House of Commons - Work and Pensions

Select Committee on Work and Pensions Sixth Report

6 Issues

Relative merits of direct bidding and co-financing

44. The biggest single issue that has emerged in our evidence is the issue of co-financing. During our inquiry, a number of witnesses, especially from the C&VS, were very critical of co-financing. They identified various disadvantages, which they contrasted with the reported strengths of direct bidding. On the other hand, other witnesses identified a number of strong arguments in favour of co-financing. Below we set out some of the arguments surrounding direct bidding and co-financing that have emerged during our inquiry.

45. Direct bidding has tended to produce a large number of small projects, which it is argued sometimes lack the strategic focus on regional employment and skills priorities.[62] With direct bidding there is also a risk that match-funding would not be forthcoming and that projects that would have otherwise become established with ESF grant, may instead struggle through lack of match-funding. According to DWP, a disadvantage of allocating monies by direct bidding is that service providers experience heavy administrative burdens when applying for funds.[63] For example, some voluntary groups do not have the specialist skills or time for engaging in a lengthy direct bidding process, nor the necessary skills or contacts to find matching funds. In fact, the system of CFOs was introduced in England in response to a perception that ESF was performing weakly because of "over-complex administrative systems and the unstructured award of funding."[64] Successive studies into ESF had apparently shown that:

delays in awards meant that ESF supported actions could not be completed in the planned timescale.
time-limited match-funding had to be re-deployed.
provider-driven direct applications to the Government Office had produced a pattern of activity that was not always well matched to need or opportunity.
there had been significant duplication in provision.
very large amounts of ESF that could have been directed to address regional needs had to be absorbed by central initiatives.[65]

46. According to our evidence, co-financing brings a number of advantages. The ESF grant and the matching funding are brought together in one funding stream, to the benefit of the service provider. This removes from the service providers the onerous task of having to find match-funding and simplifies the application procedure. Mr Pascoe (LSC) told us that under co-financing the application process had been simplified. He pointed out that the application form had been reduced from 69 pages and 6 pages of annexes to 10 pages under co-financing.[66] Mr Cragg (LSC-Birmingham and Solihull) also told us :

de facto

47. This single funding stream under co-financing also means that service providers account to a single funding body. Under co-financing, service providers do not need the specialist skills for writing bids that are needed under the previous bidding process.[68] Co-financing also allows the audit trail to end with CFOs, thereby easing the burden on service providers, although CFOs will still need to ensure that funds have been used properly.[69] Under co-financing, the nature of the auditing process is also different. Mr Cragg (LSC-Birmingham and Solihull) told us that under the conventional approach to ESF, service providers are required to provide evidence of the actual costs of the provision and not just at the level of the project but at the level of the individual participant. Whereas under co-financing, the audit regime relies on the contract cost, which reduces the burden on service providers. [70] Mr Cragg (LSC-Birmingham and Solihull) told us:

48. We also heard that CFOs can provide an agreed profile of payments, which can help ease the cash flow problems of small organisations.[72] It is also argued that CFOs allow a more systematic monitoring of projects with more emphasis on quality.[73] Co-financing was thought to encourage greater innovation and creativity by taking more risks.[74] We were told that one of the greatest strengths of co-financing was that it allowed greater flexibility on the ground, since local CFOs could tailor what they were doing with ESF to the specific needs of their local communities.[75] For example, we heard that the West Yorkshire Learning and Skills Council had determined, with the help of its regional partners, that the level of basic skills in the region needed to be improved.[76] We also heard that another advantage of co-financing was that it encouraged new organisations to come forward for funding. Ms Henderson (GO, SW)told us that

49. Mr McVey (GO, SW) gave the example of six new organisations that had come forward in Devon and Cornwall.[78] Ms Biddulph (GO, Yorkshire and Humber) mentioned that a recent study commissioned by the West Yorkshire LSC found that 94 per cent of the people who applied for funding under co-financing had said they would apply again.[79] The Co-ordinating European Fund for the East Midlands Third Sector (CEFET) gave some evidence that CFOs had widened the involvement of some V&C sector projects (from 23% to 24%) in areas where the voluntary sector had not figured strongly in the past, such as policy fields other than social inclusion.[80] Co-financing, it was argued, allows greater coherence of policies by adding value to Government programmes. Actions within national plans on employment and Regional Development Plans were aligned more closely. Thus providing greater strategic coherence than existed under direct bidding.

50. As regards criticisms of co-financing, some of the written evidence, especially from the Voluntary and Community Sector (V&C sector) groups, identified a number of concerns. Third Sector European Network (TSEN) told us that "consultation on the introduction of the policy was politically driven, hurried and incomplete.[81] European Structural Funds Voluntary Organisations Northern (ESFVON) expressed concern about the tendering process favoured by CFOs, which it said was a move towards competitive tendering rather than applying for approval against a criteria as existed under direct bidding.[82] ESFVON argued in favour of "project driven" or a "bottom-up" approach and against the top down approach characterised by co-financing.[83] CEFET told us that CFOs equate strategic control with a top down, large-scale activity approach whereas when dealing with social inclusion work, the opposite approach was most appropriate.[84]

51. ESFVON also criticised the greater specificity of projects that existed in the tendering process. As a result, some worthwhile projects could find themselves without ESF support by falling between the specifications. Ms Flanagan (TSEN) told us that the competitive tendering element had given rise to some very specific sorts of contracts that ended up "being exclusive rather than inclusive".[85] ESFVON was critical of the Government's line not to allow direct bidding in some policy fields, which it said left CFOs with an effective monopoly position in those policy fields.[86] ESFVON said there was a common view amongst the C&VS groups that the influence of CFOs had been to "ghettoise" voluntary organisations into countering social exclusion.[87] SAVAGE stated that the first round of applicants found that there was a divergence between the tried and tested approach of direct bidding and that being prescribed by co-financing.[88] London Voluntary Sector Training Consortium (LVSTC) described the delivery of ESF in the past as an example of national priorities being delivered in local terms. However, it argued, that this balance in marrying top-down with a bottomup approach had unwittingly been undermined by co-financing. It called for arrangements to support direct bidding.[89]It was also argued that the system of co-financing was likely to support a move away from small-scale projects, which tended to be favoured by direct bidding, towards large, high impact co-financing projects.[90] We were told that in contrast to the UK system, the Swedish programme funded some 36,000 projects directly. The obvious difference with the UK system was that in the Swedish programme strategic control was extremely difficult.[91]

52. Tomorrow's People said "overall evidence to date [of co-financing] suggests a pattern of increasing centralisation and delivery by Government bodies."[92] It questioned whether sufficient consultation amongst independent service providers had taken place prior to CFO status being conferred.[93] It was also alleged that CFOs did not understand the needs of the smaller service providers.[94] SAVAGE referred to an inbuilt majority enjoyed by CFOs and other Government agencies on important Committees, such as the Budget Allocation/Monitoring Committees. It claimed that the Budget Allocation Sub-Committee in the South East Region was "obviously self-serving and not representative."[95] We have no evidence that this criticism is shared generally amongst the V&C sector within the South East region. In contrast, we note that the South East Regional Committee includes a representative from the V&C sector. In general, SAVAGE argued that CFO threatened to direct money away from the most marginalised beneficiaries in favour of those at less risk and of achieving outcomes towards national targets. LVSTC said that all ESF stakeholders should be fully involved in the Monitoring Committees.

53. As regards the specific advantage that CFOs provide match-funding, we heard concerns that the amount of funding was being reduced by the use of notional rather than real match-funding. (See below). It was argued that although the opportunity of not having to secure match-funding has its attractions, this advantage was reduced if the chance of securing that match-funding was correspondingly reduced.[96] We also heard that some organisations had little problem in obtaining match-funding under direct bidding and that CFOs providing the ESF grant and the match-funding in one stream was not always an advantage. For example, NEWTEC told us that it did not have a problem finding match-funding. Ms Flanagan (TSEN) reinforced this point and told us a number of organisations were happy to look for match-funding themselves.[97] She added that in the East Midlands, less than two per cent of the match-funding for social inclusion work came from mainstream programmes. She said projects were using things like the Community Fund, Single Regeneration Budget, trusts and foundations.[98] SAVAGE told us that another advantage of using such bodies as charitable trusts for their match-funding was that they were more knowledgeable about the inherent risks when dealing with projects that helped disadvantaged groups.[99] CFOs seemed less prepared to accept the higher risks associated with helping and training people in the hard-to-reach groups. LVSTC told us that co-financing had produced confusion and disengagement amongst the V&C sector as they tried to identify how CFO priorities had translated the broader Policy Fields and measures of the Fund. [100] LVSTC said that in London, its 10 CFOs had replaced the five Policy Fields and 12 measures with 10 prospectuses detailing in excess of 100 tender specifications. Service providers were expected to endure a two-year wait between staggered rounds before the whole picture of funding opportunities had emerged.[101] We heard that the 10 different CFOs in London had slightly different bidding timetables and that organisations faced a dilemma, not knowing whether to apply to all CFOs or to put their eggs in one basket and apply to one CFO. In response to this specific criticism, the Minister told us that the Government Office for London (GOL) was looking at ways in which the process in London could be made simpler, but pointed out that service providers in London were unlikely to apply to all 10 CFOs since they were unlikely to be in the geographical areas covered by all 10 CFOs.[102]

Assessment

54. In July 2002, the first evaluation report into co-financing was published. [103] The review focused on the process. Its main findings included:

"Co-financing has the potential to enhance the quality of ESF expenditure. However, in order to fully realise this potential the intensity of co-financing needs to be increased.
"It was found that most CFOs had a positive attitude towards working with V&C sector organisations and analysis of early contracting shows a significant allocation of resources towards those providers.
"Whilst project providers have benefited from simpler applications procedures, synchronised match-funding and a single reporting channel, it is not clear that the intended reduction in the overall administration cost has materialised yet."[104]

55. We note that this first evaluation into co-financing found little evidence that the system reduced the overall administration cost on service providers. Perversely, many of the criticisms about co-financing that we heard came from the very organisations that one would have expected to welcome co-financing, such as those from the V&C sector who could benefit from the reduction in the administrative burdens. To some extent, the pro and anti views on co-financing may simply relate to particular experiences in different regions. For example, in some regions, the V&C sector groups may be reasonably satisfied with the way in which the system is being applied. A second review into co-financing, which started in February 2003, reported its interim findings in August 2003. That review focused on the impact of co-financing, and whether the implementation of co-financing had met its objectives. The main findings, which are summarised in Appendix 16, are broadly consistent with the views of this report.

56. An important advantage of the co-financing approach, which should not be under-estimated, is that it provides more of a strategic approach when it comes to approving projects, compared with direct bidding, but without the centralising controls associated with a purely top-down system.[105]We believe that this is important in ensuring that the agreed social and employment goals are met. However, we are concerned that parts of the C&VS are very critical of co-financing generally. We would like to see compelling evidence that the administrative burden is reduced under co-financing. There was insufficient evidence to make a conclusive recommendation on whether or not cofinancing should be introduced in Scotland during the current programming period, although we note it is being investigated in the Highlands and Islands Objective 1 Area. Given the disruption that such a change is likely to cause, this was hardly surprising. However, to the extent that ESF support may be available after 2006, there may be a case for providing some detailed comparative analysis on bidding and co-financing, and specifically the size of any likely savings in administration. Co-financing seems an acceptable compromise between a bottom-up approach characterised by the bidding system and the top-down approach preferred in some European countries, such as that in Germany where pet projects are more likely to be funded. We believe the Government should quantify the potential administrative savings for service providers that can be generated by co-financing and identify ways in which these savings can be realised.

57. We further recommend that the DWP compares the implementation of ESF in areas where there are a few CFOs with those areas, such as London, where a larger number of CFOs operate and, in consultation with the ODPM, describe how it proposes to improve the co-ordination between CFOs to the benefit of applicants.

Notional match-funding and the shrinkage of the Community and Voluntary Sector

58. Much of the criticism that we have heard about alleged breaches of additionality under co-financing centres on whether the EU rules require match-funding to be additional. We have heard that match-funding under co-financing is already committed to existing CFO or mainstream activity and that very little of the match-funding found its way to the voluntary sector. For example, ESFVON claimed that CFOs used existing mainstream programmes that met the policy fields and measures of the ESF to legitimise new applications being funded through the ESF. In effect, this "means that new activity is funded 100% by the ESF grant since existing programmes are already funded."[106] In short, it is argued that LSC's match-funding is notional since it would have occurred anyway.

59. We were warned about the unreliability of figures in this area. Ms Flanagan (TSEN) said the figures were especially unreliable when comparing direct bidding with co-financing since direct bidding in Objective 3 had been running out since the end of 2002.[107] She said it was too early to compare the full effect of co-financing.[108] Mr Phillips (LVSTC) told us that

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Nevertheless, a number of witnesses tried to estimate the effect of co-financing. For example, ESFVON said that match-funding did not represent any additional commitment of resources, but suggested a 55% reduction in spending compared with the position prior to the introduction of co-financing.[110] ESFVON estimated that project outputs were likely to be reduced in the North East by some £76 million, a factor of 43%.[111] TSEN referred to shrinkage in Objective 3 activity of about 31% as a result of the loss of match-funding.[112] CEFET said that very little match-funding was provided in the form of cash, an argument that, on the face of it, seems to reinforce the idea that match-funding is notional and refers to funding that was already committed by CFOs to existing projects.[113] CEFET calculated that the voluntary sector had experienced a reduction (from 36% to 33%) in the proportion of successful bids with a smaller role on social inclusion work.[114] CEFET also made the point that on current trends in its region, ESF funding and match-funding would amount to £100 million over two years or more. But with ESF of some 45% (£45 million) the V&C sector was likely to attract only £15 million over the same period whereas prior to co-financing this would have brought forward £18 million in match-funding, providing a total amount of expenditure of £33 million.[115] In terms of measures to promote capacity building, it was claimed that this had dropped from 8% to 1% of the entire East Midlands Objective 3 programme.[116]This, according to CEFET, could undermine the entire regional strategy.[117]

60. In response to the claim that match-funding was notional, the DWP made clear that contrary to what was often claimed:

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The DWP confirmed that the arrangements for co-financing had been agreed with the European Commission and that under co-financing, ESF funding continues to be additional to domestic public expenditure.[119]Mr Cragg (LSC-Birmingham and Solihull) told us:

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61. As regards the criticism that, under co-financing, the C&VS organisations were losing out, the Commission told us that such criticism was not warranted by the figures. Mr Lönnroth, (European Commission) told us:

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Mr Pascoe (LSC) also said that their evidence suggested:

"that 31 per cent of the funding is going via the voluntary sector and it does vary with 38 per cent, for example, in London. We have more difficulty in making comparisons with previous periods because our predecessor bodies are no more. However, the voluntary sector in the West Midlands did some work and produced a paper which suggests that they have seen their involvement increase from 23 per cent to 35 per cent."[122]

62. In evidence, the Minister confirmed the figures and said that since 31 per cent of providers were in the voluntary sector, it suggested that organisations were getting through this process.[123] We were told that in the Yorkshire and Humber region both the actual share and success rate of bids from the V&C sector had improved and that "in the latest bidding round from North Yorkshire over half the community and voluntary organisations who applied for funding were successful."[124] In its initial report Fraser Associates concluded:

"Although it is still very early in the process, the available evidence suggests that the voluntary sector accounts for a significant proportion of resources allocated via CFOs, both by Local Authority and LSC CFOs.

"In the course of the research, we have not encountered any hard evidence that the voluntary sector in aggregate will be disadvantaged by co-financing, although individual organisations may be more or less successful in securing funding than in the past.

"Given that ESF is unlikely to be available on a comparable scale after 2006, co-financing presents an opportunity for the voluntary sector to develop relationships with organisations that have a longer-term interest in their field of operations."[125]

63. We found some evidence that there was a misconception about two aspects of the principle of additionality. Firstly, it was often assumed that additionality applied to individual projects and that Governments should show that the spending in a locality was additional to their domestic spending programmes. In fact, the additionality principle applies only to the national programmes and Governments may demonstrate compliance with the principle by separately distinguishing between European funds and domestic spending plans. At the project level, however, Governments are required to demonstrate added value and that the project makes a contribution to national objectives. Secondly and contrary to a widely held view, additionality applies only to the ESF grant and not to the match-funding element. As mentioned above, the match-funding may be provided from a number of other sources, and may not even be provided in the form of cash. In practice, what happens and has always happened, is that match-funding organisations find the match-funding from within their own budgets, which are (of course) ultimately determined by the UK Treasury. Mr McVey gave the example of a project concerned with helping people with disabilities to get back into the labour market where the match-funding came from the existing social services budget. He emphasised that while the match-funding was not additional money, the additional money was the ESF grant which produced the extra support.[126] Mr Cragg (LSC-Birmingham and Solihull )pointed out:

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64. If match-funding were additional in the way that some witnesses have argued, then the European Commission and not the UK Government, would essentially be determining the allocation of important parts of the UK domestic public spending programmes. The DWP told us: "EU regulations do not require match-funding to be additional expenditure or to provide 'added value." [128]In our view, the rules make this clear. Indeed, we were told that the European Commission confirmed the Government's interpretation. We recommend that steps should be taken by the Government to make the EU rules on additionality, and specifically that match-funding need not be additional, more widely understood.

Process for deciding funding applications

65. One of our main concerns during this inquiry has been to consider the types of projects that are being supported by the ESF and those projects that are being rejected. As evidenced by the written evidence, ESF supports a range of projects. We heard that ESF money supported opportunities and activities that would not otherwise be done and that ESF added value to the mainstream programmes.[129] In sum, it is the output of a given project rather than the component parts of the funding package which must demonstrate added value of that project.

66. In broad terms, the process for deciding whether or not to approve an individual project is similar across the UK, regardless of whether the system is direct bidding or co-financing, although co-financing involves open and competitive tendering.[130] For example, in the case of Objective 3, the applications are checked by the GO or CFO in England and Programme Management Executive (in Scotland and Wales) and commented on by advisory groups, which comprise individuals and organisations in the field. The advisory groups help identify possible pressures on the programmes. In this way, the applications are subject to a form of peer review, reflecting the partnership approach between programme administrators and service providers that the EU regulations seek to encourage. A decision to fund or reject a project is made by the Regional Committee or CFO in England and the Programme Management Committee (in Scotland and Wales). Under direct bidding, if an appeal is made against a rejection, the appeal is heard by the GO Regional Director or his/her nominee. Ultimately, approved projects are approved on behalf of the relevant Minister. In theory, the process from application to decision can take about three months.[131] One possible reason for the relatively speedy process through the various layers is the assistance that may be provided to potential applicants by support networks or consortium members and GOs/CFOs in England and PMEs (in Scotland and Wales). For example, consortium members may have established some expertise that they make available to individual service providers. During our visit to Scotland we heard that the PMEs work intensively with the applicants before they make their applications for funds.

67. We heard that sometimes there were excessively long delays before decisions were made. We raised the problems that one applicant experienced when applying for funds in North London.[132] We publish the response from the LSC.[133] At the start of the current programming period, structural funds programmes throughout the EU had a later than expected start, For example, in the UK, some projects were not approved until the end of 2001, two years after the start of the programming period, because the Commission and Member States did not reach agreement on Single Programming Documents and Operational Programmes until mid-2000. In the case of the England Objective 3 programme, this was approved in June 2000 with the first bidding round taking place shortly thereafter. The first projects were approved in September 2000.[134] We heard that the commitment of funds for Objective 3 for the current programme was currently on target.[135]

68. Although the decision making process for project approval is not unduly long, we suspect that the process between application and decision can be further shortened while still maintaining the quality of the project. In any such fasttrack procedure, all applications should still be subject to the same quality thresholds irrespective of the size of the application. We understand that all applications are subject to the same degree of scrutiny, regardless of the size of the project and the amount of grant that has been applied for. We recommend that the DWP investigates the possibility of providing a fasttrack procedure for relatively small grant applications, such as those under £50,000. We also recommend that the DWP ensures that suitable transitional funding is in place before the end of the current programming period as protection against delays in granting programme and project approval at the start of the next programming period.

Successful projects

69. A well-known problem faced by many organisations, especially those in the voluntary sector, is the need for longer term funding to cover their core activities. In general, ESF funding is limited to 12-24 months and occasionally 36 months, although applicants may reapply for more funding.[136]

70. We were privileged to visit a number of ESF supported projects in England and Scotland. Details of various projects are published with the evidence. What struck us during our visits was the obvious commitment of the service providers and their clients to achieving their stated objectives. We saw examples of projects that seemed successfully to combine business and social aims to produce effective support for clients. The atmosphere at the projects we visited was always friendly and purposeful. For example, during a visit to Aberdeen, we visited Rosie's Café, a relatively small project that provides training placements for people with mental health problems. Rosie's Café, which has been in existence for some 3½ years, has successfully acted as a platform for obtaining employment for a number of clients. It is an example of a social firm and member of Social Firms Scotland and one of only five projects supported by Turning Point Scotland - one of the larger national voluntary organisations provides support to disabled and disadvantaged clients throughout Scotland. We heard that Rosie's Café receives funding from a number of sources, including ESF Objective 3, mental illness-specific grants and income generated from within the business.[137] But during our visit it was made clear to us that the future of Rosie's Café was in the balance and that the staff was unsure whether there would be sufficient funding for the start of next year. We heard that for Rosie's Café ESF funding was critical to its survival and that without it, it and similar projects would close. The visit gave us an opportunity to make direct contact with service providers and the problems that small organisations faced. It also underlined the importance of good network support, especially for the smaller community projects.

71. We also visited projects in North London (Delta Plus Project), East London (NEWTEC), and Edinburgh (Skillnet). In addition to meeting several members of staff at some projects, we were also delighted to meet a number of clients of the projects. We heard a number of interesting cases of people who had benefited from ESF support. All three organisations were highly impressive. We were struck by the commitment and vision shown by project leaders and staff and the enthusiasm of the final beneficiaries. We were also impressed at the range of training provided by various organisations that was available. For example, NEWTEC and Skillnet, which were both concerned with providing IT training, were also involved in widening the training they offered, to include, for example, childcare training. We welcome the widening of skills training that can be offered by such ESF projects.[138]

Rejected projects

72. During our inquiry, we were also interested in examples of projects that had been unsuccessful in applying for ESF funding. TSEN claimed that some projects had lost out as a result of co-financing because there had been a much narrower focus on employment and training at the expense of actions to combat discrimination, work with disabled people, and capacity building, which it claimed were substantially lost from the programme under co-financing. Ms Flanagan (TSEN) told us that:

"in London there is no longer direct bidding at the moment, so that there are people falling between the narrow specifications of particular co-financiers, covering particular kinds of interests."[

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TSEN claimed that co-finance was inconsistent with the Government's policy as expressed in the Compact, the National Action Plan on Social Inclusion and Cross Cutting Reviews as it withdraws resources from the VCS for capacity building and inclusion work.[140] Mr Phillips (LVSTC) told us "that there is not enough 'joined-upness' in the way in which the DWP operates across the employment and social inclusion agendas" and that it was important that the social agenda was kept in sight.[141] He expressed concern that projects related to the social inclusion side of the ESF agenda were being squeezed.[142] Witnesses from the regional training networks were especially interested in funding capacity building for projects involved in the social inclusion agenda.[143] TSEN claimed that co-financing had caused resources and focus to be lost from the current programme and recommended that at least 35% of funding should be retained in all regions and earmarked for inclusion activities, capacity building and work with hard to help groups. [144] Tomorrrow's People expressed concern that Jobcentre Plus, acting as a CFO, could stifle innovation, if a proposal was perceived as duplicating existing Government services.[145]

73. Tomorrow's People suggested that innovation is being stifled as the majority of funding from LSC is awarded to FE colleges rather than independent providers.[146] Tomorrow's People believed that the past track record was given little or no weight when bids were being awarded. Tomorrow's People also complained that overhead costs of service providers were not always reflected in the indicative bids from funding bodies. We also heard[147] that within some areas funding was being drawn to larger organisations in larger towns at the expense of smaller organisations or those based in local communities. In reply to this specific point, the Minister told us that this impression possibly arose since funds were disbursed by the larger organisations to the smaller organisations.[148]

74. As regards the argument that ESF funds were being used to reinforce government mainstream programmes, we would expect and indeed welcome this trend. The fundamental purpose of ESF spending is to support the aims of the European Employment Strategy that are also reflected in the Government's mainstream programmes. We agree with the Minister when he says that

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75. The problem arises only if the distinctive role that the C&VS can contribute to those objectives, for example, in providing specific training in small groups to hard-to-reach communities, is lost. But we have not seen any convincing evidence that this is so. We recognise that there may be a risk that worthwhile projects may fall between specifications if the CFOs make them overly prescriptive[150] For example, we were told, on the one hand, that providing ICT training to unemployed women in East London could easily fall outside the declared specifications. On the other hand we heard of an established project in Bristol that had only continued because it had received direct funding, after having failed to receive funding under co-financing.[151] We recognise that the lack of some specificity in the prospectuses produced by the CFOs would generate an overwhelming number of (inappropriate) bids, leading to a waste of effort and resource for all involved. Clearly, a balance needs to be struck. However, in our view, there is a recognisable risk that some worthwhile projects may fall between specifications. It is crucial that the transparent and impartial role of the advisory groups is maintained. As ESF funding decreases, there will be a growing number of projects which do not qualify for ESF as well as a number of projects which do not meet the quality threshold. We recommend that the Government considers two changes in the way in which project approval is considered. First, we would like to see service providers, possibly in the form of advisory groups, included more in drawing up the plans and specifications if a conflict of interest can be avoided.

76. Second, we suggest that some direct funding be retained as a safety net for those worthwhile projects that fall between specifications.[152] We therefore recommend that some direct funding be retained in all regions and re-introduced in London.

77. We also heard that some projects may fail to attract funding because the indicative costs specified in the Regional Development Plans (RDPs) might be unrealistically low, especially for those service providers who serve hardtoreach groups or include the cost of childcare facilities to their clients in their tenders. We heard criticism that the cost constraints specified in the RDPs could mean that in some activities, such as combating social exclusion, most voluntary organisations would be unable to deliver the service required at the low indicative costs. We heard that the voluntary sector might not be able to target individuals outside government programmes while remaining inside the cost norm. The lack of a detailed statistical analysis of successful and rejected projects makes it difficult to assess how funds are being allocated.[153] It is our belief that a detailed statistical analysis of the awarding of grants is needed. We recommend that, in replying to this report, the DWP investigates the concerns expressed by some members of the C&V sector that funding under co-financing is being channelled through mainstream programmes at the expense of the C&VS organisations. We have already recommended that the Government undertakes a comparative study into direct bidding and co-financing. We suggest that that study also investigates whether there are any marked differences under the two systems with respect to the types of projects supported and rejected.

78. Government Offices in England hold 5% of the ESF funding as global grants to support grass roots community groups to undertake activities that achieve the objectives of the programme.[154] Global grant awards are relatively small, but provide funding to

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We recognise the important role that global grants serve in helping small organisations. We would like to see the use of global grants retained for the purpose of supporting grass roots organisations, but that they should not be used to fill the gaps in the support left by the removal of direct grants.

79. Although CFOs must have arrangements for providing feedback to applicants and for dealing with complaints from providers about the selection process, we are concerned that feedback should be sufficiently detailed for applicants to understand the reasons behind the decision for the failure of these applications. There is no right of appeal against a decision not to award ESF funding under co-financing. The Minister told us that this was because there is no money left to meet any successful appeals.[156] The initial Fraser report recommended that an appeals process should not be obligatory.[157] We agree. Despite calls from the C&VS for an appeals system to be established, we do not see a compelling case for an obligatory appeals system. As Mr Philips (LVSTC) recognised, an appeals system does not exist in the commercial world when a contract goes elsewhere.[158] We would rather see the partnership approach strengthened by including representatives from the C&VS more closely before specifications are drawn up. As noted above, we would also like to see GOs able to use some element of direct funding as a way of filling any identifiable gaps that may arise. Although not constituting a formal appeal system as such, we believe that this system could address many of the concerns raised and provide unsuccessful applicants with a second chance of obtaining funding.

Childcare

80. During our inquiry, we repeatedly heard from service providers and clients about the importance of providing proper support towards childcare when offering training places.[159] The Government told us:

"The England Objective 3 programme reflects the important role of childcare in helping many parents back to work. Priority 5 of the programme supports specific projects to tackle barriers to labour market participation faced by people with childcare and other caring responsibilities. In addition, the programme encourages projects within all priorities to provide for the care of participants' children and other dependants. Childcare costs, such as the provision of crèches, are eligible expenditure within all priorities. This applies to the newer approach of co-financing ESF with domestic funding, as well as to the alternative process of bidding directly to Government Offices. Data collected from the final reports of ESF projects that were completed during the period 2000 to 2002 show that nearly 22,000 participants received childcare support and that 40% of all participants were on projects that offered childcare support.

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We looked into a specific case where it was thought that a bid had been refused to a well-established service provider because their costs were above the CFO's indicative bid as a result of including the cost of childcare facilities. When we questioned the relevant GO about this, we were told that on that occasion there "were other providers who were better placed to meet the terms of the tender or because applications did not score sufficiently highly against the tender criteria, rather than because of high childcare costs."[161] The Government told us that bids that do not include childcare provision are examined to ensure that equal opportunities issues are not being overlooked. We welcome this, but we would like the Government to go further. While recognising the support that the ESF provides to childcare, we recommend that the Government guarantees that bids which include support for childcare are not disadvantaged compared with bids that do not budget for such costs. We note that some 40% of participants have some element of childcare support, but would like to see support for childcare on ESF projects provided to all those clients who need it.

Bureaucracy surrounding claims and financial monitoring

81. Although the European Commission is responsible under Article 274 of the EC Treaty for all Community expenditure, Member States are responsible for implementing Structural Fund programmes and making payments to projects. EU regulations specify the minimum controls that Member States must apply to ensure Structural Fund money is used correctly while enabling the Commission to verify the validity of Community expenditure.[162] The Government told us that Commission auditors visit the UK about four or five times a year to check compliance with the regulations and that Auditors from the European Court of Auditors (ECA) visit the UK about once or twice a year. [163]The DWP controls the financial monitoring for ESF, which along with the devolved administrations is also the paying authority. Service providers submit financial information on a quarterly basis to the regional Government Offices (in England) and the Programme Management Executives (in Scotland, via the Scottish Executive) and the Welsh European Funding Office.

82. We heard a number of criticisms about claim forms and the manner in which financial monitoring was conducted. Under the usual arrangements, approved projects are paid 30% in advance of their first year's profiled ESF expenditure on receipt of a payment profile and advance claim. Projects then claim reimbursement of their actual expenditure on a monthly, quarterly or half-yearly basis.[164] The final balance is held back and only paid on receipt of a final cumulative claim and project closure report. In the event that the value of the final claim is lower than the total cumulative amount already paid, a refund is sought from the projects. Under co-financing, many projects are funded on a monthly basis. Under certain circumstances, CFOs may provide some up-front funding.[165] Unlike direct bidding, CFOs do not withhold a final balance. The Co-financing Guidance (April 2001) says: "Funding of providers must be done so that they are no worse off than under direct bidding arrangements. The Co-financing plan needs to show how providers that require advance funding will be funded accordingly so that there are no adverse cash flow implications." [166]

83. We heard anecdotal evidence that some smaller service providers were forced to divert scarce resources from the frontline services into administration simply to fulfil the bureaucratic demands associated with making claims and proving that claimed outputs had been achieved. For example, one training organisation told us that in a project of only 12 trainers, it needed to employ five support staff simply to fulfil the administrative demands required by various funding streams, including the ESF. We were also told of an incident where members of the support staff were required to duplicate certificates for each trainee for the separate funding partners. Mencap told us that "smaller organisations in particular are not equipped to deal with all the paperwork and audit processes" associated with direct bidding or the administrative burdens under co-financing.[167] Grampian ESF Network commented that the quarterly submissions of claims could present administrative problems for the voluntary sector organisations. We heard a number of complaints against the requirement that documents relating to EU funds should be kept for 12 years[168], which contrasts with the requirement to keep documents for only six years under domestic law.

84. In Scotland, where most of the administrative work (processing claims and providing advice) is handled by Programme Management Executive (PMEs)[169], we heard that the failure rate on some claim forms could reach as high as 95%, with a large percentage of forms being returned, unpaid. The errors ranged from the relatively trivial, such as misspellings, to the more serious involving the wrong budget headings being used. Consistent thresholds of quality are vital in all applications and administrative scrutiny must be balanced against the costs of excessive bureaucracy. The accuracy of those making the claims needs to be tightened up. In view of the high error rate we recommend that the design of the claim form also needs to be drastically improved and streamlined and that the process for settling claims be speeded up, including making greater use of claiming over the internet.

85. We also heard reports that the size of the claims forms and the amount of information required when making a claim could vary greatly between regions. For example, we heard complaints from organisations in the Grampian region of Scotland that they were required to complete forms comprising 47 pages, whereas a few miles south, similar organisations in the North East of England were required to complete forms of only 10 pages. It seems to us that the difference in the size of forms may reflect a difference in the perception that officials in the different regions have about possible future actions by the Commission. For example, on the face of it, the request in the Grampian area for more information than that taken by its counterpart in the north of England seems to reflect a more cautious view about the level of detail that the European Commission will accept. It is too early to say whether the more cautious and burdensome approach is right or wrong. We may find that over the next 12 years, there will be a discernible difference in the way in which the Commission scrutinises payments made by regions applying differing standards. If this anecdotal evidence is typical across the regions of the UK, it represents a major distortion in the way that the ESF is implemented in different areas. We recognise the desire to avoid having to make a refund to the Commission through poor accounting procedures, but at the same time we believe that some project sponsors and project providers may be shouldering excessively high administrative costs needlessly. We would like to see core national standards that minimised the administrative burden on service providers. It is essential therefore for the Commission to give further explicit guidance so that the administrative burdens can be reduced. In order to reduce the risk of wide regional variations, we consider that the DWP should press the European Commission for greater clarification on how intense the monitoring regime should be.

Easing the administrative burden on service providers

86. We have heard complaints about excessive bureaucracy throughout the system involving institutions of the EU, especially the Commission, through to Government departments, devolved and delegated bodies, and the various intermediary bodies. The weight of this edifice seems to fall on the service providers and the final beneficiary. In purely financial terms, some of the costs of supporting ESF are met from the budget for technical assistance with other costs being absorbed by organisations such as CFOs. However, some one to two per cent of ESF funds is also top-sliced for technical assistance and available for management, monitoring, evaluation and publicity activities. Technical Assistance cannot be substituted for DWP/GO running costs, but is used, for example, to help TSEN and other networks facilitate the participation of V&C sector organisations. Ms Henderson (GO, SW) told us that £10 million of DWP and Government Offices' running costs were involved in administering ESF in England, which amounted to about two per cent of the total value of the programme of £460 million.[170] She said that the cost of administration was divided equally between Government Offices and Whitehall headquarters. In addition, to these direct costs there is likely to be a substantial indirect cost involving staff in frontline service providers who have lost time and resources to serve the bureaucratic demands of the system. The direct and indirect costs of administering ESF are likely to represent a significant burden on Government Offices, local authorities and other public and voluntary organisations and raises questions about whether it is the best use of scarce resources.

87. We heard about a number of ways in which support for service providers could ease the administrative burden. For example, as noted above, CFOs in England found the necessary match-funding and acted as a buffer between them and Commission officials in terms of auditing.[171] Ms Minett (LSC) acknowledged that there was scope for improving the way that CFOs were monitored, although it was something that DWP needed to do with the European Commission. She pointed out that CFOs were large non-departmental public bodies with extremely well presented and well-used assurance mechanisms, including the use of internal audit. She said:

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88. According to the research by Fraser Associates, the main benefits of co-financing for service providers seemed to be simpler application procedures that concentrated on project development and delivery rather than strategic rationale and that a single source of funding created only one reporting channel.[173]In Scotland, we heard that a new IT project, costing some £1 million, was expected to reduce the time and effort spent in processing claims for ESF and other structural funds. [174]This should speed up the claims process significantly. We also heard that a telephone hotline was available to provide technical advice and guidance to service providers. Royal National Institute for Deaf People (RNID) proposed a number of specific recommendations relating to the administration, such as BAC payments should include reference numbers and called for a reduction in the number of paper records.[175] Grampian ESF Network commented that anecdotal evidence suggested that the system used to manage and administer claims in the English regions was much more effective than that used in Scotland, especially regarding the payment of accurate claims and the design of the claims form.[176]

89. Project providers and their sponsors can also help themselves more when dealing with the administrative demands. We suspect that potential economies of scale exist when individual projects tap into the expertise of project networks.[177] Support networks clearly have a part to play in providing advice, managing outcomes, and administering (consolidated) claims. We note that LVSTC called for funding for technical support to be available to support networks around the social inclusion agenda of ESF under the National Action Plan on Social Inclusion. [178] While we recognise the important contribution played by providing such support to service providers, we are concerned that any expansion in the budget lines for technical assistance may divert much needed funding from frontline services into further various layers of the infrastructure. In our view, a more effective solution is to streamline the bureaucratic demands placed on service providers. To that end, we request that an assessment be undertaken into the total administrative costs (both direct and indirect) that organisations face when dealing with ESF. We recommend that the DWP undertakes a value for money study into the use of technical assistance in the delivery of ESF.

90. We heard that in some regions a risk assessment was made of all newly approved projects in order to plan the intensity and frequency of the monitoring regime for each project.[179] The intensity and frequency of visits would be determined by the amount of money involved and how novel the project was.[180] We welcome this risk assessment and were also pleased to hear that the visits were not only inspectorial, but were also used to help service providers "deliver their project in the best possible way".[181] We recognise that the system of monitoring claims needs to be fairly robust and that the requirements should be sufficiently detailed for the paying authority, or its agents, to be reasonably confident that the audit trail is intact and the risk of fraud is being managed efficiently. However, as we heard about aspects of the claims procedures, many of the detected errors on the claims forms are unlikely to neither compromise the audit trail nor affect the amount of the claim. We recommend that the Government ensures that all newly approved projects are assessed for their risk and are subject to a monitoring regime that is proportionate to that risk.

Cash flow problems

91. We were told that some organisations faced difficult cash flow problems, especially when claim forms were delayed or their records could not fully substantiate their specified outcomes. Tomorrow's People points out the financial problems that arise when voluntary providers were awarded a contract to help a specific number of people, but were only paid for the number of clients who attended the programme. If clients refused to attend, which is not uncommon when dealing with hard-to-reach groups, the provider is left with outstanding costs that were incurred to set up the programme for the full number of clients. Tomorrow's People said that "there is a clear impact on project viability, which contrasts with the original premise of ESF, which covered the full cost of provision providing the organisation could legitimately prove those costs were incurred."[182] Tomorrow's People called for a greater sharing of risks between providers and CFOs. We understand that a fast track facility for processing claims is available in some parts of the UK, although it is not widely promoted. Clearly, the paying authorities should not be expected to know the cash flow details of the service providers that they are contracted to. However, there is a risk that some eligible organisations, especially those on a fragile financing footing, may unnecessarily experience acute cash flow problems, possibility leading to redundancies and closure. We recommend that a fasttrack service for processing claims be more widely available and that the authorities make clear that, subject to certain conditions, an emergency cash advance could be made available.

Monitoring outcomes and Inspections

92. The European Commission requires that all member states evaluate how well ESF is working in their country. For ensuring that the member states own systems are satisfactory, the Commission has "a rather complex monitoring and evaluation system" in place.[183] The Commission focuses on how the monitoring systems work, leaving it up to member states to set up the particular way in which they monitor the actual beneficiaries.[184] The Commission undertakes regular check-ups and issues recommendations and comments to individual member states on their monitoring systems.[185] In the case of the objective 3 programme, the Commission told us

186

93. The Government told us that there was some encouraging evidence that the performance of the England Objective 3 was good.[187] The Minister told us:

"16 per cent of participants on that programme are long-term unemployed; 35 per cent have no prior qualifications; 13 per cent have disabilities and 15 per cent are from black and ethnic minorities. In the period 2000-02, 360,000 people in England benefited from ESF. The final reports of projects tell us that 41 per cent of those gained a qualification, many more gained or improved IT and computing skills and over three quarters—76 per cent—of those who completed ESF courses were in jobs or had started further education."

The Government also said that the programme exceeded its expenditure target of £179 million for 2002 and so avoided decommitment of any funding by the European Commission and was on course to achieve its expenditure target for 2003.[188] The Minister also told us that the UK was on course to achieve the £100 million (performance reserve) for the Department's Objective 3 (England) programme.[189]

94. More information will be available from the mid-term evaluation. For example, the evaluation of England Objective 3 includes the issues of employment, skill development, and the employment of women and information and communications technologies (ICT).[190] There is a separate evaluation of Equal, which is testing new ways of combating discrimination and inequality in the labour market. The Scottish Executive and the Welsh Assembly Government are undertaking similar evaluations of Objective 3 in Scotland and Wales respectively. The DWP will bring together the England, Scotland and Wales Objective 3 evaluations, in an evaluation of the overarching Great Britain Community Support Framework.

95. We are not in a position to comment on the effectiveness of the ESF programme as a whole. However, we heard some indications that the GB's Objective 3 programme was performing well. For example, we were pleased to hear the European Commission describe the GB Objective 3 programme as an exemplary model in terms of linking outcomes with National Action Plan on employment (NAP) and that it was used in the Commission's training.[191] According to the Minister, the DWP was on track to secure the performance reserve, which is an additional 4% of ESF expenditure that is performance related and that the spending target for the year had been achieved.[192]

96. We also note that in a written answer, the Minister said:

"[Objective 3 and Equal]. are part of a system of active labour market policies that, together with steady economic growth, has contributed to 1.5 million more people into work since 1997, of which 850,000 are additional women in employment."[193]

97. As the DTI's consultation identified, while funding was thought to be a useful source for skills-related projects, there were concerns that Objective 3 funds may be spread too thinly to all parts of the UK and that they may be poorly co-ordinated with expenditure on Objective 2. Some respondents expressed the view that targeting funding to areas of need would be better though others disagreed and wanted continued wide coverage. We recommend that Objective 3 funding should continue to be widely available .[194]

98. The need to demonstrate "added value" has meant that projects are subject to detailed monitoring. A recurring criticism of ESF funding is the difficulty of quantifying the so-called "soft outcomes" associated with some training projects. For example, it is widely recognised that concepts such as "employability" are exceedingly difficult to measure accurately. One obviously narrow way of quantifying some aspects of employability would be simply to count the number of beneficiaries that find jobs at the end of the training programme. Although relatively easy to quantify, such a measure, however, would be too narrow to do justice to the full range of training activities undertaken or the progress made by individual clients towards their training objectives. For example, some final beneficiaries on ESF projects may have made great strides towards work, without necessarily obtaining employment. This progress should be recognised in any measure of outcomes as a worthwhile activity. This progress is especially important for those final beneficiaries with mental or physical problems or those who lack basic skills. For some people, the transition to work may be a long journey and their acquisition of key skills or progress towards future employment, however slight, should be recognised.[195] For example, an individual's self-confidence may be improved or their mental and physical condition stabilised as a result of participating on a project. Projects that encourage this should not be penalised. We raised this issue with the Minister and he told us:

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99. While we recognise that in a world of targets and quantification, it is inevitable that some monitoring of outcomes is needed, we believe that it is equally important to devise meaningful and valid measures that do not make excessive demands on service providers for data. Under the current programming period, the responsibility for monitoring projects and programmes has shifted from the EC to the Government Offices and Monitoring Committees. This delegation of responsibility allows different regions some scope to apply different monitoring standards. According to a study into the implementation of structural funds by Strathclyde University:

"The process of developing a monitoring and evaluation framework has been largely directed from the 'top down', driven by central government departments, but with scope for some regions to make their own decisions on indicators, monitoring procedures etc.

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100. This difference in the degree of monitoring in different parts of England and the UK generally was indicated to us during our visit to Scotland. We heard that the rate of returned forms were dramatically reduced when claim forms were being checked by a different PME. The DWP told us:

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101. As we commented above, there is anecdotal evidence that suggests that different GOs and Programme Management Executive Committees may have different perceptions of the risk that the Commission or the EUROPEAN COURT OF AUDITORS will intervene. As a result, the degree of monitoring and financial control that is imposed on service providers may vary considerably between regions. We recommend that the DWP provides a comparative analysis of any variation in monitoring standards across the UK and reassures us that monitoring of service providers is proportionate to their assessed risk and broadly comparable across the UK and the EU.

Feedback and accountability

102. We heard some criticism of the poor standard of feedback provided to applicants whose application for ESF funding had been rejected, specifically that the reasons for rejection were not always given.[200] In a note, the Government describes the feedback that is given to unsuccessful applicants, including the fact that feedback letters are quality assured by the relevant Regional Jobcentre Plus ESF manager and at a national level by Jobcentre Plus Internal Audit during any audit of ESF-related contracting activities. The Government says that

"Following the appraisal of tenders for ESF activity, the Jobcentre Plus Regional Office issues letters to all unsuccessful applicants explaining that their application cannot be supported. The letters either provide written feedback or inform applicants that written feedback is available to them on request.

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103. We are pleased to hear that applicants are able to receive written feedback, although in some cases this is clearly considered insufficient. For example, in the case of Jobcentre Plus the standard pro forma which uses ticked boxes is unlikely to provide the necessary information to applicants to help them understand the reasons for their rejection and to improve their subsequent applications.[202] In our view applicants need a reasonably detailed assessment of the reasons why their application was unsuccessful. We do not wish to see any further delay in awarding contracts, but we consider that there is a case for more support and feedback being given to applicants. Given the time that tender applications and bids take to produce and the scarce resources that a number of organisations invest in their applications, we recommend that the Government considers ways in which it can provide more support to potential applicants, before and after formal applications are made. We believe that all rejected applicants should be provided with reasonably full written feedback that identifies clearly the areas in which the tender could be improved. We urge the Government to review the use of the standard pro formas used by Jobcentre Plus when informing applicants that they have been unsuccessful.

62 Ev 92 Back

63 Ev 92, para 5.7. See also Ev 135, para 3.7, Q 178. Back

64 Fraser report http://www.esf.gov.uk/evaluation/documents/Final%20Report%20vf.doc Back

65 Fraser report http://www.esf.gov.uk/evaluation/documents/Final%20Report%20vf.doc Back

66 Q178 Back

67 Q42 Back

68 Q178 Back

69 QQ203 and 205 Back

70 Q42 Back

71 Q42 Back

72 Q42 Back

73 Ev 94, para 6.4 Back