Memorandum by the Competition Directorate
of the European Commission (GF 22) Gap Funding and Regeneration
The present document examines gap funding by
public authorities and in particular gap funding within regeneration
policy. This document does not constitute a policy declaration,
a guideline or a framework regarding the use of Article 87 of
the EC Treaty with respect to such gap funding. It is merely intended
to be a contribution to facilitate the work of the Environment,
Transport & Regional Affairs Committee of the House of Commons,
which is conducting an inquiry into the implications for urban
regeneration in England of the Commission's Decision on the English
Partnerships scheme under the Partnership Investment Program (hereinafter
referred to as:"EP/PIP").
The document examines the following points:
Gap funding and State aid, exemptions to the general incompatibility
of State aid, the EP/PIP Decision, follow-up.
2. GAP FUNDING
Article 87(1) of the Treaty
stipulates that "[...] any aid granted by a Member State
or through State resources in any form whatsoever which distorts
or threatens to distort competition by favouring certain undertakings
or the production of certain goods shall, in so far as it affects
trade between Member States, be incompatible with the Common Market."
According to the explanations given by the UK authorities,
gap funding in the case of EP/PIP has the objective of making
certain worthy, but loss-making projects nevertheless possible.
In the case of regeneration projects, gap funding will cover the
difference between estimated development costs and the estimated
final value of the site. Gap funding constitutes State aid in
the sense of Article 87(1) insofar as the requirements set out
in that Article are met: use of public resources, advantage for
certain undertakings or the production of certain goods, and an
effect on trade.
In examining the EP/PIP's activities, the Commission
and the UK authorities have agreed upon the following working
by bespoke development reference
is made to cases where the development is designed to suit the
needs of an end user known at the time the development works are
by speculative development reference
is made to cases where the site is to be developed in order to
be open to different uses not established at the time the decision
to develop is taken.
As it will be seet out in paragraph 4, the Commission
took the position that gap funding directed to regeneration projects
constituted aid in the meaning of Article 87(1) EC. The Commission
considered that, at least in the case of regional aid, "[.
. .] for the purpose of applying this scheme, the aid beneficiary
may be presumed to be the end user in the case of bespoke development
[. . .] and the land owner/developer in the case of speculative
The existence of aid lies in the fact that the gap funding provides
a quantifiable financial incentive to a developer aimed at carrying
out development works on a site which would be otherwise unattractive.
As EP is a public body, there is no doubt about State resources
being used. The selectivity criterion is satisfied by both the
selection of the projects among the large number of applicants
and the preference granted to developers who own the land. As
far as the effect on trade is concerned, the Commission found
that the companies affected by EP funding were conceiving and
carrying out "property developments, an activity which can
be very mobile across Member States, and [were] not just companies
active in trade in derelict land in England".
Since State aid schemes or cases must be notified
as a draft to the Commission, it is important to emphasise that
the analysis of the effects of such aid is made on an ex ante
basis, which hence does not allow for their exact quantification.
Furthermore, the European Court of justice accepts that in the
case of an aid scheme, the Commission may confine itself to examining
the characteristics of the scheme in order to determine whether,
by reasons of the nature of the scheme, it gives an appreciable
advantage to recipients in relation to their competitors and is
likely to benefit undertakings engaged in trade between Member
States. The effect on trade is given even if the beneficiary himself
does not export to other Member States. It is sufficient if competitors
or potential competitors in other Member States are active in
Finally, the European Courts have repeatedly
held that even financial compensations for additional cost caused
by specific burdens imposed on a company constitutes aid.
Article 87(2) and (3) carry exemptions to the
general incompatibility of State aid in the meaning of Article
87(1). The exemptions listed in Article 87(2) are not relevant
for gap funding to realise regeneration projects, nor is Article
87(3)(b). For regeneration projects carried out in assisted areas,
however, the regional development exemptions laid down in Article
87(3)(a) and (c) can be relevant. Also relevant may be the exemption
in Article 87(3)(c) to promote the development of certain economic
activities and in Article 87(3)(d) to promote culture and heritage
It is important to note that the exemptions
set out in Article 87(3)(c) and (d) also carry the condition that
such aid should not adversely affect trading conditions to an
extent contrary to the common interest. This condition would certainly
not be fulfilled if the aid exceeded the minimum required to have
the regeneration project in question carried out. It is well-established
case law that the use of an open call for tender or, should this
not be possible, the use of objective assessments by independent
experts, would exclude the possibility of overcompensation.
4. THE ENGLISH
On 22 December 1999 the Commission adopted a
final Decision on the scheme EP/PIP.
In 1995 the UK had notified a number of schemes, including EP,
to which the Commission had at the time not raised any objections.
Afterwards, the Commission's attention was drawn to certain cases
where benefits appeared to accrue with the developer/partner of
EP. As the scheme had previously been approved, the new investigation
did not suspend it nor does the final Decision adopted in December
1999 have any effect on regeneration projects, for which a formal
application had been submitted before the date of its adoption
(Article 2 of the Decision).
At the time of the Decision, the UK authorities
accepted to subject the bespoke development to the State aid rules,
making it compatible with the Treaty, but they did not do so with
respect to the speculative development.
Pursuant to Article 1 of the Decision, aid to
speculative development can be considered compatible if the relevant
State aid rules are respected (listed in paragraph 64 of the Decision).
Furthermore, the UK authorities are required to individually notify
cases where one of the actors involved is active in the sectors
subject to special State aid rules (also) listed in paragraph
64 of the Decision), both in bespoke and speculative projects.
It would therefore not be justified to claim that the Decision
prohibits EP/PIP, as EP/PIP is considered compatible with the
common market provided certain conditions are met. The individual
notification is also required in cases not clearly falling within
either definition (bespoke/speculative), "where the determination
of the aid beneficiary has further consequences under the State
Further to the Decision the UK authorities informed
the Commission that they would comply with it by discontinuing
EP/PIP. They subsequently provided a list of all projects still
in the "pipeline", for which funding would continue
pursuant to Article 2 of the Decision.
Several meetings have taken place so far both
at political and at service level to discuss the consequences
of the Decision for regeneration policy in the UK as well as three
follow-up schemes to EP/PIP in assisted areas (for bespoke projects,
speculative projects and direct development). These three schemes,
some points of which need to be clarified by the UK authorities,
have been formally notified to the Commission pursuant to Article
88(3) of the Treaty and the Commission will decide on their compatibility
with the common market in due course. It would be neither proper
nor prudent to speculate on the content of those decisions in
the present paper.
4 Formerly Article 92(1). Back
Recital (62) of Commission Decision on EP/PIP, OJ L 145 of 28.06.2000,
p. 34. Back
Recital (60) of Commission Decision on EP/PIP, OJ L 145 of 28.06.2000,
p. 33. Back
See cases T-106/95 (FFSA-27.02.1997) and T-46/97 (Sociedade Independente
de Communicac"ao-10.05.2000). Back
OJ L 145 of 28.06.2000, p. 27. Back
Recital (62) of Commission Decision on EP/PIP, OJ L 145 of 28.06.2000,
p. 34. Back