Select Committee on Welsh Affairs Second Report

Match funding

1. The European Structural Funds meet only a proportion of the cost of any project. The remainder of the costs has to be "match funded" from the public, private or voluntary sectors within the Member State. Match funding is available from a very wide variety of funds and bodies. Identifying and pulling together the different sources of match funding is a major challenge for those involved in the Programmes.[50] There is a total of around £638 million of match funding available from the public sector in Wales for the four financial years from April 2001 to March 2005: £278 million from the Assembly's budget and around £90 million per year which is already in the budgets of public agencies such as local government, Education and Learning Wales (ELWa)[51] and colleges of further education.[52]
2. It is the responsibility of project sponsors to find the necessary match funding, but the secretariats for the local or regional partnership for the programme may be able to assist in directing applicants to potential sources of public match funding. With a few exceptions, match funding must be secured before the Partnerships can given their formal support and the related application for structural funds can be considered by WEFO. This is also true of the three English regions.[53] Assembly Ministers have made a commitment that good projects will not be allowed to fail for want of the necessary match funding. Match funding from Assembly budgets is seen as a last resort to be used only where necessary to honour this commitment.[54]
3. Public sector match funding in Wales is spread over eight "pots", under arrangements which were approved by the Assembly's Economic Development Committee in December 2000. Access to each pot is determined by the type of organisation making the application rather than being based on the Priorities and Measures of the Programme. This is intended to save project applicants from having to make multiple applications to different pots. For example, the Pathway to Prosperity pot is available only to the private sector, the WDA, the Wales Tourist Board, Business Connect, Enterprise Agencies and the Welsh Assembly Government. Finance Wales, local authorities and voluntary sector organisations each have designated pots for which they have exclusive entitlement to bid.[55]
4. Applications for match funding from the Pathway to Prosperity pot, for voluntary sector local regeneration projects and for local authority sponsored projects, may be processed in parallel with the relevant Objective 1 application and the relevant Partnership can formally grant support for the project before the match funding is secured. In South Yorkshire, the Government Office has established a co-financing system with the Learning and Skills Council. This allows sponsors applying for money from the European Social Fund for certain types of project to make a single application for both ESF money and the necessary match funding. They have instituted a similar arrangement with Regional Selective Assistance.[56] South Yorkshire has also been prepared to approve longer-term projects provided that there is evidence that the match funding is available for the first year or two of the project. This allows projects to get up and running while match funding for subsequent years is still being sought.[57]
5. Two features of match funding are common to the English and Welsh programmes: that the responsibility to secure match funding rests ultimately with the project sponsor and that projects cannot be finally approved until the match funding is in place. How far projects can go down the approval process varies from one region to another. Although it would be undesirable for the Objective 1 partnerships to be clogged up with applications that had little or no realistic prospect of securing the necessary match funding, it is also far from ideal that sound projects should have the approval (even if it is only provisional) for structural funds delayed while match funding is sought. We believe that there are four features of match funding arrangements which will help to promote the success of Objective 1 programmes:

1. co-ordinating and drawing together the various sources of match funding so that applicants can find out easily, and at an early stage, where they might find funding;
2. integrating the application process for match funding as closely as possible with the application process for structural funds—for example through the parallel processing available to some types of project in Wales or the co-financing arrangements in South Yorkshire;
3. flexibility in offering approval in principle to projects where match funding is highly likely to be forthcoming but has not yet been secured, or where it has been secured only for part of the project; and
4. supporting applicants in developing their match funding applications during the pre-application stage.

These are areas which we recommend should be addressed in the UK forum of Objective 1 regions (see paragraph 12).

Involving the private and voluntary sectors

6. The private and voluntary sectors are involved in the Objective 1 Programme in several ways, primarily as project sponsors and as members of the partnerships that run the Programme. The European Commission encourages Member States to ensure that all three sectors—public, private and voluntary—are represented on the partnerships and to ensure that there is a gender balance on the Programme Monitoring Committee. Mr Manfred Beschel of the Commission explained that this was a sensitive area where subsidiarity was an issue—the Commission had never intervened in the determination of the composition of the partnerships of an Objective 1 region.[58] The First Minister described the Commission's involvement in the composition of partnerships as "pretty strong encouragements but ... not laid down exactly as rules".[59] In order to comply with the spirit of these "encouragements", the then-Chair of the Assembly's Economic Development Committee, the late Val Feld AM, and the First Minister decided that each of the three sectors should be represented in equal number on each of the partnerships (known as the "three-thirds principle") and that there should be a gender balance on each of the partnerships which meant, in practice, that at least 40 per cent of members should be women. Mr Beschel described this approach as "much more advanced than other countries".[60]
7. English regions have adopted different approaches to the composition of the partnerships. Merseyside has tried to ensure that 40 per cent of the members of its Programme Monitoring Committee are women but has not yet succeeded. On the other hand, it has exceeded this target in some of its other partnerships. South Yorkshire has a target to achieve a 25:75 gender spilt by the end of 2002 and hope to move beyond that in subsequent years. Cornwall has a "serious problem" in achieving gender balance, especially on the PMC. Mr Richard Bayly of the Cornwall Programme told us that they looked to the Welsh model as "an exemplar which we aspire towards".[61] South Yorkshire is aiming for a sectoral balance on each partnership but is now more focused on getting the right individuals involved and ensuring that each sector is fully represented by consultation and other means. Cornwall aims for a sectoral balance on the higher-level, overarching groups but some partnerships have compositions in which one sector is favoured over the others. For example, the taskforce on the SME agenda is composed entirely of representatives of the private sector.[62]
8. One of the problems experienced by the partnerships in Wales has been poor attendance at the partnership meetings. We were told by representatives of the Welsh Local Government Association that one reason for this was the fact that meetings were very often incomprehensible to representatives of the private and voluntary sectors.[63] Representatives from the Federation of Small Businesses argued that many people from the small business sector could not afford to participate. Aside from the earnings they lost during attendance at meetings (which were often unnecessarily lengthy), travel expenses were inadequate[64] and there was no compensation for other increased costs, such as additional stationery. One participant estimated that his business spent £1,000 per year on stationery and postage associated with his work for the partnership. The Chair of the IT Regional Partnership wrote to all members of the group towards the end of 2001 to express his concern about poor attendance. He said that attendance from the public sector had been 58 per cent, 44 per cent from the private/social sector and 14 per cent from the voluntary sector.[65] In response to similar complaints from the FSB in Cornwall, they have introduced an attendance allowance of £11 per hour, plus travel and subsistence costs.[66]
9. The First Minister acknowledged these problems with involving the SME sector in the process, which (as in Cornwall) are sometimes exacerbated by the long travelling times involved. Also, since Wales had fewer large company headquarters than some of the other regions, the private sector involvement was always going to depend heavily on the small business sector which, with fewer staff to spare, was likely to find it more difficult to participate.[67] He suggested that the Wales Social Partners Unit, a body established by the Assembly, Business Wales and the Wales TUC, was able to provide an inroad into the Objective 1 process for small business that did not have the time or resources to participate in the partnerships.
10. From the wide range of possible approaches to complying with the Commission's advice on the composition of partnerships, the Assembly Government has decided to adopt a fairly rigid set of rules. The First Minister told us that one of the main benefits of this was that the system in Wales was robust against challenges from the Commission, but witnesses from the Commission told us that they had never challenged the composition of a Member State's partnerships and suggested that to do so would be difficult because the issue of subsidiarity was involved. Despite its inflexibility, the composition of the partnerships in Wales seems to be highly regarded by both the Commission and the English regions. The Assembly has been particularly successful in securing a gender balance on the partnerships. We are concerned, however, about the obstacles to participation by representatives of the private and voluntary sectors. It does appear that for many small businesses the cost of participating in the partnerships is prohibitive and that there may therefore be a case for some more systematic form of reimbursement for loss of earnings and out-of-pocket expenses. Likewise, it is important that the proceedings of the partnerships are readily comprehensible to those people who do not have a great deal of experience of participating in EU funding programmes.

Progress of the programme: rate of commitment and spend

11. Two of the measures which are often used to evaluate the progress of Structural Funds programmes are the rate at which structural funds money is

1. committed to projects; and
2. actually spent.

These measures are important because money which is not spent by certain target dates may have to be returned to the European Commission, a process known as "decommitment".[68] There seems to be some uncertainty over what constitutes the commitment of funds.[69] Until recently, the European Commission only allowed Member States to count money as having been committed when it had entered into a legally binding obligation to pay the money.[70] Now it is up to individual Member States to determine how "commitment" is measured. We were told by witnesses from the DTI that in the UK money was counted as having been committed when a letter has been issued to the applicant approving the project.[71] The Table below shows the levels of commitment and spend for each of the Programmes in England and Wales at November 2001.

 

Objective 1 commitment and spend by region, November 2001
Region	Committed (% of total)	Spent (% of total)
Cornwall	£60 m (19.53%)	£5.98 m (1.95%)
Merseyside	£164.73 m (20.14%)	£30.68 m (3.75%)
South Yorkshire	£92.5 m (12.86%)	£13.046 m (1.81%)
West Wales & Valleys	£260 m (24%)	£30.4 m (2.7%)

Source: House of Commons Official Report, 14 November 2001, col. 759W.

West Wales and the Valleys had committed a greater proportion of its budget (and a much greater amount in absolute terms) than any of the three English regions. It had also spent a greater proportion and a greater overall amount than all but one of the English regions. Payments under the programmes lag behind commitments because the fund regulations require ERDF expenditure to be defrayed before it is claimed. ESF projects may receive an advance payment at the beginning of the project but subsequent ESF payments also take place after expenditure has been defrayed.[72]

12. Some witnesses, notably Mr John Flamson of the Merseyside Programme, felt that the pressure to meet commitment and spending targets generated by the decommitment arrangements was in itself unhelpful. He argued that it militated against the use of Objective 1 money as a strategic investment fund and turned it into a spending programme.[73] He also suggested that the decommitment arrangements created an incentive to delay approval for projects until it was absolutely certain that they would be able to proceed quickly.[74] This makes it more difficult to build flexibility into the approvals process, for example, by offering approvals in principle before match funding arrangements have been finalised (see paragraph 21). The First Minister also told us that "you have got to get balance between getting your strategy right and spending". A focus on simply "getting the money out of the door" could lead to the overall impact of the programme being undermined, as the emphasis on high-quality, effective projects offering value for money would be secondary.[75]
13. Mr Manfred Beschel of the European Commission's Regional Directorate General thought that there was no contradiction in taking a strategic approach while also aiming to meet targets for commitment and spending. He described the spending targets as "more an element of management quality than an element of strategic design".[76] He pointed out that rate of commitment and rate of spend are "just the financial indicators related to the programme"; they give no indication of whether the programme is meeting its strategic objectives or having the impact on the region which it is intended to.[77] He told us that he was not aware that any decommitment would be necessary from Wales's previous round of ESF funding, but that final figures would not be available until July 2002.
14. In terms of rate of commitment and rate of spend, Wales appears to be performing well in comparison to its English counterparts. Caution should be exercised when comparing rates of commitment between different Member States as the meaning of "commitment" may be different in different contexts. Avoiding decommitment—"use it or lose it"—is clearly an important target for all Objective 1 programmes, but the rate of commitment and spend is only one measure of a Programme's performance. Far more important than these financial indicators is the performance of the Programme against the measures related to the seven Priorities, such as the creation of new jobs and businesses, improving the ICT infrastructure, regenerating deprived areas and improving the participation of women in the labour market.

State aids

15. One of the issues we dealt with in our earlier Report was the possibility of "operating aids", in the form of tax credits, being made available in the Objective 1 area. We recommended that the Government should respond positively to proposals from the Assembly for the use of operating aid to promote economic development in Wales. The Government replied that the Assembly had made one proposal for such an aid—a doubling of the research and development tax credit for small and medium-sized enterprises in derogation 87(3)(a) areas of the UK—which the Government did not agree to on the ground that it would "undermine the relatively simple design and administration" of the credit and open up the potential for abuse of the more generous credit in assisted areas.[78] We decided to look again at this question in this inquiry, investigating the role of the Government (in particular the Treasury) in granting requests from the Assembly for operating aids. As well as raising the issue with our witnesses,[79] we held an informal meeting during our visit to Brussels with officials from the Competition Directorate General of the European Commission (DG COMP). This meeting was off the record, but we were able to establish a great deal of useful background to the use of state aids in Objective 1 areas.

State aids and the circumstances under which they may be granted

16. State aids are financial assistance given by the Government of a Member State to commercial enterprises, both public and private, which are likely to distort competition within the Community. A state aid is described in Article 87 of the Treaty Establishing the European Community as "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 ... insofar as it affects trade between Member States". The Treaty prohibits state aids in principle.[80] This general prohibition is very wide, covering not only aid granted directly by Member States but also aid that uses State resources, which includes any agencies that might distribute aid on the basis of government funding, such as local authorities, public establishments and various statutory organisations. It applies not only to non-repayable subsidies, but also to loans on favourable terms and low-interest loans, and to forms of subsidy in which the donated element is less apparent, such as duty and tax exemptions, loan guarantees, the supply of goods or services on preferential terms and even (under certain circumstances) public stakeholdings in companies.
17. Notwithstanding this general prohibition on state aids, the Treaty sets out certain circumstances in which aids are permissible. They are "aid having a social character, granted to individual consumers ... without discrimination related to the origin of the products concerned" and aid to make good the damage caused by natural disasters and other "exceptional occurrences".[81] This might include, for example, subsidies paid to consumers to purchase more environmentally friendly vehicles, provided that no restriction is placed on the origin of the vehicles they bought. As well as these cases where aid is automatically permissible, there are four situations in which aid may be permissible, subject to the agreement of the Commission.[82] They are:

1. aid to promote the economic development of areas where the standard of living is abnormally low or where there is serious underemployment;
2. aid to promote the execution of an important project of common European interest or to remedy a serious disturbance in the economy of a Member State;
3. aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest; and
4. aid to promote culture and heritage conservation where such aid does not affect trading conditions and competition in the Community to an extent that is contrary to the common interest.[83]

The Council may specify additional categories of aid which may be permissible, acting on a proposal from the Commission.[84]

18. Areas with Objective 1 status also have derogation 87(3)(a) status, since the principal criterion for the two is the same: a NUTS II region with a GDP per capita less than 75 per cent of the EU average. It is this Article 87(3)(a) derogation of which West Wales and the Valleys would hope to take advantage in granting state aids. The areas with exemption under Article 87(3)(c) correspond roughly to areas with Objective 2 status, but we were told that there were some areas which had one status but not the other.

Operating aids

19. Operating aids are a sub-category of state aids: those which provide support for the running costs of a business, as opposed to investment of some kind (which is the purpose for which state aids are usually permitted). We were told that they were viewed by the Commission as the most distorting form of aid and therefore were extremely unlikely to be granted. Operating aids would only be granted in order to address a very specific and serious problem. Very high unemployment, for example, would not in itself be sufficient to qualify. Examples of areas where operating aids have been granted are the eastern Länder of Germany following reunification (and even this is being phased out) and the South of Italy, where operating aids have been permitted in the context of a scheme to reduce the scale of the black market by offering incentives to businesses to regularise their activities. Clearly, Wales does not suffer from problems on this scale.
20. It is important to recognise that Objective 1 status does not automatically entitle the Government or the Assembly to introduce state aids in West Wales and the Valleys. Nonetheless, where there is an opportunity to use tax credits, loans or similar policies as tools of economic regeneration in Wales, they must not be overlooked and we continue to urge the Government to look favourably on any request from the Assembly for the use of state aids under the Article 87(3)(a) derogation.

What happens after Objective 1?

21. Estimates suggest that the next round of enlargement will increase the population of the EU by around 29 per cent and the GDP by only 4-9 per cent.[85] The drop in the EU average GDP per capita that would result means that if the current regulations and overall budget remain unchanged, the levels of national receipts from the Structural Funds will be markedly different. It is not safe to assume that areas which currently benefit from Objective 1 status will continue to do so after 2006. It is to be hoped that many will be lifted above the GDP per capita threshold by the success of the Structural Funds programmes, but some may rise above it as the threshold itself falls, even in the absence of substantial economic improvements.[86]
22. There are several options after the current round of Objective 1 programmes ends in 2006. Until now, the Commission's policy has been to offer a smaller amount of transitional funding for one year to those regions which lose their Objective 1 status. The Commission has started a debate on what should happen to the current Objective 1 areas at the end of the period. They are due to produce firm proposals in 2004.[87] Whatever the arrangements for 2007 onwards, there is a general consensus that an Objective 1 Programme must be "its own exit strategy".[88] According to Mr Beschel, programmes must create structures which are able to live beyond the programme period.[89]
23. One possible alternative to transitional payments is the "zoning" of the areas which continue to receive assistance, where Member States are given greater autonomy in determining which areas will receive assistance.[90] Another is that only the most deprived pockets of the current Objective 1 regions will be designated for ongoing assistance.[91] The UK Government has not yet made its position clear on which of these options (if any) it favours; the Secretary of State for Wales told us that consultation with the National Assembly would be important in reaching a view, as would any changes in European policy.[92] We welcome the Secretary of State's commitment to ensuring that the National Assembly for Wales will play a significant part in formulating the Government's position on the best policy for dealing with the current Objective 1 regions once the current programming period ends. We recommend that National Assembly Ministers should be able to make a direct contribution both prior to and during negotiations with the Commission on this issue.

 

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50   Q 35. Back

51   ELWa is the collective name for the National Council for Education and Training for Wales and the Higher Education Funding Council for Wales. Back

52   Ev 21. Back

53   Q 37. Back

54   Ibid. Back

55   Ev 21-22. The other four pots are Euro Facilitators, Food Processing and Marketing, Farm Adaption and LEADER+ (an EU rural development programme). Back

56   Q 35. Back

57   Q 37. Back

58   Q 174. Back

59   Q 114. Back

60   Q 174. Back

61   Q 16. Back

62   Ibid. Back

63   Private meeting in Cardiff, 30 October 2001. Back

64   We were told that the travel expenses for participation in the Rural Asset Strategy Partnership was 23p per mile, compared with rates of between 37p and 60p per mile paid by the National Assembly. Back

65   Private meeting with representatives of the FSB in Cardiff, 30 October 2001. See also Q 31. Back

66   Q 31. Back

67   Q 118. Back

68   Q 3. The process is also sometimes referred to as "n+2 decommitment" or simply "n+2" (e.g. at Q 38). This is because programmes have to declare expenditure at the end of year n+2 equivalent to the commitment in year n. For a fuller explanation of n+2 decommitment, including a worked example, see Annex K to the DTI's Structural Funds Manual, available on the Internet at http://www.dti.gov.uk/europe/structuralfunds/index.htm. Back

69   See Q 3, where witnesses from the English regions suggests that different measures of commitment are used in different cases. Back

70   Q 141. Back

71   Q 90. Back

72   Official Report, 14 November 2001, col. 759W. Back

73   Q 3. Back

74   Q 38. Back

75   Q 80. Back

76   Q 148. Back

77   Q 139. Back

78   See First Report from the Welsh Affairs Committee, Session 1999-2000, European Structural Funds (HC 46), paragraph 32 and Fourth Special Report from the Welsh Affairs Committee, Session 1999-2000, Responses from the Government and the National Assembly for Wales to the First Report of the Committee (Session 1999-2000), European Structural Funds (HC 470), page vi. Back

79   See, for example, QQ 47, 78 & 79. Back

80   Article 87(1): they "shall ... be incompatible with the common market". Back

81   Article 87(2). Under Article 87(2)(c), aid required to compensate certain areas of the Federal Republic of Germany for the economic disadvantages caused by the division of Germany was also permissible, but this has now largely been rendered void by German reunification. Back

82   The procedure for seeking the Commission's approval is set out in Article 88. The Council and the Court of Justice are also involved in decisions on state aid in certain circumstances, but the Commission has the main responsibility. Back

83   These sub-paragraphs correspond to sub-paragraphs (a) to (d) of Article 87(3). Back

84   Article 87(3)(e). Back

85   See European Parliament Factsheet No. 4.1.8, The agricultural implications of enlargement; Timothy Bainbridge, The Penguin Companion to the European Union, Revised Second Edition, 2000, pp. 148-150; and the Future of the EU Structural Funds UK Roadshow which is available on the DTI website at www.dti.gov.uk/europe/future.html. Back

86   Regions where the GDP per capita is less than 75 per cent of the EU average currently benefit from Objective 1 status. See paragraph 1. Back

87   QQ 184-6. Back

88   Q 56. Back

89   Q 151. Back

90   Q 187. Back

91   Q 186. Back

92   Q 134. Back

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Prepared 22 May 2002