The South Wales Report 2018 published by JLL on the 5th March highlights a shortage of industrial floorspace in South Wales and suggests that one reason for this is that, despite healthy demand, the viability of new industrial developments remains marginal.
In this sort of market environment, we are often asked to assist public authorities which are taking action to encourage development by making available public funding (either own resources or externally resourced grant funding) to plug the viability gap. The policy imperative is usually around the theme of securing the regeneration of a local area, often with a housing or town centre element, and often incorporating the objective of creating new employment space to encourage local jobs growth.
In terms of ensuring compliance with the State aid rules, it may be possible for public funding for development to be provided in reliance on the block exemption for investment aid for local infrastructures. A ‘local infrastructure’ is an infrastructure that ‘contributes at a local level to improving the business and consumer environment and modernising and developing the industrial base’. The block exemption allows aid to be given to the owner of a local infrastructure, for constructing or upgrading that infrastructure.
When using the block exemption, it is important to be aware of the associated limits and conditions, which include the following:
- It covers infrastructure costing up to €20m (that’s £17.68m at the current exchange rate), and a maximum aid amount of €10m (or £8.84m).
- However, the aid given must be limited to the amount of the viability gap. The viability gap is the shortfall between the eligible costs of constructing or upgrading the local infrastructure and the operating profits generated by the infrastructure over its lifetime. The size of the viability gap can be assessed at the outset on the basis of forecasts. Alternatively, one can adopt a ‘wait and see’ approach, with a mechanism to claw back all or part of the aid if the infrastructure generates so much profit that the maximum aid intensity is exceeded.
- It is necessary to show that the aid has an incentive effect – in other words, to show that the development would not have happened, or would not have happened as quickly or on such a scale, without the public support.
- The infrastructure must not be being built for a specific undertaking or tailored to its particular needs. Ideally, the development will be speculative in nature. If there is a pre-let, then it will be necessary to carefully consider the specificity of the works being undertaken and the implications that this may have for availability of the block exemption.
- The block exemption targets the aid at the owner of the infrastructure. Therefore, tenants which use the infrastructure must be charged a market price in order to avoid any of the aid being passed downstream.
The block exemption is just one of a range of ways in which public authorities may be able to secure local development in a State aid compliant way.
If you would like advice on the available options, please speak to one of the Geldards State aid specialists, Bethan Lloyd or Madeline Rees.