European Regional Development Fund

Written evidence submitted by the Centre for Process Innovation

1. Executive Summary

CPI has received around £17m ERDF funding to deliver technology development projects over the past seven years and through the delivery of these projects has the following observations:

1.1. Access to ERDF funding is getting more difficult as match funding is harder to come by.

1.2. ERDF is a valuable source of funding available in areas which need assistance, particularly the North East of England.

1.3. Value for money could be increased by reducing the administrative burden and allowing more flexibility in the management of ERDF projects.

1.4. Value for money could be increased by using ERDF to attract private investment in projects. Unfortunately ERDF is perceived as onerous and high risk by many potential project partners

1.5. Centralising all ERDF activities to London would risk negating the regional benefit ERDF currently delivers to the UK regions.

1.6. Administrative requirements are onerous and can mean as money is paid in arrears for ERDF this causes significant difficulties in managing cash flow.

1.7. Claw back is an ever present threat; retrospectively applied changes in rules make it difficult to ensure compliance, make the risk of claw back greater and make running an ERDF project highly risky.

1.8. The risk of claw back and the difficulty in managing cash flow present the biggest problems and the highest risk in managing an ERDF project and recommendations for future improvements are made at the end of this memorandum.

2. Introduction to CPI

Centre for Process Innovation Limited (CPI) is a company limited by guarantee and was established in 2004.

CPI is a Technology Innovation Centre positioned in the innovation space bridging the gap between research and development and industry. It is focused on driving innovation to enhance high value manufacturing in the UK process industry.

CPI is a member of the High Value Manufacturing Catapult.

CPI manages a number of publicly funded projects that are funded and administered by a number of programmes including:

· Single Programme funding administered by ONE, the Northern Way and the North West Regional Development Agency;

· Central government funding from the Strategic Investment Fund administered by the department for Business, Innovation and Skills (BIS);

· A range of collaborative projects funded by the Technology Strategy Board (TSB);

· European funding from Framework six and seven programmes; and

· ERDF, that was originally administered by ONE and is now administered by the Department for Communities and Local Government (DCLG).

CPI has managed eight ERDF projects, four in the 2000-2006 programme, and four on the current 2007-2013 programme.

These projects vary in size, value and nature with both revenue and capital projects. In total CPI has received approximately £17m of European Regional Development Funding.

The comments set out below relate to our experience of ERDF in relation to the other public funding we have received.

3. Factual information

3.1. How, and on what, is ERDF spent?

3.1.1. Of the £17m ERDF CPI has received, £14m has been used on projects linked to the National Printable Electronics Centre, £0.5m has been for the development of fuel cells, £1m has been used for SME business support in the area of renewable energy and £1.5m has been for the development of an SME Innovation Accelerator to incubate new high technology focussed businesses.

These projects were designed for the benefit of SMEs in the North East of England.

3.1.2. Eligibility of projects

For projects to be eligible for ERDF funding they must fit with strategic outcomes of ERDF under one of the three priorities. CPI projects fall in Priority 1 – Enhancing and Exploiting Innovation where the focus in the North East is to support innovation and exploit science; or Priority 2 – Business Growth and Enterprise where the focus is enhancing the competitiveness and growth of SMEs.

3.1.3. Access to ERDF funding

ERDF has provided a valuable source of funding for CPI, particularly in establishing facilities. ERDF funding must always be matched and will contribute a maximum of 50% towards the cost of a project. As such, CPI has been able to effectively double its capital investment for projects where they have a strategic fit with the ERDF priorities.

However, reduced public sector support and the current economic climate means that match funding for ERDF eligible projects is severely depleted.

3.2. Is the taxpayer obtaining value for money from the ERDF

3.2.1. Areas where ERDF has added value:

The focus of ERDF is to provide assistance to small and medium sizes enterprises (SMEs) in areas where the local economy is in need of stimulation. The projects CPI has delivered have provided assistance well over 500 SMEs in the North East of England.

CPI has delivered projects under both the 2000-2006 programme and the 2007-2013 programme. Project specific deliverables under the 2000-2006 programme were focused on delivering intensive support to a few SMEs with high growth potential whereas the projects under current programme are designed to assist more organisations but with less intensive support.

CPI is of the opinion that more intensive support to fewer organisations is of more benefit to the economy and observes that the type of support which was delivered under the previous programme adds more value to the businesses assisted. It is likely the benefit to the businesses assisted and the more general local economy will differ depending on the nature of the project; however the performance indicators used to measure the impact and success of a project are the same regardless of the nature of the project.

3.2.2. Areas where ERDF money could be used more efficiently

3.2.2.1. Cost of Administration

Where ERDF funding has been granted, there are risks to projects in not being able to access the full project grant or becoming subject to claw back of funds. As such, the administrative burden and cost required to ensure compliance with ERDF rules is very high in comparison to that of other projects we have managed.

In addition to this, the administrative burden continues after the project has finished. Every project requires a financial audit and an independent evaluation and may be subject to audit years after the project has come to an end.

As a result of the high administrative requirements and severe consequences of non-compliance on ERDF projects, compliance rather than economic regeneration or stimulation is often seen as the focus of some ERDF projects.

3.2.2.2. Restrictions to the businesses that are eligible for support

While CPI understands that ERDF funding is for the benefit of SMEs, the current definition of SME, which takes company ownership and control into account, restricts the businesses we are able to support. As we are working in a high technology area, there are some spin out businesses which are deemed ineligible for support because of ownership requirements. However, they would benefit from assistance as in practice they do not receive the level of financial support assumed from their parent company.

While CPI understands larger businesses can fund their own activity and do not need the same kind of support required by independent SMEs, there is a potential to add a great deal of value to an SMEs by enabling it work together with larger companies. This is not easily accommodated in the ERDF model at present.

Within the businesses that do fit the SME definition, there are further restrictions on the nature of the business as to whether or not they are eligible for support on the project. Any beneficiaries that were not identified in the business case are deemed ineligible for support. As a project develops, additional potential beneficiaries may be identified. However the process required to make a variation to a project plan in order to allow this additional assistance is onerous. More flexibility in the process for project variation may enhance the value for money offered by an ERDF project by increasing the number and type of businesses who can benefit from it.

3.2.2.3. Independently funded project partners

The value of ERDF funding could be maximised by engaging project partners to contribute towards the funding match required. This is an approach CPI has taken on one project and tried to adopt with regard to other project opportunities. However, it is apparent that the perception of ERDF from some potential business partners is that it is unworkable.

This is disappointing as ERDF is specifically there to help businesses in poor areas. When the businesses that should benefit from this support decide the programme is too risky, the purpose of ERDF funding cannot be met.

3.3. Could the funds contributed to, and paid out on, regeneration through ERDF be spent more effectively by repatriating ERDF to the Government in London?

3.3.1. Advantages

In CPI’s experience, funding administered by BIS or the TSB carries a lower administrative burden than ERDF. This flexibility ensures the value of the project is maximised. As CPI works in new technology areas, projects do not always follow the exact path envisaged at the beginning. In the experience of CPI, the process to amend a project plan is much more straight-forward and much quicker on projects funded by central Government bodies such as the TSB than it is on an ERDF project.

3.3.2. Concerns

ERDF funding is only available to areas requiring economic regeneration. If the funding was available to all of the UK areas in great need of public support may lose the benefit of this regional funding.

Another concern with this proposal is that the administrative and monitoring function would be centralised. This would impact on the delivery of benefit to the region’s economy; and more immediately, may result in more job losses in regions recognised as being in need of regeneration.

The administration of ERDF at a regional level ensures the optimum benefit to the region by linking local knowledge with need. At present the priorities and types of projects eligible for ERDF support are tailored to meet the requirements of each region. This discretion as well as a regional presence, knowledge and understanding is essential to ensure the maximum benefit can be obtained from funding intended to stimulate economic regeneration at a regional level.

3.4. With the abolishment of the RDA’s responsibility for ERDF in England passes to DCLG. What effects are these changes having on the administration, assessment and payment of ERDF?

3.4.1. Changes in the administration of ERDF

The transition from RDA to ERDF has been well planned and smooth, but the administration of ERDF is what causes CPI the greatest concern. However, this is largely the same under DCLG as when the RDAs were responsible for ERDF.

However, DCLG does not yet have the level of understanding or appreciation for the technical aspects of the projects that have been transferred to them. The focus of DCLG is on the eligibility of activity and spend, and compliance with the rules rather than the delivery of business benefit. The ERDF programme exists to create benefit within UK businesses and it is vital that DCLG takes an interest in the practical aspects of projects, the development of technology and the value of assistance provided to businesses. The aim is create more and better economic activity in the UK and this should take precedence over the application of administrative rules related to the achievement of output targets and spend profile.

The additional local knowledge and understanding of the projects, that the delivery team in the RDA had, meant it was able to work closely with them to ensure the projects delivered economic benefit. This allowed issues to be addressed before they became problems. DCLG do not provide this level of support or focus on delivering economic benefits.

The length of time it takes to process claims or project variations is a long standing concern, it was a concern when the RDA was responsible and the level of concern has increased, as has the delay, following the transfer to DCLG.

3.4.2. Issues

3.4.2.1. Payment of claims

As ERDF projects are paid retrospectively management of cash flow is the biggest difficulty CPI faces with the ERDF projects. CPI is a not for profit organisation and is not permitted to use any borrowing facility such as an overdraft or loan. ERDF projects are always cash negative while they are running by their nature and payment of claims takes too long.

ERDF funding is repayable upon monthly or quarterly grant claim submissions. Funding can only be claimed once it has been defrayed and therefore payment to suppliers must be made before we are able to draw down funding.

Every claim is checked very thoroughly by several people within DCLG and queries are raised in respect of every funding claim. It is apparent that every transaction detailed in a claim is checked.

The volume and nature of the queries is inconsistent and does vary depending on the member of the DCLG claims team who is handling the claim. Questions are asked at each stage of the claim checking process and we are often asked the same questions more than once. This causes particular problems on revenue projects, where there are a high number of low value transactions.

Questions typically address how items were procured, how value for money was ensured and whether activity incurring the expenditure was eligible. A claim can not be submitted without completing a declaration stating procurement and eligibility rules have been followed. In addition to this, procurement, eligibility and value for money are assessed in regular audits.

While it is acknowledged that DCLG are responsible for ensuring ERDF is spent in accordance with the rules, and some level of checking of claims is prudent, the level of scrutiny each claim is subject to, and the length of time taken to process each claim, is disproportionate to the value of the checks performed.

While we did receive some queries from the RDA, the volume of questions and the length of time taken to process claims in order to release payment has increased significantly.

3.4.2.2. Interpretation of ERDF rules and guidance

In our experience, the controls on ERDF funding are very tight and the interpretation of what is eligible expenditure on an ERDF project vary widely. The interpretation often depends upon the person’s own interpretation from DCLG and we have found in several cases that this interpretation has also differed from an auditors interpretation which can put a project at risk of claw back or removing outputs.

3.4.2.3. Variation Requests and response time in general

Project variations usually take more than 6 months and can take more than 12 months to process. CPI projects are typically 2 years long. These processes are not practical; if variations were quicker to process and simpler, projects could be managed more flexibly and deliver better value to more beneficiaries. The time to process a variation is therefore disproportionate to the length of the project and the changes being requested.

3.4.2.4. Output Targets

Output and performance indicator targets are assessed without proper consideration of the nature of the project. As part of the value for money assessment of a project during the technical appraisal, the amount of money requested is reviewed against the number of outputs to be achieved to determine whether or not the project will deliver value to the region.

The value for money a project delivers does not necessarily directly correlate with the number of outputs the project delivers.

3.4.2.5. Claw Back

The risk of having funding clawed back is a risk associated with any ERDF project. This risk is seen to be increasing to the point where it is becoming too high a risk for many organisations to apply for ERDF.

Audits are becoming more frequent and increasingly focused on actively identifying non-conformances for claw back rather than successful business outcomes. Initial interaction with DCLG indicates it is taking the same approach.

3.4.2.6. Changes applied retrospectively

Changes to ERDF rules or guidance are applied retrospectively to projects. This occurs in the auditing of projects and in the checking of claims. This is confusing and onerous as systems are often created within an organisation using the guidance that was in force when the project was agreed.

3.4.2.7. Financial completion date

Every project has a financial completion date. It is not possible to reclaim the cost of any expenditure after the financial completion date but there is a requirement for every project to undergo a financial audit and an independent evaluation once it is complete. The audit and evaluation costs are not defrayed until a project is complete and therefore can not be funded by the project. In addition to these costs, some administrative cost is incurred in closing a project and the cost of any invoices for project expenditure which are received or paid after the financial completion date can not be recovered.

4. Recommendations for Action

4.1. Processing payments

4.1.1. The claims process could be simplified to ensure quicker payment. While we appreciate that checking of transactions and eligibility of expenditure is important to ensure applicants comply with the rules, the claim checking process could test a random sample of transactions rather than every transaction. This could be done at one session. The current process of iterative questioning wastes time and delays claims.

4.1.2. A little flexibility could be awarded to ensure expenditure that is unavoidably incurred after the project completion date can be covered by the project grant. For example, a small amount of project funding could be reserved specifically for evaluation costs.

4.2. Reducing the risk of Claw Back of funding

4.2.1. Changes in law, ERDF rules or guidance documentation must not be applied retrospectively

4.2.2. Clearer, more readily available guidance documentation and more support from DCLG with the interpretation of ERDF rules may clear up uncertainty as to what the rules are and how they should be construed.

4.2.3. Once an ERDF representative has given their interpretation of the guidance it should not be overruled by an auditor from the same organisation.

4.3. Outputs and performance indicators

4.3.1. Performance indicators and outputs should reflect the nature of a project and more intensive support to fewer businesses could be considered (like the 2000-2006 programme). It may also be beneficial to apply different performance indicators to different types of ERDF project; for example, a few intensive SME supports may deliver better value for money on a priority one technology project where a hundred two day training sessions may be more beneficial on a priority two project

4.4. Other administrative issues

4.4.1. The abolition of the RDAs has resulted in less effective communication and assistance between projects and DCLG. More input and support throughout a project would reduce the levels of ineligibility.

Centre for Process Innovation

April 2012