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Select Committee on European Union Nineteenth Report


CHAPTER 2: The European Union Structural and Cohesion Funds

The Current Funds

16.  Three Funds are used for regional policy:

17.  The Funds are allocated to meet three objectives:

  • The Convergence Objective is "aimed at the speeding up the convergence of the least-developed Member States and regions".[15] It is the main instrument of regional policy and accounts for 81.5% of spending. It covers the areas of "improvement of the quality of investment in physical and human capital, the development of innovation and of the knowledge society, adaptability to economic and social changes, and of the protection and improvement of the environment and administrative efficiency".[16] It is focussed on the poorer regions, defined at NUTS2 level. (See Box 2 for a discussion of the NUTS regions.) Different eligibility requirements apply under this Objective based on which Fund the spending is being sourced from. These are summarised in Table 3.
  • The Regional Competitiveness and Employment Objective is designed to act "outside the least developed regions … at strengthening regions' competitiveness and attractiveness as well as employment by anticipating economic and social changes, including those linked to the opening of trade"[17]. The Objective accounts for 16% of regional funding and is funded by the ERDF and ESF. Every region not covered by the Convergence Objective is eligible and it is up to the Member States to decide which of their regions should receive funding. This Objective recognises that even the richest Member States have areas that are struggling. As these areas may be further disadvantaged by the integration of EU markets and, more generally, by globalisation, they may need regional aid.
  • The European Territorial Cooperation Objective has the aim of "strengthening cross-border co-operation through joint local and regional initiatives."[18] Unlike the other Objectives, it operates at the NUTS3 level (although in practice a NUTS2 region can be designated, if all its NUTS3 regions are chosen). This means that it operates in regions that are also eligible for the first two Objectives and, with its narrow remit and relatively small budget, it is a complement to them.

18.  Regions that formerly qualified for Objective 1 status[19] under the 2000-2006 financial framework, but are now no longer eligible for convergence funding, receive transitional competitiveness funding as "phasing in" regions. The accession of the 10 new Member States had the statistical effect of lowering the EU GDP per head by about 12.5%. This made some regions and countries that would have been eligible for support under the old calculation, ineligible. These areas have been given tapering transitional support up until 2013, known as "phasing out" regions when under the convergence objective.

19.  Table 2 summarises the interaction between the Funds and Objectives. The map shows the eligibility of regions during the current Financial Perspective.

MAP

Structural Funds 2007-13: Convergence and Regional Competitiveness Objectives

Source: European Commission

Position as of October 2006.

Regional boundaries in Bulgaria and Romania are indicative only.

TABLE 2

Regional Policy Architecture (2007-13)[20]
Objective Financial Instruments Eligibility Financial Allocation

(Million €, 2004 prices)

Regions/countries receiving allocation
ConvergenceERDF

ESF







Cohesion Fund

NUTS2 regions whose GDP per head is less than 75% of the EU average (shaded red on the map)

Tapering transitional support up to 2013 for regions that would have been eligible if the threshold had remained 75% of the EU15 GDP per head average and not the EU25 ("phasing out")21 (shaded pink on the map)

Member States whose GNI per head is less than 90% of the Community average for the period 2001-03

Tapering transitional support for Member States that would have remained eligible for the Cohesion Fund if the threshold had remained 90% of the EU15 GNI per head average and not the EU25[21]

177,083 (57.5%)


12,521 (4.1%)




58,308 (18.9%)


3,250 (1.0%)



Subtotal:
251,162 (81.5%)

84 regions (31.7% of EU27 population)

16 regions (3.4% of EU27 population)



All new Member States, Portugal and Greece

Spain

Regional Competitiveness and Employment ERDF

ESF

All NUTS2 regions not covered by the Convergence Objective or by transitional support (shaded light grey on the map)

Transitional support for NUTS 2 regions which were covered by Objective 1 in the 2000-06 framework (which corresponds to the present Convergence Objective) but whose GDP per head now exceeds 75% of the EU15 GDP per head average ("phasing in")[22] (shaded dark grey on the map)

38,742 (12.6%)


10,385 (3.4%)





Subtotal:
49,127 (15.9%)

All regions not covered elsewhere (61% of the EU27 population)

13 regions (3.9% of the EU27 population)

European Territorial
Cooperation
ERDF (i) Cross-border co-operation. NUTS3 regions that have maritime, national or EU borders

(ii) Trans-national co-operation. All European NUTS3 regions are eligible but the Commission has identified 13 co-operation zones

(iii) Inter-regional co-operation and setting up networks and exchanges of experience. All European NUTS3 regions are eligible









Subtotal:
7,750 (2.5%)
Total:
308,041 (100%)

INTERVENTION PRINCIPLES

20.  The implementation of the Structural and Cohesion Funds is controlled by a number of intervention principles, some of which date from the 1988 reforms with others added since. The principle of concentration is where, because of limited financial resources, the Commission seeks to target the funds both spatially and sectorally. This forms the rationale for having the three Objectives discussed above and the accompanying eligibility conditions, although in previous programmes there were more Objectives. A major innovation of the 1988 reforms was the programming principle which represents a move away from funding project-by-project to funding on a multi-annual basis. The 1988 reforms also introduced the principle of decisions being made in a partnership between the Commission and the Member State, their regional organisations and other public bodies and non-governmental organisations. The principle of proportionality was introduced into the latest financial framework with the aim that the total spend on administration, control and monitoring should not be disproportionate to the total expenditure on a particular project. Why this is required is discussed in Chapter 4.

21.  Subsidiarity is a fundamental EU principle, enshrined in the Treaties, that requires the decentralization of powers to the lowest level of government that is compatible with efficient policy delivery. For the Structural and Cohesion Funds to respect the subsidiarity principle, their provision must achieve something that the Member States by themselves could not achieve, i.e. they must "add value". In the case of the poorer Member States where the Funds represent a net contribution to their resources, the principle is straightforwardly met: the Funds represent a net contribution to the resources of the Member States. However, many witnesses argued that when richer Member States who are net contributors to the EU budget are merely receiving back funds that they have already contributed, this principle is breached. We return to this issue in Chapter 3.

22.  A condition of the Structural and Cohesion Funds is that expenditure should also leverage in additional spending by the Member States on their own regional policy or from the private sector. Under the principle of co-financing, the maximum contribution that the EU will make to a particular project varies between 50% and 85%, with the EU making a greater contribution to the projects of the new Member States than the other richer Member States.

23.  Furthermore, the Structural and Cohesion Funds are designed not merely to replace national public expenditure: there must be additionality. The objective is to ensure that the Member State does not reduce their own related public expenditure in the 2007-13 period when compared with the previous Financial Perspective. Member State expenditure is only verified by the Commission with respect to the Convergence Objective.[23] As the Funds comprise only 0.38 of the EU's GNI and are small compared with the public expenditure in many Member States they are best seen as seed corn, leveraging in further funding, both from the Member States because of the co-financing regulations, but also from the private sector.

24.  For those Member States in the European Union prior to 1 May 2004, 60% of expenditure under the Convergence Objective and 75% of expenditure under the Regional Competitiveness and Employment Objective must explicitly meet the aims of the Lisbon Strategy.[24] The spending categories eligible under the Lisbon Strategy are:

  • Research and technological development, innovation and entrepreneurship
  • Information society
  • Transport
  • Energy
  • Environment protection and risk prevention
  • Increasing the adaptability of workers and firms, enterprises and entrepreneurs
  • Improving access to employment and sustainability
  • Improving the social inclusion of less-favoured persons
  • Improving human capital. [25]

The Current 2007-2013 Financial Framework

25.  Regional policy's share of the budget has also increased over time: as Table 3 shows, by 1988 the share was 17% and since then it has slowly risen and is budgeted to be 38% by 2013. This growth has been at the expense of payments to agriculture, for which the share of the budget has gradually decreased over time. For the 2007-2013 Financial Framework, the total funding available is €308 billion at 2004 prices[26] which constitutes approximately 0.38% of the EU's GNI. However, the proportion of the budget allocated to regional policy has not risen significantly in recent years despite the increased disparity in wealth in the enlarged EU.

TABLE 3[27]

Policies' shares of the EU budget
Year Percentage of European Budgeta Size of EU Budgeta as % of EU GNP or GNI
Regional Policy
Common Agricultural Policy
1975
6.2
70.9
0.53
1980
11.0
68.6
0.80
1985
12.8
68.4
0.92
1988
17.2
60.7
1.12
1993
32.3
53.5
1.20
2000
34.8
44.5
1.07
2007
36.7
47.1
1.04
2013
38.1
43.0
0.93

26.  Table 4 shows the allocation of the Structural and Cohesion Funds between the Member States for the financial framework 2007-2013. It includes the allocation for the Convergence Objective and also for the total funding a country receives from all of the Funds. The biggest beneficiary is Poland with €60 billion (19.4% of the total), followed by Spain (€32 billion, 10.2%) and then Italy (€26 billion, 8.3%).

TABLE 4[28]

Indicative Financial Allocations: 2007-2013
CountryNational Convergence Objective Total EU Regional Funds
GDP per head, €, 2005
Million €
€ per head in recipient regions
Million €
€ per head in recipient country
Share of GDP %
Share of total regional funds %
Bulgaria
7,913
5,888
753
6,047
768
3.15
2.0
Romania
7,933
16,912
778
17,316
795
3.00
5.6
Latvia
11,180
4,010
1,725
4,090
1,749
3.52
1.3
Poland
11,482
59,048
1,546
59,698
1,562
3.43
19.4
Lithuania
11,914
5,999
1,737
6,096
1,757
3.42
2.0
Slovak Republic
13,563
9,663
1,796
10,264
1,904
3.30
3.3
Estonia
14,093
3,011
2,221
3,058
2,247
3.31
1.0
Hungary
14,393
20,243
1,998
22,451
2,210
3.22
7.3
Portugal
16,891
18,316
1,750
19,147
1,847
1.82
6.2
Czech Republic
17,156
22,979
2,252
23,698
2,323
3.25
7.7
Malta
17,330
747
1,878
761
1,922
2.35
0.2
Slovenia
19,462
3,646
1,827
3,739
1,874
1.70
1.2
Cyprus
20,753
193
265
580
812
0.56
0.2
Greece
21,589
17,447
1,585
18,217
1,658
1.34
5.9
Spain
23,069
23,411
1,566
31,536
778
0.49
10.2
Italy
23,474
19,255
1,112
25,647
449
0.25
8.3
Germany
25,797
14,323
933
23,449
284
0.14
7.6
France
25,077
2,838
1,623
12,736
208
0.10
4.1
Finland
25,774
0
0
1,533
295
0.13
0.5
United Kingdom
26,715
2,594
949
9,468
160
0.07
3.1
Belgium
27,135
579
452
2,020
195
0.09
0.7
Sweden
27,721
0
0
1,682
188
0.08
0.5
Denmark
28,375
0
0
545
101
0.04
0.2
Austria
28,852
159
568
1,301
161
0.07
0.4
Netherlands
29,374
0
0
1,697
105
0.05
0.6
Ireland
32,197
0
0
815
207
0.06
0.3
Luxembourg
59,202
0
0
58
130
0.02
0.0
Not allocated
392
0.1
EU27
All Member States
308,041
100.0
EU12 New Member States
158,190
51.4
EU15
Pre 2004 Member States
149,851
48.6

27.  Although GDP/GNI per head is used to determine the eligibility of the region/Member State for funding, the actual moneys received are determined by a formula that involves other criteria. These are the Member State's relative prosperity, the number of people unemployed (Convergence Objective only) and in addition, for the Regional Competitiveness and Employment Objective, the number of jobs needed to reach an employment rate of 70%, the number of workers employed with a low education level, and population density.

28.  As a result of the application of this formula and, in some cases, the absorption cap (discussed in paragraph 35), there is no clear relationship in the Convergence Objective regions between the value of Funds received per head and national GDP per head. This is shown in Table 4. Regions in some of the wealthier Member States receive more funding per inhabitant than eligible regions in the poorer countries. The United Kingdom will receive, over the 2007-13 Financial Framework, a total of approximately €9.5 billion (at 2004 prices) of which €2.6 billion is for the Convergence Objective. The two regions eligible for this are Cornwall & the Isles of Scilly and West Wales & the Valleys (covering 2.5 million people). The Highlands and Islands are eligible for phasing out assistance. €6.2 billion is allocated to Regional Competitiveness and Employment Funding and Merseyside and South Yorkshire are eligible for phasing in funding (see paragraph 18). The phasing in and phasing out regions together cover a further 3 million people. €0.6 billion is available under the Territorial Co-operation Objective. The EU funding only covers 75% and 50% of the eligible expenditure under the Convergence and Regional Competitiveness and Employment Objectives respectively. This means that relatively large additional funds will also be available from the required United Kingdom public and private "match funding".

IMPLEMENTATION

29.  Implementation of regional policy involves a dialogue between the Commission and the Member States and their regional organisations, and encompasses what is termed "multi-level governance". Broadly, the Commission sets out the strategy to be observed and the Member States put forward proposals for the individual projects and programmes for agreement by the Commission.

30.  The European Council sets, and Council and the European Parliament then fine tune, the amounts in the Financial Perspective to be allocated to the Structural and Cohesion Funds. The Commission, in consultation with the Member States, draws up the Community Strategic Guidelines on Cohesion which set out the broad guidelines for the use of the Funds. The guidelines are used to produce the aims for each Objective and are now aligned with the Lisbon Strategy priorities. For the 2007-13 period, the Guidelines identified three main priorities, as noted in paragraph 11:

31.  Each Member State is required to produce a National Strategic Reference Framework (NSRF) which sets out the country's economic strengths and weaknesses and how it intends to implement the EU regional policy priorities, taking account of local conditions. The Member State will have received an indicative allocation of funding. After negotiations between the Member State and the Commission, the NSRF is validated by the Commission. The funding for the Convergence Objective is ring fenced for the eligible regions, except for the Cohesions Fund. As long as it acts within the NSRF, the Member State can propose exactly how and where the funds all allocated under the Regional Competitiveness and Employment Objective are to be allocated. Operational programmes then spell out in detail the projects to be implemented, taking into account the NSRF. There are, in total, 455 operational programmes in the EU for the 2007-13 exercise. Following approval, the Commission authorizes expenditure and subsequently, together with the relevant Member State, monitors and evaluates the projects.

32.  In the United Kingdom, the Government has allocated ERDF Regional Competitiveness funding between the United Kingdom's Competitiveness regions[29] by reference to population, GDP and levels of innovation, enterprise and skills. For the ESF Regional Competitiveness Funds, the criteria are numbers of jobless people, numbers of working-age people with no qualifications, and numbers of working-age people with low qualifications.[30]

ALLOCATION BETWEEN THE MEMBER STATES

33.  The accession of the new Member States in 2004 and 2007 has had a major impact on the distribution of the funds. Because of the enlargement and the overall EU budget constraint, the original EU15 will receive 36% less support in this Financial Perspective compared with the last.[31] The United Kingdom's Structural Funds allocation fell by nearly a half. Nevertheless, the richer Member States (i.e. the original EU15 less Greece and Portugal) are set to receive a substantial share of the Structural and Cohesion Funds over the period 2007-2013. They received 36% of the budget commitments with the remaining 64% allocated to the poorer Member States. With the ending of transitional relief for some of the richer Member Sates and their regions, the share of the poorer Member States will rise to 67% in 2013 (p 58).

34.  The Commission gives each Member State indicative annual sums for each of the seven years of the financial framework. The fact that the funding is guaranteed for seven years is seen as one of the advantages of multi-annual programming.

35.  The amount allocated to each Member State depends on the population of regions or Member States falling within the various objective categories and the various allocation formulae which differ between the objectives.[32] However, the size of the funds for which the new Member States would be eligible under the allocation formulae is so large that there are doubts as to whether they have the capacity to use them efficiently. Consequently, an absorption cap based on a sliding scale, related to the Member States' GNI per head, has been introduced; while this applies in theory to all Member States, in practice the constraint is only triggered for some of the new Member States. For example, the cap for countries whose average GNI per head in 2002/3 was less than 40% of the EU average limits the total contribution of the Funds to about 3.8% of GNI. This can result in a reduction of around a half of the funds available for a number of the new Member States,[33] although the amounts allocated can still amount to around 20% of total public and private investment in these countries.

36.  As the Funds are territorially concentrated, they can also form a not insignificant proportion of a region's investment, even within the richer Member States. This is notwithstanding the fact that the funds received by several of the richer Member States amount to less than 0.1 % of GDP each.

Alternatives to grants

37.  Both the Government and Graham Meadows, former Director General, Regional Policy, European Commission suggested that especially for the richer regions, more use could be made of loans as opposed to grants, and in particular of recyclable loans (Q 245, pp 57, 79). We heard from Mr Meadows (Q 245) that as late as 1989, Marshall Aid funds were still being recycled in Germany. The advantage of recyclable loans, as opposed to grants from the Funds, is that the money is returned to the region at the end of the programming period when they are repaid. They can thus be used repeatedly time and again over a long period. The Government suggested this could be facilitated through more extensive use of the EIB[34] (p 57). We would welcome increased use of loans and invite the Government, in their response, to outline what steps they are taking to encourage their use.


14   Technical assistance provides funding for those activities that enhance the quality and efficiency of the implementation of ERDF projects. Back

15   Council Regulation (EC) No. 1083/2006 of 11 July 2006 laying down general provisions on the European Regional Development Fund, the European Social Fund and the Cohesion Fund and repealing Regulation (EC) No. 1260/1999, Article 3(a). Back

16   Ibid, Article 3, 2(a). Back

17   Ibid, Article 3, (6). Back

18   Ibid, Article 3, 2(c). Back

19   In the 2000-2006 period, Objective 1 regions were those that had a GDP per head less than 75% of the EU average. Back

20   Sources: European Commission: Cohesion Policy, 2007-13 Commentaries and Official Texts Luxemburg, Office for the Official Publications of the European Communities. Commission Communication The Growth and Jobs Strategy and the Reform of European Cohesion Policy. Fourth Progress Report on Cohesion (Table 3). Back

21   The accession of the 10 new Member States to the European Union had the statistical effect of lowering the EU GDP per head by about 12.5%. This support will not be renewed after 2013. Back

22   This also includes Cyprus which, due an overestimate of its GDP per head, did not have Objective 1 status. Back

23   For the methodology employed see the European Commission, Directorate-General Regional Policy, "Commission Methodological Paper Giving Guidelines on the Calculation of Public or Equivalent Structural Spending for the Purposes of Additionality", Working Document No.3, December 2006. Back

24   As set out in the Integrated Guidelines for Growth and Jobs (2005-2008)-Council Decision 2005/600/EC of 12 July 2005. Back

25   Article 9(3) and Annex IV of Council Regulation (EC) No. 1083/2006 of 11 July 2006 laying down general provisions on the European Regional Development Fund, the European Social Fund and the Cohesion Fund and repealing Regulation (EC) No. 1260/1999 include a list of the priorities underlying each of the above categories. Back

26   2004 prices are often used by the Commission as the reference point for the 2007-13 Financial Perspective. The Commission and the Government equated this amount to €347 billion at current prices (p 58).  Back

27   Sources: European Commission, The Community Budget: Facts in Figures, 2000; European Navigator at www.ena.lu and Commission documents. Notes: a Total appropriations for payments. 1998, 1993, 2000 and 2007 are the first years of the Financial Frameworks, Sources: European Navigator at www.ena.lu, European Commission, EU Budget 2006-Financial Report. Back

28   € in 2004 purchasing power parities except GDP per head which is 2005. Sources: OECD (2007), Economic Surveys: European Union, Table 7.4, p.144. European Commission (2006) The Growth and Jobs Strategy and Reform of EU Cohesion Policy. The difference between the Total and the Convergence Objective is made up of spending under the Competitiveness and Territorial Cooperation Objectives. Back

29   All regions other than Cornwall, West Wales & the Valleys, and the Highlands & Islands. Back

30   National Strategic Reference Framework for EU Structural Funds Programmes, 2007-2013, HC Deb 23 October 2006 cols 72WS-74WS. Back

31   Bachtler, J., Wishlade, F. and Méndez, C. (2007) New Budget, New Regulations, New Strategies: The 2006 Reform of EU Cohesion Policy (Figures 9 and 10, p.37), European Policy Research Paper no.63, European Policies Research Centre, University of Strathclyde.  Back

32   Annex II of Council Regulation (EC) No.1083/2006 of 11 July 2006. Back

33   See Table 14, p.27 of Bachtler, J., Wishlade, F., and Méndez, C. op. cit. Back

34   The European Investment Bank was established in 1958 and raises considerable sums of money on the capital markets for lending to the Member States. Priority is given to projects for developing less-developed regions. In 2006, €27.5 billion, or two-thirds of total EIB lending, went to regional development in the EU27. The Commission is already in partnership with the EIB in JASPERS (Joint Assistance to Support Projects in European Regions), JEREMIE (Joint European Resources for Micro-to-Medium Enterprises) and JESSICA (Joint European Support for Sustainable Investment in City Areas). JEREMIE is an initiative with the European Investment Fund, of which the major shareholders are the EIB and the Commission. (See also Communities and Local Government, Financing Investment in Sustainable Cities and Communities in Europe-the Role of the European Investment Bank, 2007.) Back


 
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