Memorandum by Arlene McCarthy MEP (ERF
At the Lisbon Summit the EU set itself a challenge:
". . . to become the most competitive and
dynamic knowledge-based economy in the world, capable of sustaining
economic growth with more and better jobs and greater social cohesion".
State Aid reform is a key element of this wider
economic reform agenda. State Aid rules are an important tool
to remove the barriers governments can put in the way of completing
the single market. State Aid, however, can also play a role in
facilitating structural reform and can improve efficiency. Neither
should the EU State Aid regime prevent governments from intervening
to pursue the Lisbon targets of delivering enterprise, employment
and more social cohesion. The EU State Aid regime needs to enable
governments to intervene where markets have failed, to pursue
dynamic efficiency or to pursue social objectives.
Public Private Partnerships (PPP) are essential
to tackling market failure in urban areas, and fall within the
EU's objectives of the regeneration of urban areas, as well as
strengthening economic and social cohesion (Article 158 of the
EU Treaty) and sustainable development (Article 2)
The Economic and Social Committee noted in 1997
"the use of long term contracts to provide
private financing for public works is growing in several countries...such
methods should be promoted and used more widely as they help States
save public money".
Following the European Commission's challenge
to the UK's Partnership Investment Programme (PIP) on State Aids
grounds, and representations to the European Parliament by local
authorities and regeneration organisations, such as English Partnerships
and the Coal Field Communities Campaign, a campaign was initiated
to argue for a more flexible approach to State Aid policy to facilitate
regeneration objectives in urban areas.
The campaign took the form of letters and parliamentary
questions to both the Commissioner for Regional Policy, Michel
Barnier and Competition Commissioner Mario Monti. (Parliamentary
questions were addressed to the Commissioners during the Committee
Session and questions were addressed to the Commissioners during
the debates on regeneration and competition policy.)
In March 2001, meetings were arranged with key
policy officers and Cabinet staff in DG Competition and DG Regional
Policy, with the Alliance for Regional Aid in attendance.
DG Competition Officials acknowledged that when
the PIP Scheme had been notified in 1995, the Commission had evaluated
them as part of the Single Regeneration Budget and they were deemed
not to be in contravention of state aid policy under Article 87(1)
of the Treaty.
However a complaint was made to the Commission
alleging financial benefits to the car industry from the PIP scheme,
in particular that new sites and factory infrastructure was financed
via PIP. Two similar cases were referred to the then Competition
Commissioner, Van Miert, and a review was launched under Article
88 (1), due to the sensitivity of the car sector in State Aid
The UK was warned of the need to bring the schemes
into line with EU State Aid rules. A formal investigation was
launched in December 1999. This produced the negative ruling outlawing
the schemes. DG Regional Officials informed us during our discussions
that the Competition Directorate, could not sanction a scheme
which was being used to create "a tailor made site for a
car company at a knock down price", and which was in breach
of EU State Aid rules under the following four tests:
1. Is the measure granted by the State or
through State resources?
2. Does the measure favour certain undertakings
or the production of certain goods?
3. Is the activity tradeable between Member
4. Does the measure distort or have the potential
to distort competition?
DG Competition Officials reasserted the position
that State Aid flexibility or exceptions can only be granted where
the conclusion is that potential beneficiaries of the assistance
are not engaged in EU cross border activities.
The Commission reserves the right to assess
this on a case by case basis. In addition, the participation of
the private and public sector should be on equal terms, ie not
favourable to the private sector.
Meetings with DG Regional Officials revealed
a different perspective of these activities. The Regional Officials
accepted the need to address market failure through PPP's, and
viewed these schemes as playing an important regeneration role.
Market distortion could not exist, if there is proven European
Market for activities, such as derelict land reclamation.
DG Regional Officers have offered to give advice
to ensure regeneration schemes do not fall foul of State Aid rules
and Commissioner Barnier has taken the initiative, to produce
a discussion paper internally for the Commission services on innovative
approaches to financing urban regeneration.
While the view from DG Regional Policy is supportive,
The DG Competition Directorate does not see this as a priority.
It is clear there is a need for better co-ordination and coherence
on State Aids and regional policy within the Commission.
The Parliament has asked for a Commission internal
working group to be established to review this policy.
NEW EU REGENERATION/STATE
Slow progress is being made in changing attitudes
in the Commission regarding the need for more flexibility on public-private
partnerships in regeneration. Under the French Presidency, the
Urban Development Working Group, adopted a programme for co-operation
in urban affairs.
One of the nine priorities is to increase work
on public-private partnerships (PPP), in particular, on defining
conditions for an appropriate legal framework in the EU for PPP.
A majority of Member States expressed the need for clarification
by the Commission of the rules relating to competition and state
aid to ensure greater contractual security and reduce concerns
expressed by the private sector in relation to disputes of, breaking
off or interrupting signed agreements and contracts.
Importantly EU Ministers concluded that:
". . . the relevant Directorate Generals
at the Commission should work together to clarify issues, relating
to the application of regulation concerning state aid in programmes
of urban regeneration, and the Commission in consultation with
the Member States, should develop a new regeneration framework".
Some Member States want this framework to provide
for a State Aid exemption in the case of urban regeneration, applicable
under certain conditions but not only to assisted areas.
Enlargement of the EU will result in a 28 per
cent increase in population with only a 6.6 per cent increase
in GDP. EU regional and state aids policy must therefore evolve
to meet the challenge with a dynamic approach, permitting investment
in R&D, venture capital, supporting regeneration of industrial
dereliction in particular in areas where market failure has occurred.
The review of state aids policy, undertaken
by the Commission provides the opportunity for a new approach
to the problem of regeneration. The current debate on the reform
of structural funds post 2006 must, due to tighter budgetary resources,
include a new State Aid policy in the area of regeneration, if
urban areas are to fulfil their role as driving forces for economic
development in the future of Europe.
The Preparatory Report of recommendations from
the Informal Council of Urban Ministers on PPP and Urban Regeneration,
drafted by the Belgium Minister for Economic Affairs, highlighted
the need for clarification of legal issues. The report also stressed
that more Member States are developing a mixed public/private
financing approach to regeneration, namely Germany, Sweden, Italy
However, opinions remain divided on whether
we need a new legislative framework which can create its own straightjacket
or whether we need to adapt current directives to take account
of the specific nature of PPPs for regeneration. One option proposes
agreeing a set of principals or guidelines for a new approach
to PPPs, while preserving the specific feature of legal arrangements
in each Member State.
Another option is to write in an exception to
Article 87 of the Treaty relating to State Aids and issue an interpretation
circular, explaining how public aid for urban renewal comes under
It is clear that approaches to State Aid regime
are evolving beyond traditional outmoded economic analysis to
take account of the role that State Aid can play in correcting
market failure. It s also clear that under current procedures,
State Aid cases can take up to two years to resolve, while for
example merger rulings normally take approximately five months.
In addition the Commission enjoys considerable discretion in the
interpretation on whether a measure or activity complies with
State Aid rules. Each case analysis is constrained by guidelines
and case law.
The approach by the UK government, following
the PIP ruling, has been to repackage schemes and resubmit them
for State Aid clearance. This has resulted in schemes getting
the go ahead and more recently, a gap funding scheme for housing
in Scotland has been approved, "the Grants for Owner Occupation".
The Viridian Fund, Regional Venture Capital
Funds, the Coalfields Enterprise Fund and the Community Development
Venture Fund have also been agreed. However approval has been
a slow process and the amounts do not yet make up for the loss
in available funds through the PIP scheme.
The PIP experience has also continued to create
uncertainty for PPPs with lack of confidence a major barrier to
the development of innovative new schemes.
The following actions need to be carried forward:
the government should continue the
twin track approach of working on successor schemes and clearing
them with the State Aids unit in the Commission. The Directorate
General for Regional Policy can assist in facilitating this process;
Commissioner Barnier should be assisted
in his efforts to generate a debate and new approach to PPPs for
regeneration in urban areas;
the UK government should continue
the process of creating a critical mass of support with other
Member States for a new approach to State Aid and regeneration.
The State Aids and Regeneration Conference of March 2002 is a
the debate on State Aid reform and
regeneration needs to be a fundamental component of the general
debate on the reform of cohesion and regional policy, including
structural funding options post 2006;
one government department needs to
take a strong lead on the issue ensuring co-ordination with other
key departments. The key departments are DLTR, DTI and Treasury.
The Cabinet Office has a strong role to play and can ensure a
coherent approach by all departments to the reform of State Aids
the Commission, in particular DG
Competition, needs to be persuaded of the arguments for a positive
regulatory environment, designed to enable rather than to prevent
innovative PPPs in regeneration;
there needs to be more economic analysis
and input on State Aids cases as opposed to the current overemphasis
on legal aspects; and
Member States need to call for greater
coherence between Commission departments on State Aid policy.