Select Committee on Transport, Local Government and the Regions Memoranda

Memorandum by Department for Transport, Local Government and the Regions (ERF 17)


  1.  The Government has introduced five new land and property regeneration schemes which partially replace the Partnership Investment Programme (PIP). The new schemes will enable the Regional Development Agencies (RDAs) and English Partnerships (EP) to support a wide range of land and property regeneration projects, including projects which can be taken forward in partnership with the private sector. The new schemes cover:

    —  Direct development;

    —  Speculative gap funding;

    —  Non-speculative gap funding;

    —  Community Regeneration; and

    —  Environmental Regeneration.

  Only the gap funding schemes contain State aid.

(a)  Direct development

    —  Involves a situation where a RDA or EP undertakes development works on publicly owned or procured land either by itself or with other public sector partners.

    —  Direct development may include:

      Acquisition of land/buildings at market rates;

      Preparation of land;

      Provision of services/infrastructure;

      Development/refurbishment of buildings;

      Sale or lease of resulting project at market rates.

(b)  Speculative gap funding

    —  This involves the funding of projects for the development of a site with no particular end-user in mind and where the site is to be disposed of at market value.

    —  Projects may be supported in any of the Tier 1 or Tier 2 Assisted Areas. Aid of up to 35 per cent is available in Tier 1 areas. In Tier 2 areas, projects may receive aid of between 10-20 per cent depending on location;

    —  Projects outside Assisted Areas may also be supported provided that the beneficiary is a small or medium enterprise (SME). Additional grant is available to SMEs - up to 15 per cent in Tier 1 areas and up to 10 per cent in Tier 2 areas. Outside the Assisted Areas, medium sized enterprises may receive grant of up to 7.5 per cent and small enterprises may receive up to 15 per cent grant. The rationale for allowing greater subsidy for SMEs is that this has less risk of distorting competition than subsidy to large enterprises.

(c)  Non-speculative gap funding

    —  This involves the funding of projects for the development of a site for an identified company or individual who will occupy the site following completion. A distinction is made from speculative developments because, in principle, it allows public authorities to choose projects with the aim of helping the end-user, rather than simply regenerating a site, increasing the potential for abuse.

    —  Projects may be supported in any of the Tier 1 or Tier 2 Assisted Areas. The levels of aid noted above also apply to non-speculative projects;

    —  Projects outside Assisted Areas may also be supported provided that the beneficiary of the aid will be a SME. The aid levels which apply to SMEs undertaking speculative projects also apply to SMEs involved in non-speculative developments.

(d)  Community regeneration

    —  This scheme involves making funding available to community and voluntary organisations so that they can take forward small-scale regeneration projects;

    —  Funding is only available for projects which are put forward by such groups which are non-profit making and locally based.

(e)  Environmental regeneration

    —  The purpose of the environmental regeneration scheme is to improve the environment by reclaiming derelict or potentially derelict land and providing a cover of vegetation;

    —   Subsequent uses of the site may include public open spaces, nature conservation areas and playing fields;

    —   Scheme may not be used for "hard end" uses, eg offices, industrial buildings etc.

  2.  The schemes were approved by the European Commission as follows:

—  Direct development Not formally approved, but the Commission confirmed that the scheme did not contain State aid.
—  Speculative gap funding 28 February 2001;
—  Non-speculative gap funding 28 February 2001;
—  Community regeneration 13 March 2001;
—  Environmental regeneration 28 March 2001.

  3.  There will be expenditure in the current financial year on direct development, community regeneration and environmental regeneration projects. Details are set out below:

Forecast Spend 2001-02—Direct Development (£m)
Forecast Spend 2001-02—Community Regeneration (£m)
Forecast Spend 2001-02— Environmental Regeneration (£m)
Forecast Spend 2001-02—Gap Funding (£m)
Yorkshire Forward
East of England
(Actual Spend
to 22.1.02)


  4.  We are exploring with the European Commission the possibility of extending the two gap funding schemes so that they would apply in all areas of England, thereby enabling us to support non-SMEs outside the Assisted Areas.


  5.  We are currently consulting the RDAs and English Partnerships on the need for a new gap funding scheme which would permit the payment of State aid for predominantly housing projects. We have also had representations on this issue from, amongst others, The Prince's Trust. We are seriously considering notifying the Commission of a new gap funding scheme for housing in the near future.


  6.  The Government believes that the following features of the new schemes may create barriers to regeneration:

    —  Gap funded projects must normally be located in an Assisted Area. However, this restriction does not apply where the beneficiary is a SME;

    —  There are limits on the amount of aid available for gap funded projects;

    —  The extent to which housing may be supported as part of a mixed use development is uncertain (see paragraph 5 for details of the action we are taking to remedy this situation).

  7.  Compared with gap funding, there are limitations to the use of direct development:

    —  Direct development can only be undertaken on land owned by the public sector and in some circumstances it may be difficult to purchase particular sites;

    —  Direct development requires more up front public expenditure than would be required under gap-funding;

    —  Under direct development, the public sector assumes all of the developmental risk;

    —  Under direct development, the public sector does not benefit from private sector expertise.


  8.  Significant extra resources were made available to RDAs—£60 million in 2000/01, £150 million in 2001-02, thereafter land and property funding will form part of a new single RDA economic development and regeneration budget with increases of £350 million in 2002-03 and £500 million in 2003-04 compared with current budgets—to reflect the higher public expenditure costs of these schemes. However, it is still likely that the restrictions noted above will result in fewer outputs in the short term and less progress towards outcomes. In the longer term, as receipts from completed direct developments are received, the number of projects, and therefore outputs, are expected to increase.

  9.  No figures are available at present for outputs solely attributable to the five new schemes. The RDAs will be asked to provide figures at the end of the current financial year.


  10.  The Government is exploring the possibility of permitting the payment of State aid for regeneration purposes with the Commission and other Member States. The Commission has sole responsibility for the introduction of new frameworks under the State aid rules. The Government has argued that if the Commission does decide to introduce a framework, that it should permit, throughout the European Community, the payment of State aid for the regeneration of brownfield land to take account of market failure.

  11.  At an Informal Ministerial Meeting held on 9 October 2001, Sally Keeble, the Parliamentary Under Secretary of State with responsibility for regeneration, pressed the case for the Commission, in consultation with Member States, to introduce a new regeneration framework. This was supported by four other Member States[6] and a further three supported the need for clarification of the rules on PPPs and State aids.[7]

  12.  The Government supports the Commission's overall policy on State aids which is designed to promote free competition within the European Union and thereby contribute to the development of a Single Market. It is, therefore, necessary, to find a balance between achieving regeneration objectives and preventing abuse of the system. The Government believes that such a balance should be possible to strike. Payment of State aid for regeneration should be permitted where this would improve efficiency and productivity, contribute to the Community's wider goals, and enable Member States to more fully engage with the private sector. In the Government's view, any distortion of competition which arises through the payment of State aid for regeneration is likely to be limited provided that:

    —  Projects eligible for public sector assistance are additional to investor's plans. They are non-viable commercially and will only proceed with public sector support;

    —  The amount of public funds provided is the minimum necessary to enable the site to be developed;

    —  The end-user pays a full market rate for the property.


  13.  The Government believes that a good case can be made for a new framework taking the following considerations into account.

  14.  The limited distortion of competition which may occur can be justified by the resulting economic, social and environmental advantages which flow from the regeneration of land. These advantages include:

    —  A reduction of development pressures on greenfield land;

    —  Economic, social and environmental advantages of physical regeneration, including the improvement of the physical characteristics and infrastructure of a site and the removal of contamination or dereliction;

    —  Wider benefits—not only increasing the value of a particular site but also the surrounding area;

    —  A contribution to the creation of new jobs, a general improvement in the standard of living and the promotion of social inclusion.

  15.  The EC Treaty allows in principle for flexibility on the type of aid which can be approved. Under Article 87(3)(c), the Commission can decide to permit State aid in order "to facilitate the development of certain economic activities or of certain economic areas". This is provided that the aid does not "adversely affect trading conditions to an extent contrary to the common interest". There is a strong argument that physical regeneration serves Community objectives on improving the standard of living and quality of life within the Member States, achieving social cohesion and creating a better environment, and promoting sustainable development.


  16.  A 1998 survey for the National Land Use Database (NLUD) showed that there are approximately 57,710 hectares of previously developed land in England that could be re-used. Other Member States, especially those with a history of urban and industrial restructuring, also have large amounts of brownfield land (eg Germany's Ruhr Valley and former coalfield areas in Belgium and France).

  17.  There is a strong case that the public sector should be permitted to contribute to the regeneration of these sites—with or without private sector partners—wherever the impact on cross-border competition of the proposed aid schemes is limited.

  18.  The key reason why regeneration of some brownfield land is not undertaken solely by the private sector is that the cost of development would exceed the likely end value. Derelict and contaminated land is widespread and exists even within the most prosperous cities. The relatively higher costs of, for example, demolition and remediation; extra costs of building in an urban environment; lack of confidence; and the effects of high crime and deprivation may hamper the development of such land and tend to depress market values. However, brownfield land in urban areas may have access to good transport links and its use can preserve greenfield areas from development; it can catalyse regeneration in that area and bring wider social and economic benefits.

  19.  Public sector intervention is sometimes essential to bring forward brownfield land for socially responsible and environmentally beneficial development. Where there is a need for intervention, and such intervention would be compatible with the Common Market, the Government believes that the State aid rules should be developed to accommodate this.

  20.  The private sector has an important role to play in the physical regeneration of brownfield land. This is reflected in the increasing trend for Member States to work in partnership with the private sector in order to take forward economic and social cohesion. The benefits of working with the private sector include:

    —  Levering in private sector resources reduces the amount of public money required for a project;

    —  Working in partnership with the private sector helps to bring a better commercial awareness to projects. Property developers have expertise in interpreting market conditions and developing projects that work with the grain of the market. It is unlikely that the public sector would have a similar level of expertise;

    —  In a number of Member States, the majority of land requiring regeneration is privately owned. It would be costly and time-consuming if the public sector had to acquire all the privately owned land required for a development before the project could begin;

    —  All or part of the risk can be transferred to the private sector partner.


  21.  Despite the above arguments, the Commission is quite rightly concerned about the potential effect of State aid for regeneration on competition within the European Union and needs to take this factor into account as part of its decision making process. The Commission is also treating our efforts in this area with care in the wake of the PIP decision. The Commission are concerned to ensure that aid for regeneration would not undermine the discipline of the Guidelines on National Regional Aid. These issues are complex and not capable of easy resolution. Control over policy on State aid rests entirely with the Commission and we have therefore embarked on a long process of negotiations, with no certainty of early results.

  22.  However, this is likely to be an opportune time to explore these issues with the Commission given that recent cases suggest that the Commission's thinking in this area is evolving. For example, the Commission recently approved a Scottish scheme, Grants for Owner Occupation,[8] under which the public sector provides a grant to private sector housing developers in order to bridge the gap between high development costs and low end values whether or not the projects are inside the Assisted Areas. In addition, in its judgment in the case "Ferring v Acoss",[9] the European Court of Justice cast doubt on whether payments to developers should be considered as "State aid" where they are paid the minimum necessary to fulfil a non-economic purpose involving no aid to the end-user, or to fulfil an economic purpose where aid to the end-user does not exceed the maxima laid down in the SME and regional aid frameworks.


  23.  The UK is hosting a conference in London, currently planned for 21 March, to discuss the possibility of permitting the payment of State aid for regeneration. The Commission and all Member States have been invited to attend.

6   Denmark, Portugal, Austria and Ireland. Back

7   Sweden, Finland and Belgium. Back

8   Commission decision N497/01: C(2001) 3459 Final, 13.11.2001. Back

9   C-53/00, judgement of 22.11.2001. Back

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