Select Committee on Transport, Local Government and the Regions Memoranda

Memorandum by The House Builders Federation (ERF 06)


  The House Builders Federation is trade federation covering England and Wales. It has over 650 member companies. The membership are responsible for building approximately 80 per cent of all new homes within England and Wales in any given year.


  The policy emphasis on brownfield development has rightly increased across Europe in recent years. The European Spatial Development Perspective in section 3.2.2 refers to the need for dynamic, attractive and competitive cities and urbanised areas. Para 83 refers to the achievement of sustainable urban development and paragraph 84 to the need for the "compact city". Para 85 states: "Both the reconstruction of neglected areas and derelict industrial land, and a balanced supply of inexpensive, high quality housing in urban areas have to be promoted". Para 88 then advises that: "Particular attention should be given to fighting social exclusion and the recycling and/or restructuring of underused or derelict `urban sites and areas'".

  The British Government's commitment to urban renaissance is confirmed in much of its policy output in recent years. For example, Planning Policy Guidance Note 3: Housing; the Urban White Paper and the National Strategy for Neighbourhood Renewal all confirm the leading role that new housing developments will play in both brownfield redevelopment in particular and urban regeneration in general.

  Funding is a key issue in achieving these goals of urban regeneration. Many areas in need of regeneration do not have high value land or buildings whose development would, from the outset, provide returns that would pay for infrastructure and other investment required to start the process of change. So State aid to kick start the regeneration process can have a very beneficial impact.


  In England, the Partnership Investment Programme (PIP) was a uniquely successful public-private partnership which tackled these problems. It raised £2.5 billion in private sector capital to redevelop otherwise non-commercially viable sites in areas of depressed market activity where end values were lower than development costs. Gap funding under the PIP involved awarding the minimum amount necessary to bridge the gap between development costs and forecast end value in order to enable the developer to go ahead. A clawback arrangement ensured that, if actual costs were less than forecast, or end values were higher than forecast, an appropriate part of the grant was repayable. The EC ruled against gap funding in England.

  On 22 December 1999, the European Commission announced its view that PIP was in breach of the rules on State aid. A State aid is any form of aid that is provided directly by the State, or indirectly through State resources, to an undertaking or group of undertakings. A State aid is regarded as incompatible with the Common Market if it distorts, or has the potential to distort, competition within the European Union. However, under the Treaty of Rome, certain types of aid are, or may be declared to be, compatible with the Common Market.

  The Commission ruled that PIP involved the use of State aid for the following reasons:

    —  gap funding constitutes State aid because it provides a quantifiable financial incentive to a developer to invest in an area or location in which little or no private investment would otherwise have happened;

    —  The aid favoured certain undertakings;

    —  PIP had the potential to distort trade between Member States. An important factor in the Commission's view was that the recipients of EP's funding were undertakings active in trade between Member States.

  The British Government's counter argument was that:

    —  The grant given was the minimum necessary to bridge the gap between development costs and market value of the regeneration site;

    —  It did not confer an unfair competitive advantage on the developer;

    —  There was negligible (if any) intra-Community trade in the development of derelict land and buildings.

  The decision meant that the vast majority of projects formerly funded under PIP would become ineligible, so the scheme was closed as of the decision date, although transitional arrangements were agreed in order to protect projects which had already reached formal application stage. It is extraordinary that while the Regional Policy Directorate General of the Commission spends immense sums throughout the European Union on regeneration, the Competition Directorate General has decided effectively to abolish the most efficient, effective and imaginative regeneration scheme in the European Union. Quite clearly, this is unsatisfactory.


  The Commission took the view that if the scheme was recast into a Regional Aid framework, so that it would operate solely in the Assisted Areas, and that grant levels would be subject to the aid intensity ceilings within these areas, it could be considered as compatible.

  So gap funding has also been re-introduced on a limited basis in Assisted Areas for all schemes, and has been made available to Small and Medium Sized Enterprises (SMEs) throughout the country (an SME is defined as having less than 250 employees or a turnover of less than £30 million). But, in the absence of full scale gap funding, the main alternative became direct development, ie where the public sector (through the Regional Development Agencies (RDAs)) acquires derelict land and either develops the site itself or in partnership with another public sector organisation.

  There are many disadvantages to this system:

    —  Because the site must be acquired, reclaimed and developed by the public sector, the up-front costs of direct development are approximately three times higher than gap funding.

    —  The public sector must also pay the costs of any aborted projects.

    —  It is also doubtful whether the RDAs currently have the skilled personnel to undertake such work. It will take time to build up this expertise.

    —  Direct development will also make new compulsory purchase powers essential.

  Direct public sector development on its own is an expensive, inadequate substitute for the regeneration skills, expertise and investment which the private sector is able to offer. The EC needs to encourage private investment in partnership with the public sector.


  The house building industry is adopting a positive and innovative approach to urban development notwithstanding the high commercial risks. We must be allowed to continue our efforts. We need to achieve the physical redevelopment of sites, so that they will produce economic outputs in terms of jobs, industrial/commercial space, and housing, with the consequent social and environmental improvements which flow from this development. Regeneration sites are invariably in areas where the local land and property market has either collapsed, or operates at a very low level. So a new regeneration framework is vital. Under this framework, State aid would be permitted for the physical regeneration of derelict or disused sites throughout the Community, subject to certain strictly defined conditions. European Governments must develop a co-ordinated approach to such a framework.

  A new framework would meet the following EC objectives:

    —  physical regeneration serves Community objectives of improving both the standard of living and quality of life within the Member States, promoting a high level of protection of the quality of the environment and promoting sustainable development (as set out in Article 2 of the Treaty of Amsterdam);

    —  regeneration is an economic activity for the purposes of Article 87(3)(c);

    —  none of the existing frameworks (for example for Regional aid or Environmental aid) directly or comprehensively serves regeneration goals;

    —  regeneration is a "horizontal" issue where a framework could apply across the full range of economic sectors (as opposed to the "sectoral" frameworks which exist for State aid to particular industries, such as motor manufacture);

    —  all existing and potential Member States could benefit from the existence of the framework for furthering regeneration objectives.

  The Belgian Presidency has indicated its intention to move forward on this issue. The UK will be hosting a conference with other Member States on this ssue, and how public private partnerships can help in urban regeneration, in March 2002. It is important that significant progress is made before then. The European Commission must show unusual urgency in this matter, if our cities are to avoid further degeneration.

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