Memorandum by The House Builders Federation
(ERF 06)
HOUSE BUILDERS
FEDERATION
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.
POLICY CONTEXT
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.
THE ENGLISH
EXPERIENCE
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.
STOPGAP SOLUTIONS
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.
WHAT NEEDS
TO HAPPEN
NOW
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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