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2.50 pm

Mr. Rhodri Morgan (Cardiff, West): I also wish to return to the subject that caused such a conflagration in the House two hours ago. I hope that my remarks about objective 1 funding and its effects on Wales do not re-ignite that tinderbox.

We all accept that it is crucial to secure objective 1 and matched funding. However, no one should be cheering about the prospect of achieving objective 1 funding because one does not get it for nothing. It is like compensation for mine workers. Someone might think, "Isn't it wonderful: I'm getting 50 per cent. compensation from the National Coal Board for having pneumoconiosis", but it is terrible because that person has pneumoconiosis. The same deduction applies to objective 1 funding: we will receive it because Wales has economic pneumoconiosis. Our gross domestic product levels are so low that we require the maximum rate of European grants to help us put the economy back on a sound footing.

I understand why objective 1 funding causes such excitement. There are two reasons: first, because the timing is so critical relative to the commencement of the Assembly; and, secondly, because objective 1 funding is the jam on the bread for the Assembly's public spending capabilities. We have the Barnett formula and the three-year comprehensive spending review programme--which will begin in a few short weeks on 1 April--and objective 1 funding is a way of going beyond the limit.

If we ultimately secure objective 1 funding and there is no real problem with the provision of matched funding, there could be lots of jam on the bread for the Welsh Assembly. Therefore, the prospect stirs a certain amount of interest. If the figures that we have heard bandied around are correct, in theory, it might mean up to £500 million a year extra in public expenditure for different kinds of infrastructure in Wales for each of the seven years from 1 January 2000. Bearing in mind the fact that the Welsh Office's comprehensive spending review budget is £7 billion, an extra £500 million--if it is as much as that--amounts to an 8 per cent. increase. That is a pretty substantial increase to have running for the next seven years.

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That £500 million is the top whack figure--it might be £450 million or £400 million if things go reasonably well but not perfectly. I understand that £300 million a year in European money would be provided for seven years, which we would expect to be matched--perhaps not pound for pound--by British Treasury sources. If that European funding were matched two thirds of a pound for a pound, it would mean that the additional £300 million would be matched by perhaps £150 million to £200 million in Treasury money, which would total £450 million or £500 million. If my calculations are not correct, the Minister will no doubt set me straight at the close of the debate. It is natural for people to want to examine the subject in considerable depth.

I mentioned that the timing of receipt of objective 1 funding is crucial. We all know why that is so. The three-year public expenditure programmes of the Welsh Office, which begin on 1 April this year--and will be inherited by the Welsh Assembly a month later--will continue for three years until 2002. Objective 1 funding should have been determined by then--perhaps at the European Union Council of Ministers meeting in March--and, if we are to receive it, will begin on 1 January. That will be some seven or eight months after the Assembly has taken charge of the bulk of Welsh Office powers. That funding will certainly stir the pot and be an integral and dominant part of the early activities of the Welsh Assembly.

The hon. Member for Meirionnydd Nant Conwy (Mr. Llwyd) referred to the interesting reply given by the Economic Secretary to the Treasury. We could debate for at least all of today--and probably on several other occasions--whether that response was a bit of a downer or left the door open for the Treasury to agree to matched funding. Let us try to view the matter positively. It is a chicken and egg situation. There is no way that the Treasury will say, "Here's an extra £200 million a year for the next seven years, provided Europe gives you objective 1 funding at the March Council of Ministers meeting". Unfortunately, it also works the other way. There is no way that the European Commission will agree to confer for fun the objective 1 funding designation--as though it were referring to a map--in the March Council of Ministers meeting.

The EC will confer objective 1 status only if it receives some sort of serious signal from the British Government that matched funding is being negotiated and is on the way. The Government must demonstrate that they are agreeing the details and taking a serious approach to securing the whole package. If there is no matched funding, there will be no objective 1 status. If there is no objective 1 status, there is no point in having matched funding.

We must somehow address that chicken and egg situation. The resolution of that problem should not be left until the early weeks of the new Assembly when Assembly Members will be finding their feet. We must sort it out before 7 May and the elections to the Welsh Assembly. The more clarity that we can lend to that chicken and egg situation, the better.

I think that the Secretary of State said earlier--I repeat the point now--that the Welsh situation is unique as regards objective 1 funding. It is not a problem in Northern Ireland, Scotland or England: it is only a problem in Wales. Scotland and Northern Ireland have received objective 1 funding before, so it is programmed

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into their three-year public expenditure programmes that start on 1 April. Wales has never had objective 1 funding. Although it is true that Cornwall and south Yorkshire have never received objective 1 funding, it is possible within the big block of public expenditure in England--comprising the Department of the Environment, Transport and the Regions, the Department of Trade and Industry and several other blocks--to rob Peter to pay Paul. However, it is not possible to rob Eddie to pay George--as we now say--within the Welsh block because almost all areas of Wales that are not objective 1 designates are objective 2 or objective 5b areas and will continue to receive European assistance.

The European Commission will not allow the British Government to take funds away from areas with objective 2 entitlements--which is the next level down in European grant--and give them to objective 1 areas by switching around expenditure within the Welsh block. That will not be allowed because it will infringe the additionality rule. Europe will not allow the British Government to tell the Welsh Office now--or the Welsh Assembly in the future--"Take it from Cardiff, Newport, Powys, Wrexham, Deeside, and so on, and give it to the objective 1 areas", when the Government are also claiming that the eastern strip of Wales along the English border remains sufficiently lacking in prosperity to require a lower level of European assistance.

Wales does not have the flexibility of the English block to take money from wealthy areas--such as the home counties--in order to provide matching funding in Cornwall and south Yorkshire, for example. That is not possible in Wales because of our double poverty gap problem. In other words, the whole of Wales is 18 per cent. behind England and, within Wales, the areas that we hope will receive objective 1 funding are another 10 per cent. behind the Welsh average. Therefore, they are 28 per cent. behind the British average or standard of living evaluation in England.

We must somehow solve that problem during a critical period of constitutional change. The House of Commons was devised to debate and resolve that sort of difficulty. There will not necessarily be any answers today because we have a few months to go, but we need maximum clarification of that issue.

The Welsh economy is undergoing a serious period of change, so objective 1 funding is critical. There is nothing we can do using objective 1 funding that we cannot do under the programmes of assistance provided by the present designations of 2, 5b and 3. However, the objective 1 category offers more money and a higher maximum rate of grant and encourages long-term planning and projections because the funding is available for seven years. The maximum rate of grant is higher. However, the essence is the same as that of the programmes that have been running for the past 10 years.

We must get away from the classic methods of regional development that we have used since the days of the big pit closures in the 1960s and 1970s. The aim of objective 1 funding is not to provide additional sheds and roads or to give the building industry grants to construct large highways or extrude vast quantities of 25,000 sq ft advance factories all over Wales. We have too many factories lying empty. We must find a way to fill the factories that we have with activities, rather than build more. We live in a world of surplus in such facilities, and we must modernise our products, processes, management

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and skills, improve training and upgrade apprenticeships. We must increase research and development and seed capital and widen access to venture capital.

Objective 1 funding is oriented towards those aims rather than providing static factors such as bricks and mortar and highways. It is concerned with how to make the economy more dynamic by improving access and the part of the infrastructure that will lead to faster economic growth.

We shall need that growth, because recent closures have revealed that this winter has been a difficult period for the Welsh economy. The closure of Lucas-SEI in Ystradgynlais in the constituency of the hon. Member for Brecon and Radnorshire (Mr. Livsey) is a symptom of a widespread malaise in the Welsh economy of dependence on the middle level of technology in electronic assembly or automotive components which is coming under huge pressure from the shift towards eastern Europe. Factory facilities such as the Lucas-SEI plant in Ystradgynlais can be shipped to Poland where the workers are paid wages that are, perhaps, one sixth of the prevailing rates in Wales.

American factories have faced similar problems since the signing of the North American Free Trade Agreement, because wage rates in Mexico and north America have roughly the same relationship as wages in eastern Europe do to those in western European areas such as Wales. Low to intermediate technology assembly line skills are gained with tremendous speed, and for the past 20 to 30 years, through no fault of our own, Wales has specialised in those skills and in automotive and electronic components, without housing the headquarters of the firms that are using design skills to upgrade and plan the next generation of products.

We have been developing the assembly line skills that are now at risk because the pound is relatively high and the next wave of European Union expansion points eastward to low labour cost countries. That sector will be under huge pressure unless, for any reason, the pound comes down sharply.

New and exciting economic prospects are opening up in sectors in which it is very difficult for us to compete, such as software and the globalised market for what are known as traded services. Those arise from huge mergers between, for example, merchant banks, which suddenly want 150,000 sq ft office blocks so that they can house their whole human resources department, finance office or back-office operation in one city. At the moment, for various reasons, Welsh cities are not seen to be as exciting as Dublin, Edinburgh or Barcelona, and we cannot therefore compete in the globalised traded services office market.

We are losing out in manufacturing and we are not at present in a position to gain in other sectors because we do not have the necessary software skills. The Republic of Ireland targeted software 10 years ago. It trained people in those skills and then succeeded in attracting inward investment. I am not saying that Wales should target software--we could target something else--but Ireland demonstrated what could be done with objective 1 funding, and that is one reason why its gross domestic product has overtaken that of Wales and, on some measures, that of Great Britain. I hope that, with the Assembly, Wales will be able to do the same.

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I am looking forward to finding out how we can creatively use objective 1 funding to provide a more secure future for everyone in Ystradgynlais and other communities throughout Wales where there are job losses in intermediate technology.

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