ANNEX 2
Notes of a meeting of the ETRA Committee and DETR
and English Partnerships officials, 8 June 2000
Officials present
Paul Evans, DETR
Liz Sealey, DETR
David Shelton, EP
Richard Beattie, EP
The meeting was held as a follow-up session to the
discussions between the Committee and European Commission officials
on 11 May 2000, and in response to the issue of gap funding being
declared a State Aid by the European Commission.
DETR officials told us that they were 'dismayed'
by the EC ruling in December 1999 which declared that English
Partnerships' Partnership Investment Programme was in breach of
state aid rules. This was a particular blow because the Partnership
Investment Programme had been very successful and had been running
for some time. Moreover, the UK approach to regeneration—ie
involving the private sector in partnership schemes—had
begun to be noticed by other European countries and deemed beneficial
to urban regeneration. We were told that the Government had deployed
"every technical and political argument" against the
ruling, but to no effect. Now the Government is putting its efforts
into finding a way forward.
Gap funding
The rationale behind gap funding was explained:
- it closes the gap between
the forecast higher costs of regenerating difficult sites, and
the forecast lower end values arising as a result of market failure.
- the gap funding is calculated as the minimum
amount necessary to enable the developer to go ahead on the expectation
of a normal profit. It does not provide any guarantee of that
profit.
- all gap funding offers are backed by formal
Funding Agreements which include clawback arrangements. Any cost
savings, and any value in excess of the forecast, are shared between
the public and private sector. Sharing is necessary to give the
developer the necessary incentive to secure savings and maximise
end values (In contrast, any cost overruns or shortfalls in value
are left for the developer to absorb).
- all appraisals are conducted on the basis of
open market costs.
English Partnerships told us that the situation in
England was unique due to:
- high population density
(third highest in the world after Bangladesh and the Netherlands)
and thus a strong desire to avoid unnecessary greenfield development
- the legacy of brownfield land
- a property market which is very different to
that of other European countries. (We were told that usually institutions
own commercial property and that the occupiers lease it. This
compares with Europe where owner-occupation tends to be the rule.
Also, land ownership is very much more fragmented in the UK).
EC ruling
The officials summarised for us the Commission's
arguments against PIP. The acid test, we were told, was a programme
is state aid if it is deemed to distort or to have the potential
to distort trade. The EC merely has to assert that there is a
potential for trade distortion but does not have to present hard
evidence that that is the case.
All those projects which already had financial approval
by 22 December 1999 were being allowed to proceed. Those schemes
which had been submitted to PIP by that date would be allowed
to go through the appraisal process. No new applications would
be accepted.
When asked why the Government took the decision to
close the programme, we were told that it could not continue to
run a programme which had been established (by the Commission)
to be in breach of state aid rules. We were also told that launching
a legal challenge was not a viable option.
Alternatives
- The DETR is currently pulling together the elements
of PIP which would still be eligible under the state aid rules
(ie those projects in Assisted Areas). Unfortunately, the officials
told us, only about 10-20 per cent of schemes traditionally taken
forward under the Partnership Investment Programme would be eligible
under this route.
- Other schemes may be able to be undertaken under
a direct development route. However, this, we were told, changes
the relationship between the public sector and developers. In
particular, the public sector agencies would have to spend the
money up front and also take the risk which, under PIP, the developers
bore. Direct development would cost much more. The public sector
will also have to be more "directional" under direct
development and produce masterplans, etc—rather than seeing
what the market suggests. One advantage of direct development
is that you are asking developers to take on a smaller risk, which
may make it an attractive proposition for them.
- Other possibilities were explored by the Committee.
We suggested that joint ventures might be a solution but were
told that it would be difficult to convince the Commission. Mr
Evans said that partial public sector ownership of a development
would not help. Another suggestion which was discussed was a scheme
specifically for the development of contaminated land. The officials
conceded that this may be possible but that it would only address
part of the problem. We also asked whether the EC's objections
would still apply were PIP funding housing-only schemes. The officials
told us that this would not work because house building also constituted
a tradeable activity in the eyes of the EC.
- We were also told that a more permanent and substantial
solution was being sought. The officials told us that there had
been a 'fairly intensive debate' with the Commission about the
scope for a new framework agreement for regeneration. This would
be a long term exercise.
Implications
We discussed the implications of the ruling. These
were summed up as follows:
- developers may cease to get involved in as many
urban regeneration projects (although the limited number of greenfield
sites may restrict this)
- we were warned that any new framework/schemes
would not be implemented quickly since they would need to be notified
to the Commission before being introduced.
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