Brussels officials are investigating whether a government scheme, which has safeguarded 29,000 jobs and attracted pounds 760m of private investment, amounts to illegal state aid. "All the signs are that Mario Monti, the Competition Commissioner, is going to put the boot in," a Brussels source said yesterday.
Mr Prescott fears the threat to the Partnership Investment Programme (PIP) could undermine the credibility of his new regional development agencies, which could be left without enough cash to fund planned regeneration projects.
PIP has helped to persuade companies such as Siemens, Toyota and BMW- Rover to invest in the UK and officials in the Department of the Environment, Transport and the Regions hoped to persuade the commission not to pursue a full investigation.
The officials were shocked when Brussels rejected their arguments and said the practice of giving private investors millions of pounds to make up the difference between the amount of money spent on regenerating land and its final value - so-called "gap funding" - was an illegal incentive because it subsidised investors and landowners.
Control of the multi-million pound PIP scheme was due to be transferred to the flagship regional agencies in April but the move was blocked by the commission's intervention. The eight agencies may now have to submit their strategic plans to Mr Prescott next week without having the money to implement them.
Under the commission's proposals, future funding would be restricted to strictly defined "assisted areas", with a ceiling placed on aid which could be as low as 20 per cent.
One PIP scheme in Grainger Town, Newcastle, contributes 60 per cent of the project, and the commission's ruling could stopsimilar regeneration plans in Leicester, Derby and other parts of the East Midlands.
"Much of this money goes to improving badly contaminated sites," said Derek Mapp, chairman of the East Midlands Regional Development Agency. "This fund is vital for us to promote regeneration in town centres and on brownfield sites."
Professor Peter Roberts, of the European Strategic Planning Unit at Dundee University and chairman of the Town and Country Planning Association, warned that a commission ruling against the scheme could set back the development of derelict inner-city land and push projects on to greenfield sites.
John Redwood, the Toryenvironment spokesman, said: "It looks like Prescott thought he could sweet-talk his friends in Europe round but it is clear that his mates want to close this programme down. This funding is a necessary evil which is vital for some parts of the country."
If the commission sticks to its guns, the Government's last resort would be to take action in the European Court of Justice, but this could involve a long delay.Reuse content