Memorandum by European Policy Directorate,
Department of Trade and Industry (ERF 20)
CONTEXT AND
SCOPE OF
THIS MEMORANDUM
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.
RECENT PROGRESS
IN STATE
AIDS LAW
AND POLICY
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.
THE NEED
FOR A
NEW EU REGENERATION
FRAMEWORK
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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