Select Committee on Environment, Transport and Regional Affairs Appendices to the Minutes of Evidence


Memorandum by the Competition Directorate of the European Commission (GF 22) Gap Funding and Regeneration Policy

1.  INTRODUCTION

  The present document examines gap funding by public authorities and in particular gap funding within regeneration policy. This document does not constitute a policy declaration, a guideline or a framework regarding the use of Article 87 of the EC Treaty with respect to such gap funding. It is merely intended to be a contribution to facilitate the work of the Environment, Transport & Regional Affairs Committee of the House of Commons, which is conducting an inquiry into the implications for urban regeneration in England of the Commission's Decision on the English Partnerships scheme under the Partnership Investment Program (hereinafter referred to as:"EP/PIP").

  The document examines the following points: Gap funding and State aid, exemptions to the general incompatibility of State aid, the EP/PIP Decision, follow-up.

2.  GAP FUNDING AND STATE AID

  Article 87(1) of the Treaty[4] stipulates that "[...] 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 trade between Member States, be incompatible with the Common Market."

According to the explanations given by the UK authorities, gap funding in the case of EP/PIP has the objective of making certain worthy, but loss-making projects nevertheless possible. In the case of regeneration projects, gap funding will cover the difference between estimated development costs and the estimated final value of the site. Gap funding constitutes State aid in the sense of Article 87(1) insofar as the requirements set out in that Article are met: use of public resources, advantage for certain undertakings or the production of certain goods, and an effect on trade.

  In examining the EP/PIP's activities, the Commission and the UK authorities have agreed upon the following working concepts:

    —  by bespoke development reference is made to cases where the development is designed to suit the needs of an end user known at the time the development works are undertaken;

    —  by speculative development reference is made to cases where the site is to be developed in order to be open to different uses not established at the time the decision to develop is taken.

  As it will be seet out in paragraph 4, the Commission took the position that gap funding directed to regeneration projects constituted aid in the meaning of Article 87(1) EC. The Commission considered that, at least in the case of regional aid, "[. . .] for the purpose of applying this scheme, the aid beneficiary may be presumed to be the end user in the case of bespoke development [. . .] and the land owner/developer in the case of speculative development."[5] The existence of aid lies in the fact that the gap funding provides a quantifiable financial incentive to a developer aimed at carrying out development works on a site which would be otherwise unattractive. As EP is a public body, there is no doubt about State resources being used. The selectivity criterion is satisfied by both the selection of the projects among the large number of applicants and the preference granted to developers who own the land. As far as the effect on trade is concerned, the Commission found that the companies affected by EP funding were conceiving and carrying out "property developments, an activity which can be very mobile across Member States, and [were] not just companies active in trade in derelict land in England".[6]

  Since State aid schemes or cases must be notified as a draft to the Commission, it is important to emphasise that the analysis of the effects of such aid is made on an ex ante basis, which hence does not allow for their exact quantification. Furthermore, the European Court of justice accepts that in the case of an aid scheme, the Commission may confine itself to examining the characteristics of the scheme in order to determine whether, by reasons of the nature of the scheme, it gives an appreciable advantage to recipients in relation to their competitors and is likely to benefit undertakings engaged in trade between Member States. The effect on trade is given even if the beneficiary himself does not export to other Member States. It is sufficient if competitors or potential competitors in other Member States are active in intra-Community trade.

  Finally, the European Courts have repeatedly held that even financial compensations for additional cost caused by specific burdens imposed on a company constitutes aid.[7]

3.  EXEMPTIONS TO THE GENERAL INCOMPATIBILITY OF STATE AID

  Article 87(2) and (3) carry exemptions to the general incompatibility of State aid in the meaning of Article 87(1). The exemptions listed in Article 87(2) are not relevant for gap funding to realise regeneration projects, nor is Article 87(3)(b). For regeneration projects carried out in assisted areas, however, the regional development exemptions laid down in Article 87(3)(a) and (c) can be relevant. Also relevant may be the exemption in Article 87(3)(c) to promote the development of certain economic activities and in Article 87(3)(d) to promote culture and heritage conservation.

  It is important to note that the exemptions set out in Article 87(3)(c) and (d) also carry the condition that such aid should not adversely affect trading conditions to an extent contrary to the common interest. This condition would certainly not be fulfilled if the aid exceeded the minimum required to have the regeneration project in question carried out. It is well-established case law that the use of an open call for tender or, should this not be possible, the use of objective assessments by independent experts, would exclude the possibility of overcompensation.

4.  THE ENGLISH PARTNERSHIPS DECISION

  On 22 December 1999 the Commission adopted a final Decision on the scheme EP/PIP[8]. In 1995 the UK had notified a number of schemes, including EP, to which the Commission had at the time not raised any objections. Afterwards, the Commission's attention was drawn to certain cases where benefits appeared to accrue with the developer/partner of EP. As the scheme had previously been approved, the new investigation did not suspend it nor does the final Decision adopted in December 1999 have any effect on regeneration projects, for which a formal application had been submitted before the date of its adoption (Article 2 of the Decision).

  At the time of the Decision, the UK authorities accepted to subject the bespoke development to the State aid rules, making it compatible with the Treaty, but they did not do so with respect to the speculative development.

  Pursuant to Article 1 of the Decision, aid to speculative development can be considered compatible if the relevant State aid rules are respected (listed in paragraph 64 of the Decision). Furthermore, the UK authorities are required to individually notify cases where one of the actors involved is active in the sectors subject to special State aid rules (also) listed in paragraph 64 of the Decision), both in bespoke and speculative projects. It would therefore not be justified to claim that the Decision prohibits EP/PIP, as EP/PIP is considered compatible with the common market provided certain conditions are met. The individual notification is also required in cases not clearly falling within either definition (bespoke/speculative), "where the determination of the aid beneficiary has further consequences under the State aid rules"[9].

5.  FOLLOW-UP TO THE DECISION

  Further to the Decision the UK authorities informed the Commission that they would comply with it by discontinuing EP/PIP. They subsequently provided a list of all projects still in the "pipeline", for which funding would continue pursuant to Article 2 of the Decision.

  Several meetings have taken place so far both at political and at service level to discuss the consequences of the Decision for regeneration policy in the UK as well as three follow-up schemes to EP/PIP in assisted areas (for bespoke projects, speculative projects and direct development). These three schemes, some points of which need to be clarified by the UK authorities, have been formally notified to the Commission pursuant to Article 88(3) of the Treaty and the Commission will decide on their compatibility with the common market in due course. It would be neither proper nor prudent to speculate on the content of those decisions in the present paper.

July 2000


4   Formerly Article 92(1). Back

5   Recital (62) of Commission Decision on EP/PIP, OJ L 145 of 28.06.2000, p. 34. Back

6   Recital (60) of Commission Decision on EP/PIP, OJ L 145 of 28.06.2000, p. 33. Back

7   See cases T-106/95 (FFSA-27.02.1997) and T-46/97 (Sociedade Independente de Communicac"ao-10.05.2000). Back

8   OJ L 145 of 28.06.2000, p. 27. Back

9   Recital (62) of Commission Decision on EP/PIP, OJ L 145 of 28.06.2000, p. 34. Back


 
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