Select Committee on Transport, Local Government and the Regions Appendices to the Minutes of Evidence

Memorandum by European Policy Directorate, Department of Trade and Industry (ERF 20)


  1.  DTI does not have policy responsibility for regeneration, but it does lead across government on European state aids policy. A corollary of this policy lead is that DTI, through its state aids policy unit (SAPU), advises other government departments (OGDs) and decentralised arms of government on the interpretation of the state aids rules and on how to approach the European Commission to obtain state aids approval for aid schemes. The Commission's role in relation to state aid is, however, paramount, as with other areas of competition policy. Only the Commission, in practice, can approve projects and schemes, which contain aid and give operators legal certainty. Only the Commission can draw up new frameworks for state aid policy.

  2.  Our policy for dealing with state aids issues has several strands:

    —  improve awareness and understanding of state aids constraints and risks across UK government and assist in the design of schemes to avoid unnecessary state aids hurdles and minimise risk;

    —  assist UK government in presenting aid schemes to the Commission such that their approval is facilitated as far as possible; and

    —  influence Commission policy development and legal precedent through representations in cases before the Commission, high-level policy interaction with senior Commission officials, engagement in the formal mechanisms for consultation of Member States and intervention in the European Courts, where appropriate.

  3.  Our contacts with devolved and decentralised authorities throughout the UK have indicated widespread dissatisfaction with the current European rules on state aid for urban regeneration.

  4.  We have tried to improve understanding of state aid for urban regeneration through publication of guidance material on the DTI web-site, a series of seminars for staff of the government offices and the RDAs and more recently, through a series of seminars in the regions for staff from local government and various regeneration partnership organisations. DTLR officials have participated in several of these events. More such events are planned for 2002.

  5.  The dissatisfaction, in our experience, seems to stem from three main sources:

    —  the aid intensities, which are permitted under the EU regional aid guidelines and the SME Block Exemption Regulation, are not sufficient in some areas to overcome the gap between the cost of development and the value of the developed site. The problem is worst where dereliction makes the sites more expensive to develop, making almost any development uneconomic without state aid;

    —  the nature of economic, social and physical problems that regeneration policies are trying to address is different from the broader economic development issues that give rise to regional aid policy. Pockets of deprivation and regeneration market failures exist outside Assisted Areas. The current rules therefore act as a barrier to regeneration in these areas; and

    —  in many cases developers are constrained through the planning process in relation to the developments, which are permitted. Some sites cannot be developed commercially because of the imposition of social, architectural and environmental limitations and obligations. Government often wishes to compensate developers for such imposition of cost or revenue limitation but finds that doing so brings the aid over the permitted aid intensities.

  6.  This Memorandum seeks to explain how the state aid rules have evolved in recent months and years, looks at the scope for progress in overcoming state aid obstacles and finally assesses the need for a new EU state aids framework for regeneration.


  7.  The "traditional" approach to state aids for investment has involved an examination of the costs of the investment and a calculation of the subsidy element or "aid intensity". An elaborate regional aid map allows the aid intensity to increase in assisted areas and especially "Objective One" or "tier one" areas and allows extra aid if the company or "undertaking" receiving the aid is a small or medium-sized business (SME). Aid for large companies outside assisted areas is not, however, allowed.

  8.  This approach governed the European Commission's analysis of the PIP scheme in 1998-99. The Commission examined aid to the developer and to any identified end-user in the same way; by looking at the aid intensity as a proportion of the total investment cost. The Commission concluded that because PIP offered the potential for aid above permitted intensities, especially in the non-assisted areas, it was not compatible with the state aid rules. The Commission's concerns were especially focused on PIP assistance for bespoke development schemes, where manufacturers, for example, could use PIP funds to have sites rehabilitated for their use and the risk that this might undermine cross-border competition unless such aid was restricted to the permitted aid intensities.

  9.  The "traditional" approach still governs most investment aid within the EU, but other approaches have also emerged in recent years (sometimes at the UK authorities' instigation) and been approved by the Commission. Examples are as follows:

    —  higher aid intensities are available for clean-up of some types of contaminated land;

    —  near market aid for venture capital funds was approved even for investments outside assisted areas where the aid responded to a demonstrable market failure; and

    —  aid to compensate for the provision of Services of General Economic Interest (SGEI) was approved where it was the minimum necessary to cover the cost of provision of such services.

  10.  In early November 2001 the Commission accepted an argument, which we had developed with the Scottish Executive in the context of the Scottish GRO "grants for owner occupation" scheme. In that case grants are to be made available for developers, which build social, residential housing for owner occupation in certain parts of Scotland. The grant will meet the gap, if any, between the cost of the development and the value of the housing, when sold on to the private owners. The Commission accepted that if the state could have delivered the social housing itself at the same price to the buyers without state aid issues arising, state aid should be permitted, if it offers a developer the minimum necessary to achieve the same outcome.

  11.  This decision, and the decisions and case law on SGEI, which preceded it, should offer scope for progress across the UK in relation to urban regeneration policy. As long as support is only being offered to the end-user of the site in a manner compatible with the "traditional" state aid approach, the Commission may now accept that it should be possible to pay the developer the "minimum necessary", whatever that is, to perform the development exercise on the state's behalf. The challenge is to design schemes, which build on this principle and which build in checks and balances (tender procedures, independent surveys, clawback mechanisms) to ensure that only the minimum is paid each time.

  12.  Later in November 2001, the European Court of Justice ruled in the case Ferring v Acoss (case C-53/00, judgement of 22 November 2001) that there was no state aid at all in certain circumstances, where the state merely paid for the cost of public service obligations imposed on a company. This principle might also offer valuable opportunities for bringing some regeneration projects outside state aid restrictions. In January 2002 the Government intervened in the hearings for another case in front of the European Court of Justice. This case ("GEMO", case C-126/01) involves an assessment of the application of Ferring v Acoss as a precedent, so the UK intervened to try to ensure that the "Ferring" principle is upheld and subjected only to necessary conditions.

  13.  The particular status of State spending for cultural, artistic and heritage purposes has also been addressed in the state aid rules. A new basis for exempting such aid was inserted into the Treaty of Maastricht and now forms Article 87(3) (d) of the EC Treaty. According to this article:

    "aid to provide culture and heritage conservation, where such aid does not adversely affect competition to an extent contrary to the common interest..." may be considered to be compatible with the common market and approved by the Commission.

  14.  Using this article as a basis, the Government has begun the process of notifying its heritage lottery funding schemes such that all such aid is approved. The funds disbursed by English Heritage, the National Heritage Memorial Fund and other, similar bodies, very rarely give rise to state aid, because the recipients are not usually businesses engaged in competitive activity. On occasion, however, it is necessary to channel funds for heritage purposes through businesses, so legal certainty is being sought for those cases through formal notification. In the meantime care is being exercised so that state aid problems do not lead to grant awards being blocked by competitors or to demands for aid to be reclaimed from its beneficiaries.


  15.  In 2001, the Chancellor of the Exchequer and the Secretary of State for Trade and Industry met with Commissioner Monti to discuss reform of the overall state aids regime. Discussions have also continued at official level, in the Commission and with other EU Member States. The core of the UK's thinking is that State aids decisions and frameworks should be more rooted in economic theory and follow the broad economic reform agenda articulated at the Lisbon Summit of Heads of State and Government in March 2000. A major element of this approach is that state aid should be aimed at remedying market failure rather than at protecting favoured companies and distorting markets. Where market failures can be identified, therefore, we are prepared to argue in favour of near-market responses, which may involve an element of state aid.

  16.  New options are clearly required for local and regional government in many parts of the UK to promote regeneration effectively. The market failure in this area appears clear. Some of this might, as explained above, be possible within the existing, overall EU state aids framework, although it requires new regeneration schemes to be devised in this country and notification processes to be followed through so that the Commission will approve the schemes. DTI is working with DTLR and, from time to time, with regional and devolved authorities to draw up new schemes to test the changing boundaries of Commission acceptance of aid in this way.

  17.  It should, in particular be possible to build on the Scottish GRO decision to design schemes based on similar principles in the rest of the UK.

  18.  Such incremental progress will not, however, solve all the problems. Bespoke developments would probably still be restricted to the "traditional" state aids analysis and regeneration aid (in whatever form, grant or fiscal instrument, for example), with no explicit social, cultural or environmental element, but still aimed at tackling market failures, would still be difficult to implement, especially outside assisted areas and where the developer owns the land.

  19.  There are a number of issues that a new EU regeneration Framework could try to address. For example:

    —  permitting regeneration aid to tackle market failures and pockets of deprivation that exist throughout Europe, not just in the Assisted Areas; and

    —  widening the concept of "contaminated land" in the environmental aid guidelines justifying higher aid intensities to also cover derelict land, so that the perverse incentive to invest on green-field sites can be removed across the entire country.

  20.  Such ideas might demand a redrawing of the map of areas eligible for support or the development of different maps for regeneration support or the redrawing of the guidelines on environmental aid, so they are controversial inside the Commission. The Commission will want to ensure that regional aid policy is not undermined as a result.

  21.  A new EU framework would also be valuable, however, even if it just set out clearly the different options available for justifying regeneration aid, clarifying the scope of any incremental progress we can make in the months to come. One of the biggest problems remains communicating awareness and understanding of state aids to the wide range of government actors in this arena.

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