Select Committee on Transport, Local Government and the Regions Appendices to the Minutes of Evidence


Memorandum by Arlene McCarthy MEP (ERF 28)

BACKGROUND

  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 that:

    "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 policy.

  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 States?

    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.

THE NEED FOR A NEW EU REGENERATION/STATE AIDS APPROACH

  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 and Portugal.

  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 exemption arrangements.

CONCLUSION AND RECOMMENDATIONS

  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 useful initiative;

    —  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 for regeneration;

    —  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.



 
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