House of Commons - Environment, Transport and Regional Affairs

Select Committee on Environment, Transport and Regional Affairs Sixteenth Report

The Implications of the European Commission Ruling on Gap Funding Schemes for Urban Regeneration in England

THE WAY FORWARD

30. We are told that the Commission's decision is final and some way forward needs to be found. However we are not optimistic that there is a straightforward solution. We agree with the House Builders Federation that "it is difficult to envisage alternative schemes that will be as good".[88] At the same time, we recognise that a realistic approach is required. At present there seem to be four possible alternatives:

31. The first two schemes have now been notified to the Commission (as a package called 'Partnership Support for Regeneration') and we await their decision.[89]

Gap funding schemes in Assisted Areas

32. According to the Commission's evidence, gap funded schemes within Assisted Areas[90] will continue to be allowed.[91] Assistance benefiting recipients of economically disadvantaged areas (ie Assisted Areas) is known as 'Regional Aid' and may be allowed an exemption from the state aid rules.[92] The decision to allow such gap funding to continue has been described by the Commission as "partially positive".[93] Clearly this provision is better than nothing. However, we cannot agree with the 'positive' spin applied by the Commission. There are two fundamental problems. First, such a scheme would capture only a proportion of the activity previously funded by the Partnership Investment Programme.[94] Second, even where projects are located within Assisted Areas, they will be subject to much lower levels of 'intervention' or 'grant intensity' which will greatly reduce the ability to close the cost/value gap. These grant levels will be established once the Assisted Areas map has been announced, but are expected to be between 10 and 35 per cent (of total project costs)[95] depending on Assisted Area status. Even for those projects located in 'tier one' areas and receiving the maximum intensity of funding, witnesses warned that grant levels may not be adequate to "bridge the gap between cost and end value in many regeneration initiatives".[96] DETR estimates that only 10-20 per cent of activity undertaken under the Partnership Investment Programme would go ahead on this basis. Unless a more comprehensive solution is found, the regeneration of our urban areas will be in serious jeopardy.

Direct development

33. Direct development describes the process whereby the public sector reclaims and develops sites in its ownership, before selling on to the private sector. This activity would fall primarily to the RDAs. While they already undertake a limited amount of direct development, as the DETR comments "it has not been the preferred approach for physical regeneration because of its costs, and the fact that it limits the valuable private sector input".[97] Witnesses told us that this was a possible partial replacement to the Partnership Investment Programme, but that there were a number of difficulties.

34. First, it would require a massive increase in the public sector resources committed to regeneration. Of course, a proportion of this outlay should be recouped once the development was sold on to the private sector, so as the Alliance for Regional Aid told us "it is a cash flow problem rather than necessarily an ongoing drain on the public purse."[98] Notwithstanding this, direct development is still going to be (initially) around four times more expensive than the Partnership Investment Programme. The RDAs told us:

In future years as projects are completed and sold, then increased receipts would be available to recycle further investment into regeneration."[99]

35. The Comprehensive Spending Review announced on 18th July 2000 allocated £500m additional funding to the RDAs over the next three years. This represents a per annum increase of 10 per cent real growth in their budget after inflation.[100] Perhaps more importantly the Government has agreed to allocate the funding as a single pot from 2002, allowing the RDAs to determine their spending priorities (albeit linked to certain conditions relating to performance and output). This means that, in theory at least, the RDAs could allocate a large proportion of their budget to direct development activity, if they considered that appropriate. The new funding and increased flexibility has been welcomed by the RDAs.[101] However, even with this new boost in resources, it will be difficult for the RDAs to launch a significant direct development programme quickly. Nor will the overall level of resources committed match the total public and private spending which was invested in urban regeneration under the Partnership Investment Programme.[102] For the purposes of comparison, the most new resources the RDAs could invest in direct development, if they chose to devote all their new resources to this activity, is £500million over three years, whilst total public and private investment under the Partnership Investment Programme was £2.1 billion[103] for the last three years of its operation.[104] Given the need to increase the amount of money spent, consideration should be given to the RDAs and English Partnerships being permitted to borrow against assets.

36. Witnesses told us that they would be constrained by a lack of capacity to undertake such work. We were told that not only are skills in project delivery, marketing and the property market lacking, but that it would take time to assemble and build up a team equipped to undertake direct development properly.[105] The public sector is also not particularly used to risk-taking. Nor does it have the "entrepreneurial edge"[106] that is integral to some of the more innovative regeneration projects. Under direct development, we were told, the public sector would also find mixed use schemes difficult.[107] For example, it is unlikely that the Urban Splash type of refurbishment would be undertaken by the public sector. Another casualty would be the smaller, lower profile, "bread and butter projects" which English Partnerships told us are important in creating floor space, employment and regeneration, but would not deliver adequate economies of scale to justify a public sector direct development scheme.[108] Furthermore, a direct development approach runs counter to the philosophy adopted towards regeneration in the UK in recent years, which is for it to be "market-driven and private sector-led".[109] Working in partnership was described by the RDAs as a "fundamental cornerstone" for the regeneration of brownfield sites.[110]

37. Another signficant barrier to the establishment of a large scale direct development programme is ownership. As we discussed in paragraph 16 above, in contrast to many other European countries, brownfield land in England does not tend to be in the ownership of the public sector. Since this is a prerequisite for direct development activity, a major programme of compulsory purchase would have to be launched by the Regional Development Agencies.[111] As Mr Gill told us "the land bank to deliver that direct development does not exist at the moment".[112] The problems this presents can be illustrated by Barnsley where 68 per cent of development sites within the borough are in private sector ownership. The owners are reluctant to develop their sites because the cost of doing so would exceed their market value.[113]

38. It seems clear that direct development is not in the short term going to deliver the same level of outputs, in terms of land reclaimed, floorspace and housing built and jobs created, as a gap funding approach. Neither is it going to be as effective in dealing with mixed use and innovative schemes, both of which are key to the Urban Renaissance.

Public procurement

39. Another measure being considered to ensure that reclamation work can continue to take place is the introduction of a competitive public procurement approach. This would involve a full and open procurement exercise involving a set of criteria for development in a certain area, with bids invited from site owners in that area. The contract would be awarded to the applicant offering the best value for money. The DETR told us that this would get around the Commission's objection that under the Partnership Investment Programme, proposals came from the recipients of support (ie the developer/landowner) rather than the public sector.

40. This proposal does appear to offer a useful tool for future regeneration projects, with perhaps the only drawback being an increased level of bureaucracy associated with the tendering process which would affect both the private and public sectors. However, at this stage it is only a tool for regeneration, rather than a comprehensive strategy. Moreover, such an approach would only generally be possible where the public sector owned the land, meaning that it suffers from the same drawbacks as a direct development approach. More work needs to be undertaken by DETR to develop this as a serious contender to replace the Partnership Investment Programme.

A new regeneration framework

41. Given that the options currently being considered offer at best only a partial replacement for the Partnership Investment Programme, it is imperative that the Commission and DETR agree a new regeneration framework, based on public:private partnership working as soon as possible. Any new framework should aim to replicate the best aspects of the Partnership Investment Programme, ie it should transfer risk to the private sector, use private sector management resources, and operate in partnership with the RDAs and local authorities.[114] The potential of joint ventures should be fully explored.[115]

42. At the beginning of our inquiry the concept of a new framework was held out as a concrete solution. However, we are very worried that so far this seems to have come to nothing and the DETR has not yet worked up specific proposals. Mr Gill of English Partnerships told us:

116

One of the most serious consequences of the Commission's ruling is the hiatus that it creates in regeneration activity. We are very disappointed that the prospect of a) agreeing a new framework and b) getting this in place quickly now looks remote.[117]

88 GF19, para 15-see also GF10, GF09 Back

89 Q152 Back

90 Assisted Areas are those areas deemed by the EC to be economically disadvantaged and as a result firms locating or expanding in those areas can receive aid from the relevant member state. In the case of the UK this aid is called 'Regional Selective Assistance'. The purpose of designating Assisted Areas is separate from and different to Objective 1 and 2 areas which are designated for the purposes of receiving Structural Fund assistance. Back

91 GF22 Back

92 Treaty of Rome, Article 92 (3) (a) and (c) Back

93 GF13, para 7 Back

94 DETR estimates that on average, around 50 per cent of Partnership Investment Programme schemes were located in Assisted Areas, although the level varies year to year Back

95 Net of tax Back

96 GF14-and see GF07 Back

97 GF13 Back

98 Q91-and see QQ34, 164 Back

99 GF14 Back