculated betas have little correlation with stock returns.
7. because the correlation coefficients (and the R2) of the regressions used to calculate the betas are very small.’
The paper provides numerous examples to support all of the seven statements.
2. The
relevant
time
frame
In our previous analysis, we used the year 2004 as a reference year for the calculation of the NPV, as this was the
time when the entire investment of EUR 199,4 million had been committed. However, we can easily duplicate our
analysis for the year 2000. The resulting WACC would be higher than in 2004 ( 1 ), due both to a higher market
risk premium (which according to the information gathered by Fernández should be around 7 % — see section
1.1) and to a higher risk-free rate (which stood at 5,53 % for Spain in 2000 ( 2 )). Hence, an internal rate of return
of 8,84 % would still be much lower than the cost of capital (more precisely: WACC = 5,53 % + 1,59 * 7 % =
16,66 %).
It is possible to go one step further and compute the NPV of the project in 2000. Bearing in mind all the caveats
we stressed in our previous analysis (i.e., the use at face value of the cash flows and the parameters used for the
calculation of the terminal value, except, of course, for the WACC) we obtain the following negative NPV:
2000 2001 2002 2003 2004 2005 2006 NPV
Cash
– 46 479 –
69
719 9
005 12
616 6
930 7
710 68
698
flow
Discount
1 1/(1
+
1/(1 +
1/(1 +
1/(1 +
1/(1 +
1/(1 +
WACC) WACC)^2 WACC)^3 WACC)^4 WACC)^5
WACC)^6
16,66 %
1 0,8572 0,7348 0,6298 0,5399 0,4628 0,3967
DCF –
46
479 –
59
762,56 6
616,67 7
946,13 3
741,50 3
568,16 27
252,87 –
57
116,22
( 1 ) According to our calculations the WACC in 2004 was 14,91, using a risk-free rate of 4,1 % and a market risk premium of 6,8.
( 2 ) See OECD Statistics.

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3. Financial
ratios
The LECG report agrees with our point of view that CAPM is the right instrument to assess the ex-ante cost of
capital. Moreover, the report does not provide any argument to rebut the use of the ROCE as a proxy for the
WACC. Therefore, it is not necessary to repeat the reasoning already set out in the previous note. However, it may
still be worth recalling why the ROCE is the most appropriate ratio. Since the economic profitability of a company
is measured ex-post by the difference between the return on capital employed and the cost of capital, then
intuitively, if one were to construct a benchmark based on past data of competitors in order to determine the
minimum return required by investors, then the appropriate proxy would be the average industry ROCE.
4. The
extension
of
the
investment
to
hotels
and
office
spaces
The assertions in this point are based on new evidence, namely six land valuation reports. As a preliminary
remark, we note that this evidence is produced ex-post, and therefore was not part of the information available to a
potential investor at the time ( 1 ). Secondly, we note that the Arthur Andersen report only mentions the possibility
of developing a hotel complex (in phase III) and certain office space (in phase IV). The report contains an estimate
of costs for developing hotels and offices but none of the associated revenues; hence the information to assess the
profitability of developing the land is missing. Indeed, no business plan is provided for the development of phases
III and IV. In the Consultia IT business plan, the reference to the hotels is made only indirectly through the
mention of an area of complementary services, while offices are not even mentioned. Furthermore, these activities
are not considered at all in the section on the economic and financial forecasts. In other words, at no stage would
the private investors have been presented with a business plan concerning the development of the land. As such,
this implies that the ex-ante assessment of the project should solely be based on the business plan concerning the
film studios; indeed, all the relevant evidence indicates that land development was not part of the original business
plan. In fact, the LECG submission of April 2008 explicitly stated, in section 5 (The operational value of a hotel
complex and commercial area in Ciudad de la Luz) that the details of the investment in the services complex (hotels
and commercial area) were not analysed in either of the two business plans because (i) the above mentioned
services would in any event be built after the studio and (ii) the profitability of the studio was high enough and
therefore it was not necessary to analyse at that moment the additional cash flows Ciudad de la Luz might
generate.
The only pertinent information relevant for the assessment of the land is represented by the bids received by
Ciudad de la Luz in 2005 for the construction and operation of hotels and a commercial area, which were
presented in section 5 mentioned earlier. This represents an evaluation made by the market in a period contem
poraneous with the investment decision, a period moreover characterised by the real estate boom. As will be
explained in the next section, the Euroval valuations do not offer proper guidance regarding the value of the land
plots.
For the purpose of calculating the NPV including this additional land development, it is possible to use the price
set by the market (the fact that it is relatively low, as recognised by the Spanish, is indeed evidence that this
property development did not seem to be very attractive for private investors).
The following table provides NPV calculations that include the property development on the basis of the bids that
were actually made in 2005 (EUR 560 000 per year, adjusted for inflation, as stated by LECG). As can be readily
seen, the NPV remains negative.
2002 2003 2004 2005 2006 2007 2008
Cash flow –
884 –
1
792 –
2
601 –
118
177 –
55
813 –
25
088 4
462
IPC hotels 1,000 1,021 1,042 1,064
Hotels 560 572 584 596
Total –
884 –
1
792 –
2
601 –
117
617 –
55
241 –
24
504 5
058
Discount (1
+
1 + WACC
1 1/(1
+ 1/(1 +
1/(1 +
1/(1 +
WACC)^2
WACC)
WACC)^2
WACC)^3
WACC)^4
( 1 ) The LECG report of 25 April 2008 follows the same line, as it states at the outset (beginning of section 2.1.) that the relevant question
for the application of the MEIP is ‘With the information available at the time the investment was made, did the project offer enough
profitability to induce a private investor also to decide to undertake this investment? […] The investment decision must be analysed
from an ex-ante perspective.’

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2002 2003 2004 2005 2006 2007 2008
14,91 % 1,3204 1,1491 1,0000 0,8702 0,7573 0,6591 0,5735
DCF –
1
167,26 –
2
059,19 –
2
601,00 –
102
355,76 –
41
835,77 –
16
149,82 2
901,01
2009 2010 2011 2012 2013 2014 NPV
5 526 6
561 6
842 8
057 8
307 80
447
1,087 1,110 1,133 1,157 1,181 1,206
609 621 634 648 661 9
401
6 135 7
182 7
476 8
705 8
968 89
848
1/(1 +
1/(1 +
1/(1 +
1/(+
1/(1+/WAC
1/(1 +
WACC)^5
WACC)^6
WACC)^7
WACC)^8
C)^9
WACC)^10
0,4991 0,4344 0,3780 0,3290 0,2863 0,2491
3 061,91 3
119,74 2
826,09 2
863,46 2
567,38 22
383,73 –
126
445,48
A series of land valuation reports were prepared by Euroval. These reports were commissioned by the Sociedad
Proyectos Temáticos de la Comunidad Valenciana, the investor in Ciudad de la Luz (CDL). The reports purport to
provide an objective valuation of the land that would be used for the construction of hotels and offices in the CDL
complex. They provide a valuation for the years 2000, 2002, and 2009. For each of these years, two plots are
valued: one destined for the development hotel complex, and the other for office blocks, making for a total of 6
valuation reports.
Since the reports broadly follow the same methodologies, some of our comments are generic; whenever reference
is made to specific assertions, the corresponding report is identified.
This memo describes the limitations of the aforementioned reports and concludes that the valuations presented
therein are untrustworthy. In addition, the memo notes that the valuation report is not compatible with some of
the claims found in the documents previously provided by Spanish authorities. Last, the memo indicates the kind
of evidence that could have been used to obtain an estimate of the value of the land.
4.1. The
reports
As can be seen, Euroval has not signed nor stamped any of these reports, i.e. there is no evidence at all that the
entity takes responsibility for the valuations.
The Spanish authorities state that the valuation reports on the land drawn up in 2000 and 2002 do not fulfil the
requirements of Ministerial Order ECO 805/2003 regarding the valuation of buildings, ‘since their purpose is other
than the scope of application of that Order’ (e.g. p. 3 of the report providing the 2000 valuation for office space).
It is not explained why the aforementioned ministerial order should not apply. The aforementioned ministerial
order is also mentioned in conjunction with Law 6/1998 on land valuation (p. 13 of the aforementioned report).
It is argued that, since it is a retrospective valuation for the year 2000 made in 2002, ‘the acting technical team is
free to apply the calculation adjustments and hypotheses it considers most appropriate for the objective pursued.’
However, the ‘adjustments’ and ‘hypotheses’ are not spelled out. Furthermore, it is not clear why existing law can
not be applied, particularly with regard to the valuation of the land. Nor is a justification provided for not applying
the laws that were in force at the time.
The report providing the current (2009) valuation of the plot destined for office blocks contains an even more
surprising statement. It is claimed that the valuation methods applicable according to the current legislation in force
can be adapted because: ‘since the purpose of the valuation is a non-monetary contribution at the date in question,
the acting technical team is free to apply the calculation adjustments and hypotheses it deems most appropriate for
the objective pursued.’ In other words, since the valuation will not lead to a monetary transaction, the valuation

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methods that have to be applied by law can be modified. To be more precise, since no real money/transaction is
involved, the technical team admits that they consider that they can make adjustments that they deem opportune
given the ‘objective pursued’.
It is therefore no wonder that Euroval has not officially endorsed any of the six reports.
4.1(a) R e p o r t s p e r t a i n i n g t o t h e b u i l d i n g o f o f f i c e s p a c e ( N N T p l o t )
The reports should have also explained more clearly what the qualification of ‘tertiary use’ for the land entails.
The most glaring limitation of these reports is the way they establish benchmark prices for office space in the
Ciudad de la Luz complex. On p. 18 of the 2000 report, nine transactions are listed, including the price paid per
square meter. These transactions took place between December 1999 and September 2000, and the average price
paid was of EUR 1 111,7 per square meter. This is the value taken to represent the benchmark for office space in
the Ciudad de la Luz complex.
The Ciudad de la Luz complex is outside the city of Alicante and next to an industrial complex (polígono industrial).
By contrast, the nine transactions mentioned above involve offices (average size: 115,26 square meters) located in
the most prestigious business streets in Alicante. Using these transactions to establish a benchmark for the
66 576,54 m 2 that would be built in Ciudad de la Luz simply does not make sense.
The report uses the Spanish Consumer Price Index (CPI — Indice de Precios al Consumo, IPC) to deflate current
values. In particular, the IPC is used to deflate a current valuation of the land back to the year 2000 (p. 24). We
note that, as its name indicates, the CPI/IPC does not encompass asset price inflation; the index is computed on the
basis of a basket of consumer goods. Using the CPI/IPC to deflate land values and/or real estate values is far from
being innocuous, for the reasons explained below.
As is well known, Spain experienced a housing boom that lasted more than 10 years (to a notable extent, its
current macroeconomic woes are related to that bubble). As a consequence land prices increased much faster than
the general CPI.
According to statistics gathered by the Ministry of Housing of the Spanish Government (Ministerio de Vivienda,
http://www.mviv.es/es/), housing prices in the Alicante province increased by 122,2 % during the period spanning
the first quarter of 2000 and the third quarter of 2009 (this time period has been chosen as it corresponds to the
one used in the 2000 Euroval report: January 2000 to August 2009). A cursory glance at the time series indicates
that house prices increased fastest at the start of the time period under consideration.
The same statistical source also provides data on land prices; unfortunately, the series only begins in 2004. The
average price per square metre of urban land in the Alicante province stood at EUR 234,3/m 2 during the first
quarter of 2004. The corresponding figure for municipalities of more than 50 000 inhabitants in the province of
Alicante stood at EUR 464,9m 2 during the first quarter of 2004.
Since the price of land that can be used for real development of urban land is closely correlated to housing prices,
it is possible to obtain an approximation to the deflator for land prices during the period Q1 2000 – Q4 2003 by
looking at house price inflation during the same period. According to the Spanish Housing Ministry, house prices
in the Alicante province increased by 80,1 % over the period between the first quarter of 2000 and the third
quarter of 2003.
Thus, irrespective of whether one takes the average land price for the entire province (EUR 234/m 2 in Q1 2004),
or that for large municipalities (EUR 464,9/m 2 in Q1), applying a deflator of that order of magnitude (+/- 80 %)
would result in a land price in Q1 2000 much lower than that reported in the Euroval report.
It is also worth mentioning that, regarding the evolution of prices, the reports contradict each other. As mentioned
above, on p. 18 of the 2000 report, nine transactions are listed, including the price paid per square meter. These
transactions took place between December 1999 and September 2000, and the average price paid was of EUR
1 111,7 per square meter. This is the value taken to represent the benchmark for office space in the Ciudad de la
Luz complex.

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The 2009 report follows the same methodology. On p. 18, seven transactions that took place between April 2007
and December 2008 are listed. The average value is EUR 2 736,22 per square meter. Thus, the 2009 report
provides glaring evidence that real estate inflation was far above the 33,5 % used in the 2000 report. By
comparing the two reports, we obtain inflation of 146,1 %. This is in line with the Ministry of Housing
reports: between the first quarter of 2000 and the second quarter of 2008 (the period of most of the transactions
reported in the 2009 report), housing prices in the Alicante province increased by 152,1 %.
The fact that the figures found in the 2009 report are deflated by 15 % to establish current prices does not change
the overall picture in view of the magnitudes involved.
As a by the way, we would also reiterate that using prices for small offices in the centre of Alicante to establish a
benchmark for the Ciudad de la Luz complex does not make sense.
Two further comments should be borne in mind. Firstly, during property boom periods, the price of land usually
increases faster that final house prices. In any case, the house price index understates land price inflation. Secondly,
the average land price for large municipalities is probably not representative of land prices in a location such as
that of CDL. Indeed, most of the underlying data used to construct this average price stems from land located in
cities or their immediate vicinity (e.g. suburban ‘urbanizaciones’); CDL is located outside the city in a location with
little (if any) residential housing.
Lastly, house price inflation is illustrated by the material used to teach second-year undergraduates at Unversidad
Carlos III de Madrid that can be found at: http://www.eco.uc3m.es/~ricmora/ee/, materiales, Tema I, slide 67, which
we reproduce below. This graphical evidence further confirms that house prices have increased much faster than
the CPI/ICP.
Original source: LA VIVIENDA EN ESPAA: DESGRAVACIONES, BURBUJAS Y OTRAS HISTORIAS, José García
Montalvo.
In all the reports, the arguments used to show that the costs of land development are nil are rather thin, given that
some additional costs would have to be borne.
Finally, in the case of the office complex (NNT) a difference of 35 % (2002) or more than 50 % (2000) between
the values obtained from the two valuation methods (dynamic residual method and increase in CPI) is indicative of
the highly speculative nature of the exercise.

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4.1(b) R e p o r t s o n t h e v a l u a t i o n o f t h e p l o t d e s t i n e d f o r a h o t e l c o m p l e x ( N N H p l o t )
The 2000 and 2002 reports on the second plot (‘NNH’) suffer from the same limitations (e.g. use of an inadequate
deflator, lack of justification for not applying valuation methods established in Spanish law, etc.). As mentioned
above, none of these reports are signed or stamped.
Some additional comments are nevertheless in order. The 2000 and 2002 reports establish benchmark prices for
hotel rooms with the help of average prices. However, the source is not provided, nor is it clear whether it refers
to Alicante province (2002 report), or the Comunidad Valenciana (2000 report).
The resulting average prices are EUR 44,95/night in the 2000 report, and EUR 47,65/night in the 2002 report.
Although the source underpinning these values has not been provided, they are not out of line with previous
figures.
By contrast, the 2009 report provides a list of 6 well located hotels, all of which are 4- or 5-star, to establish a
benchmark price. The latter is established EUR 104/night. There is no explanation as to why the methodology to
establish benchmark prices is different from the one used in the 2000 and 2002 reports.
More importantly, it is hard to understand why the focus is on 4-5-star hotels. Is there any indication that demand
would exist for 4-5-star hotels outside Alicante, located next to a highway and a ‘poligono industrial’?
In the same line, it is quite telling that the only hotel close to the CDL complex has been omitted. The latter is an
IBIS, whose prices range from EUR 49 per night for the summer of 2010 (http://www.ibishotel.com/gb/
reservation/multirates.jshtml consulted on 24 February 2010). As further evidence, luxury apartments next to a
golf course (and relatively close to CDL) charge EUR 80 per night in August 2010 (peak season, see http://www.
hotelesoasis.com/WebOasis/EN/ficha_hotel/plantio_golf/descripcion.jsp, consulted on 24 February 2010).
The 2009 report for the NNH plot also contain some surprising statements. One is initially pleasantly surprised to
find out that the method to undertake the valuation is in conformity with the law (p. 13 reads ‘The methodo
logical references are the criteria laid down in Ministerial Order ECO 805/2003 on real estate valuation and Law
6/1998 of 13 April 1998 on land valuation, the aim of the valuation being to establish the value at the present
date.’ However, on p. 25, one discovers that, after all, the valuation report has not complied with the requirements
set out in the Ministerial Order: ‘In accordance with Article 61(1)(b) of Order ECO 805/2003 of March 2003 on
rules for real estate valuation, we would point out that this Valuation Report does not formally comply with that
Order since its purpose is other than the scope of application of the Order’ (‘por ser su finalidad distinta al objeto de
aplicación de la misma’).
It is also interesting to note that there is a huge difference between the estimates per square meter for the two
plots (NNH and NNT). While not denying that the projected uses (offices vs. hotels) may explain part of the
difference, the gap is still striking. For hotels, the values range from EUR 144,12/m 2 (2000) to EUR 188,35/m 2 in
2009. For office space, the respective magnitudes range from EUR 491,64/m 2 (2000) to EUR 800/m 2 in 2009.
What can explain the significant difference in the price evolution (inflation) of these two plots situated next to
each other? How is it possible to account for this difference of over 300 %?
Should we conclude that this is due to the fact that the methodology used to value the plot destined for hotels is
closer to the standards established by the law? Or should it be put down to the greater transparency of the price of
a hotel night?
It is also claimed that variable costs represent 50 % of revenues (e.g. on pp 18-19 of the 2009 report). Where does
the estimate of such large margins come from?
Building costs are estimated on the basis of a benchmark price module. For the 2000 and 2002 reports, the
correct figures are chosen. However, for the 2009 report, the 2006 figure is used. Why is this?
4.2. Risk
premiums
We also note that the reports recognise that investment in hotel facilities is riskier than investment in office space
(e.g. on p. 12 and p. 26 of the 2000 report). At all times, the Spanish authorities have consistently envisaged the
construction of a ‘hotel complex’.

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Similarly, the report indicates that the discount rate (tipo de actualización) is given by the following formula (p. 16
of the 2000 report):
i = Risk-free rate + risk premium
On the same page, a table provides the minimum risk premiums to be applied. The relevant premiums are above
the ex-ante expected return on investment in Ciudad de la Luz.
Lastly, the risk premium used in the calculations appearing on p. 21 of the 2000 report (10 %) is lower than the
one appearing in the corresponding table on p. 16 (11 %).
4.3. Credible
valuations
In order to obtain a credible valuation of the land, valuations for around 2000 of various plots of similar
characteristics in terms of size and location (next to the Aguas Amargas industrial complex), and intended for
‘tertiary use’ and ‘hotel use’, should have been provided.

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