Examination of Witnesses (Questions 20-39)
4 MAY 2004
MS PATRICIA
HEWITT MP AND
MR JOHN
NEVE
Q20 Mr David: Can I apologise for being
late. Can I press you a little bit: as you know I come from Wales
and the Commission Office there has been pressing very strongly
for the view, if you stick with the Commission you would be better
off than sticking with the Government. I think that argument can
be countered on a purely factual basis, as you have already hinted
at. One of the things the Commission also says is, OK you might
be able to trust this Labour Government but just supposing—and
I do not think it is very likely—there was a change of government
before the end of the financial perspective, before 2013, one
thing is absolutely certain you would be better off with the Commission
then than you would be with a Conservative Government. How do
you respond to that? Is there any way some arrangement could be
built in to make sure things do not get demonstrably worse if
we ever get a Conservative government?
Ms Hewitt: On the third point,
of course the Commission is seeking support for their proposal.
I think we just have to keep pointing out that this is entirely
hypothetical; they are offering jam to Wales and other parts of
the United Kingdom from a pot that does not exist. They would
like that pot to be a great deal bigger when it does exist than
some of the key funders who are prepared to accede to it. We think
the Commission package is just unrealistic and unacceptable because
of the 50% that they are proposing to put into the EU 15 Member
States. We think that is wrong in principle whatever the size
of the pot. All they are offering is hypothetical funding. I think
we can push back on that pretty comfortably. The other point I
would make is that of course any additional funding that the Commission
were able to offer to Wales and elsewhere for structural funds
is more than paid for by the increased contribution that would
come from the United Kingdom because we are net contributors.
An increase in the structural fund costs us about £1.60 for
every pound we might get back. That is not particularly satisfactory
and I think it makes much more sense for the disadvantaged communities
of our nations and regions to rely on the very clear commitment
which the Chancellor has made for increased resources into those
areas through the appropriate mechanisms to ensure that we can
keep strengthening those disadvantaged economies. In terms of
could we prevent a future Conservative government from going back
on this, I think that once it is clear what the agreement is going
to be, once we have been able to spell out how much additional
funding will go to Wales it might be rather difficult for the
Conservative party to campaign on taking that money away.
Q21 Mr Steen: Can I ask on that point,
you mentioned 15, do we have any idea what the new 10 are thinking
about regionally and about our approach?
Ms Hewitt: We have obviously been
discussing this with other Member States and there is considerable
interest in the proposals we are putting forward as well as considerable
support for the view that 1% is the right maximum. Clearly the
accession countries are concerned to make sure that they get a
maximum possible receipt up to the limit of 4% of their GDP, which
is a limit most people would agree because it is to do with their
capacity to absorb increased funding.
Q22 Mr Cash: Is there lurking at the
back of our analysis of the hypothetical question that you have
just been asked that in fact of course from the Commission's point
of view they would like a tax policy? If you create functions
and you have arrangements for the dispersal of funds and you make
promises it is not unreasonable for people to say, "where
are you going to get the money from?" That is what you were
just saying. The bit I think you left out—unwittingly I
am sure—was the way in which the money could be made up
would be by imposing a tax policy on the European Union. Would
I be right in saying that the Government is aware of the fact
this is not entirely a hypothesis because they do actually propose
having a tax policy to make up the difference?
Ms Hewitt: We have made it crystal
clear the national veto on tax policy remains.
Q23 Mr Cash: It is a fraud, basically.
Ms Hewitt: I would not use that
terminology myself.
Q24 Mr Cash: I am being quite clear about
this. If in fact people are making suggestions that money should
be available but know the money is not going to be made available
then that is actually a fraudulent approach, is it not?
Ms Hewitt: The Commission is putting
forward a proposal and they are entitled to do so. We are saying
this 1.26% is unaffordable. Furthermore we will retain the tax
veto for national governments and Member States within any constitutional
Treaty that is agreed.
Mr Steen: That is extremely clear.
Q25 Mr Heathcoat-Amory: Secretary of
State, I am glad the Government has realised that the system under
which we pay twice as much into the budget than we get back is
a pretty bad deal for the taxpayer. Your proposal on this section
of it makes financial sense. I would like to press you a little
more about the implications for our regions. Your Department's
Explanatory Memorandum says that under your proposals the Government
would guarantee—which is quite a strong word—that
should its proposal be agreed domestic funding will be increased
so that the United Kingdom nations and regions do not lose out.
Does this mean that our existing regions will continue to receive
the same funding as we are at the minute, contrary to the Commission's
proposals?
Ms Hewitt: What we are saying
in paragraph 13 of the supplementary memorandum I gave the Committee
is, "If our proposals are agreed domestic funding will be
increased . . . compared with their entitlement in a system where
the current eligibility rules applied across a EU of 25".
That is something that the Chancellor repeated when he appeared
before this Committee.
Q26 Mr Heathcoat-Amory: I can read that
but I am asking what that will mean for practical terms?
Ms Hewitt: It means increased
funding. At this point we have not yet settled on the new financial
perspective for Europe, we are in the middle of a Spending Review
for the next three years and I am certainly not going to try and
anticipate the Chancellor in putting numbers on to the guarantee
he and I have given.
Q27 Mr Heathcoat-Amory: The word "guarantee"
is quite strong. I want to be clear what "guarantee"
means. I am trying to read the small print. I want to be clear
what is being guaranteed for an area of the United Kingdom like
Cornwall and the South West. What can we expect the Government
is guaranteeing according to that paragraph in your explanatory
memorandum?
Ms Hewitt: It means exactly what
it says. We are comparing what we would do with what would happen
under structural funds if the current allocation system and the
current percentages, and so on, were applied to an enlarged European
Union. A further reason why we cannot put figures on that is because
the economic performance of the different regions and the different
Member States will change between now and when we move to the
new system. We have not got that future data yet; we can show
the methodology but what we cannot do is make the calculation
because we do not know what the GDP will be of different regions
in different Member States in future years.
Q28 Mr Heathcoat-Amory: You must have
worked out what either 1% or the Commission's proposals would
mean when applied under the current eligibility rules because
they are current. Will it mean more funding or less funding or
the same?
Ms Hewitt: We do not know what
the Commission proposal will mean, partly because they have not
published any methodology at all and partly because we know what
proportion of average EU GDP different regions have at the moment
but we do not know what the data will show in years to come when
these calculations will have to be made. What we do know about
the Commission's proposal is that if the budget was increased
to 1.26%, as they want, our contribution would go up significantly
and that would mean less money for the United Kingdom Government,
including, I think inevitably, less money to put into regional
policy and into the devolved nations.
Q29 Mr Heathcoat-Amory: I think it is
very strange to issue a guarantee and not be able to explain it.
You mentioned you discussed it with other Member States; have
you also discussed it with the European Parliament? I say that
because under the proposals for the constitution this whole area
becomes subject to co-decision. That move was opposed by the Government
representative on the Convention and the European minister at
the time but it was not successful in changing the text. I am
just wondering about our freedom of action here; it will be in
time not just subject to majority voting; we will not be able
to get our own way in that respect. Co-decision means you will
have to get the agreement of the European Parliament. What discussions
have taken place at that level?
Ms Hewitt: There is unanimity
on the current discussions. The current discussions we are having
about the new framework for the Structural and Cohesion Funds
is subject to unanimity. As far as MEPs are concerned my colleague
Jacqui Smith has had discussions with various members of the European
Parliament.
Q30 Mr Heathcoat-Amory: It is more than
that; you are giving up control of this policy. You have a very
bold policy change that the Commission do not like. I think many
of us on this Committee rather support you in this change of direction
but at the same time you are negotiating a new constitution for
Europe under which these powers will be substantially taken away
from the United Kingdom. I just wonder whether that is wise and
whether this is going to be a red line in the forthcoming negotiations
on that constitution?
Ms Hewitt: Our position on the
Constitutional Treaty remains exactly as it was set out in the
White Paper last autumn. What we are discussing today and what
we are seeking to agree will all be done under the current Treaty,
including those negotiated by the previous Conservative Government.
Q31 Mr Connarty: What was the blinding
light which suddenly convinced everyone here that regional policy
is a good thing contrary to the fact that there was no regional
policy under the last Conservative Government? I just wondered
about the fact that in the Commission's own proposals Cornwall,
which you mentioned, is likely to qualify under the convergence
criteria with 78% of the money, so that will not be one of the
regions which will require a new strategy?
Mr Heathcoat-Amory: I thank Mr Connarty
for answering the question I did not get from the Secretary of
State.
Q32 Mr Connarty: I think there may be
something deeply flawed about the whole approach to the funding
of the EU and our hope for the future. I know there are political
considerations to be taken into account. I hate budgets where
people are bidding down the budget. On the one hand we hear people
talking about the need for a commission for Africa and on the
other hand we have 10 countries coming into the EU plus two, Romania
and Bulgaria, which will be included in any new arrangement, and
yet we are talking about cutting the budget. How do you expect
the new Europe to grow and not end up in the situation which East
Germany and Germany ended up with, where East Germany is dragging
down Germany. The 10 countries might be under-funded because we
did not properly budget for the task? Should we give an adequate
budget to the EU to allow those countries to grow? How do we expect
the EU to grow in its new form to a level where it will have a
thriving market? There seems to me to be a contradiction here:
we want to pacify the mean-minded people who do not want anybody
else to get any of our money. I worry about our 1% commitment
and the fact that if we repatriate and renationalise regional
policy it may in the end drag down the whole EU project. It may
suit Mr Heathcoat-Amory and Mr Cash.
Ms Hewitt: I agree with part of
what you are saying, I hope the more important part. I think it
is absolutely essential that we ensure there is enough investment,
public sector but also private sector, in the 10 accession countries
to ensure that they can grow, and obviously they will be growing
faster than the average across the EU 15 Members States because
they have a lot of catching up to do. I agree with you this is
in our interest in Britain. We can already see that increased
trade with the countries of Central and Eastern Europe who are
now coming into the European Union will benefit us as well; they
will buy more from us and sell more to us. Just as every earlier
enlargement of the European Union has let the new member countries
grow, so have the existing member countries and exactly the same
will happen with enlargement. The point I do not agree with you
on is the suggestion that what we are seeking to do is to bid
down the EU budget. We do not support the Commission's proposals
for 1.26% but the 1% we are proposing not only maintains the current
budget in terms of percentage of Europe's gross national income—an
enlarged gross national income because of enlargement—but
actually allows in money terms quite a significant increase, indeed,
as I said earlier, a faster increase in the size of the Commission's
budget than most Member States are enjoying at the moment. I think
that is a sensible way to proceed and that, because we have these
new demands as a consequence of enlargement and because of the
priority we want to give in all of our interests to ensuring those
countries really do grow rapidly, we should concentrate the structural
funds income on them. We should not be putting 50% into the regions
of the EU 15 and we should rely on the richer Member States themselves
to finance a regional policy, a devolution policy within a broader
European framework. We have not touched on the issue of a European
framework or a regional policy; that is at least as important
as any money which might go with it. I think the Commission is
making a mistake of saying there has to be lots, lots more money
and we have to spread it all across the 25.
Q33 Mr David: Can I ask two questions
specifically with regard to your proposals. If it were to come
about that the British Government would have control of regional
policy, how would the finance be allocated? Would it be an addition
to the Barnett Formula or something different? It is very important
to indicate how much money we are talking about, how much money
the regions would get, and it is also important to know how the
money is spent. I believe in that European principle of subsidiarity,
with decisions taken at the most appropriate level, and I would
hope that the Government would give as much flexibility as possible
to devolved administrations for them to decide how this money
is best spent.
Ms Hewitt: In terms of the allocation
of future money that is primarily a matter for the Chancellor.
We have the Barnett Formula and we have made it very plain that
is not going to be changed. I think in relation to the devolved
administrations that will play an important part in deciding how
the money is spent. In terms of the English regions and the funding
which goes to Regional Development Agencies we have a funding
formula which really starts from the level of disadvantage in
the different regions and looks at issues like level of business
formation—which of course is very, very low in the North
East compared with the South East—it looks at unemployment,
and so on. It is very much based on the needs of different areas.
In terms of how the money might be spent I agree with you about
needing to ensure that there is real scope for devolved administrations
or the Regional Development Agencies and future elected regional
assemblies to make decisions close to the areas they are going
to affect and the people they are going to affect. There does
need to be an overall framework, and this comes back to the discussion
about the state aid policy: we would not as a Government be in
favour of saying either to a Regional Development Agency or to
a devolved administration, "you can use any amount of money
you like to subsidise companies". I do not think that is
a good idea at all. At the moment we have strict criteria negotiated
across Europe for regional selective assistance. We are in fact
tightening or rather modernising those rules to put much greater
emphasis on productivity and high value added so that we do not
use regional selective assistance to prop up jobs that frankly
do not have much of a future because they are relatively low wage
and low margin jobs that are likely to be replaced by technology
or will move to another much lower-cost part of the world. You
need that framework and you need it across the European Union
as a whole to make sure there is a level playing field. Once you
have got through that issue then what you want is for the devolved
administrations and the RDAs to be able to say, we need to put
funding into a particular area to support a science business park,
to support relationships between the local business and science
base, whatever it is, to support skills within the framework of
a national skills strategy but heavily devolved to the regions
in order to make sure that we are strengthening the fundamentals
of those regional economies.
Q34 Mr David: Can I come back to the
first part of your answer? I agree entirely with what you said
in the second part; can I flag up a slight concern I have. I know
that it is not really your area, the intricacies of the Barnett
Formula, some of the allocations that come to my area, South Wales
and West Wales, the financial allocations have been above and
beyond Barnett and I think there would be a concern to make sure
that that precedent is maintained.
Ms Hewitt: I do not pretend to
be an expert in Barnett or generally in the devolved funding formula
but I am sure the Committee will want to make that point.
Q35 Mr Steen: Under your proposals the
Member States are going to sign up to an agreed framework for
development policies. Obviously we are interested to know particularly
the emphasis you place on this. What will be the main principle
which underlines this framework?
Ms Hewitt: Although the question
has not specifically been asked I think I have given a lot of
the answers. We believe regional policy should be directed towards
strengthening the fundamentals of the different regions of the
United Kingdom and more generally the European Union and it is
therefore a question of looking at what the long-term sources
of competitive advantage are within any particular nation or region:
education and skills being absolutely crucial; infrastructure;
the science base; the close connection, and we need it to be much
closer, between the science base and the business communities;
broader environmental factors, which are important not only in
themselves but also because they are an increasingly big factor
in the decisions that businesses make and people with skills make
about where they are going to locate themselves. It is all of
those issues which I think in European jargon are more to do with
horizontal issues rather than support for a particular vertical
sector. That is where we would see a modern regional policy being.
Q36 Mr Cash: I hope you forgive me for
using the word "socialist" instead of "artificial"
because actually at the bottom line a lot of this organisation
on a vast basis and with all of the bureaucracy which goes with
it is liable to interfere with the rational decisions based on
practical decision-making as to where it is most appropriate for
businesses to be located. We hear today the Commission is now
expanding—and I was amazed it was as formal as this—Romano
Prodi was talking about expanding the area of the single market
into North Africa, and there is talk of the Ukraine, I think even
Russia was mentioned and I think the word "Asia" also.
Is there no limit to the aspirations and the exaggerations of
policy making? As I said previously if the principles that you
describe are to try to calibrate all those in Europe the planning
process is liable to be extremely incoherent if it is not backed
up by the practical decisions of business men.
Ms Hewitt: It is difficult to
know where to start. There are clearly limits to the European
Union's future expansion, although we have not reached them yet.
There are many countries who want to join and who I certainly
hope in future will meet the conditions for membership, and amongst
those I would include Turkey. In terms of Asia and the rest of
the world, while there has to be a limit to European expansion
there should be no limit to our ambition for spreading prosperity
throughout the world which we can do, amongst other things, through
negotiating and getting back on track the Doha development round,
ensuring we have a framework of rules for free and fair trade
which will indeed spread prosperity throughout Asia and indeed
Africa as well. Coming back to the framework of the regional policy,
I do not wish to be misunderstood, particularly by euro-sceptics,
on this issue: I am not suggesting that the European Commission
should make decisions about, for instance, what support the East
Midlands Development Agency and my own region should be giving
to, let us say, the development of a science park or a partnership
between several science departments and several businesses within
the region. What I am saying is that there should be a policy
framework across the European Union which says these are the proper
objectives of European national and devolved regional policies;
those decisions should be left, following the principles of subsidiarity,
to regional and sub-regional organisations to take but there should
be some limits on them. Coming back to the point about state aid
and not having subsidies all over the place, and so on, when I
talk about the real determinant of long-term competitive advantage
you may decide to call them socialist—it has been a little
while since anyone has called me that so I will pocket that as
a compliment—if you look at the work of Michael Porter,
who is one of the world's leading analysts of competitiveness—and
he is certainly not a socialist—he is absolutely clear in
the modern world that if you are trying to create a knowledge-driven
economy you have to have the public sector and the private sector
working together. If you ignore, as our country did for the best
part of 20 years, the transport infrastructure and the science
base in universities or the need to make sure every child leaves
school with not only good basic skills but a lot more than that,
then you damage your economy and you make it less likely that
business will choose to start up or to stay or to come to Britain.
That is why it is so important that Government does play its part
in making sure those basic infrastructure investments are there,
and that is what our Government is doing.
Q37 Mr Connarty: I think we are now getting
the meat as well as the bones of the new structure. It does seem
what you are anticipating is not the one we have witnessed in
the past. As the Chairman said to you there are examples of money
going in other directions. I can think of something which is coming
home to roost now, where East Germany has been absorbed as part
of West Germany. BP had just done a European analysis of the new
form of ethylene cracker in Europe and they found there was one
too many so they closed the one in Baglan Bay, Wales. Then Germany
gave funds to East Germany to build a completely new ethylene
cracker. In my own constituency because of a surplus of Olefin
production and ethylene cracking, BP are about to divest themselves
of what they call the weakest units because of the excess supply
and the fall in the market. That is an example that despite all
of the rules pointing to a state aid project Germany said it was
all about convergence and the EU Commission nodded it through.
That seems to be so common. People have been saying we should
be more interested in state intervention in some of our vital
infrastructure industries, but we do not do it. Yet Deutsche Telecom
is actually buying back large portions of shares which it had
privatised because it has been so successful. It is the same with
Deutsche Post. Governments are still in the mode of keeping nationalised
industries supported by public funds. Is it likely that the vision
you have will be really achievable? We heard the Chancellor say
recently if it was not about subsidising a company but in fact
ironing out the difficulties of a developing market, there might
be some argument for government investment. Do you really believe
we can change the rules given that most of our European partners
in developed countries are still playing by the old rules?
Ms Hewitt: I do not know the details
of the specific East German case that you refer to. What I do
know is the European Commission over the years have got much tougher,
and we have cheered them on, in bearing down on state aid which
is not justifiable and indeed not lawful in some cases. My own
view and our Government's view is that there is a role, but quite
a limited role, for public sector support for investments that
would not otherwise happen in disadvantaged areas and where there
is real additionality and the chance of securing good quality
long-term jobs. Last year I made what I think is the largest ever
grant of regional selective assistance which was £50 million
to Ineos Chlor to support an investment in a modernised chlorine
plant which otherwise would not have happened and which if it
had not happened would have meant closure of a very large part
of the United Kingdom's chemical industry affecting parts of Scotland,
the North West and the North East. We have used these instruments
as well. We can argue about scale and exact parameters but my
view is there is a role for them. What I think we also need—and
I set out some details of this in the paper which I published
along with my parliamentary statement in December last year—is
a framework for regional policy across the European Union which
deals with the state aid question but also makes it clear that
regional policy should be part of the Lisbon Agenda, part of creating
the most dynamic knowledge-driven economy in the world, which
is, of course, our goal here. We should use peer review and open
coordination methods so that different regions and countries can
learn from each other. We should keep the things that are really
working within the existing framework, including, vitally, the
use of networks across Europe to share best practice. There are
some very, very good structural fund programmes where you have
disadvantaged neighbourhoods or regions in different parts of
the European Union working together and we would not want to lose
that, even under our own proposals. You focus attention on the
way in which the European Commission and the European Union can
really add value to the process of regional policy but you shift
the funding within the richer countries back to those countries
and you push the decision down with as much flexibility as possible
into the Member States and the regions. These are the principles
we set out for a new regional policy framework.
Q38 Mr Heathcoat-Amory: This Committee
sees a lot of examples of EU expenditure programmes which are
not properly monitored and evaluated and we have criticised in
the past more expenditure without proper evaluation of existing
programmes. We are about to embark on an enormous expansion of
these structural programmes into countries with pretty weak administrative
systems, where the Commission itself was criticised for a degree
of corruption and fraud in those countries already. What safeguards
are you pressing for because the paper seems to be rather silent
on this point? The Commission have a view, I know, that it is
all going to be done centrally; they want a European public prosecutor
to guard the Union's financial interest from the centre. They
say it is all the fault of the Member States and they need additional
powers in those states. That presumably is not the Government's
thinking. I know they are opposed to a European public prosecutor.
What alternatives are you proposing to stop scandals before they
arise? Are you just going to accept the usual reassurance that
this time it is all going to be different?
Ms Hewitt: What we have been seeking
to do as part of the accession process is to ensure that each
of those new Member States actually strengthens the capacity they
have within their own government to ensure that increased funding
is properly used and that there is neither waste or corruption
in the process. Indeed we have been very involved working with
the new Member States to help train up officials, to bring some
of their officials over here to look at how we in particular administer
state aid, and so on. That process of capacity building, which
will continue now they have come into the European Union, is a
very important part of making sure that the new funding they will
get is indeed properly used and delivers real benefits. The other
point I would make is, yes, there have been examples of waste
and in some cases actual fraud but nobody should dismiss or under-estimate
the enormous benefits which have come for the people of Ireland,
Greece, Portugal or Spain from both accession and the investment
of significant quantities of structural funds enabling them to
improve their skills, to build new roads, to actually modernise
their economies and raise their standard of living. That is an
achievement we should be very proud of and not something that
we should blank out simply because in some cases there has been
wastage or fraud as well.
Q39 Mr Heathcoat-Amory: You have some
radical changes for the allocation of funding under the new programme.
I think it is fair to say you have similar radical proposals on
the follow up, evaluation, monitoring and auditing. Are you not
now building up a problem for the future which you have not addressed
today?
Ms Hewitt: What we are saying
is of course there needs to be strong, financial and accounting
controls and strong legal controls to ensure that the extra money
which is going in is properly spent. That is best done by strengthening
the rules and capacity of Member States' governments to do that
and of course making sure that the Commission is investigating
as well and securing compliance with the rules. The Commission
themselves recognise that the current controls which they impose
on European spending are pretty burdensome and pretty complex
and, although those controls are there for a very good purpose,
actually having very complicated and costly controls does not
always secure the goal, so trying to simplify those and then ensuring
that there are stricter sanctions when there are irregularities
seems to us to be the right approach.
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