House of Lords - European Union

Select Committee on European Union Nineteenth Report

CHAPTER 3: Proposals for change

38. As Table 2 explains, the distribution of the Structural and Cohesion Funds is based upon disparities in GDP per head, and it is judged on its success at reducing those disparities (Q 127). There are alternative approaches that could be used. One is to measure relative prosperity in terms of income directly accruing to the inhabitants of a region or in terms of their actual consumption. Two common measures are primary income (per head), which is defined as income before taxes and transfer payments, and disposable income (per head) which is income after taxes and benefits. Primary and disposable income overcome the commuting problem (see Box 1), and disposable income takes into account government transfers. A further measure is actual individual consumption (AIC) per head. AIC comprises household final consumption expenditure (goods and services purchased by households directly) as well as the consumption of individual services, notably health and education services provided by government and non-profit organisations.

39. The use of other indicators to pick up economic changes at a local level (such as reductions in disparities in health, unemployment, degree of social exclusion) that the funds might have brought about would be desirable. These are sometimes masked by the broader economic measures used by the Commission. However, GDP per head is used primarily because it is the indicator for which there are the most reliable and consistent data across the regions.

40. Professor Bachtler, University of Strathclyde, informed us that determining the effectiveness of regional policy, especially in quantitative terms, is quite a difficult proposition (Q 103). A major problem in studies of the effectiveness of the Funds is how to measure what might have otherwise occurred (p 18): the fact that disparities may be widening, or not closing very rapidly, is not in itself an indication that EU regional policy is ineffective since the position might have been worse in the absence of the policy.

41. On the one hand, the opening up of markets, exposure to greater competition, and the diffusion of best-practice production techniques can all increase the rate of economic growth in the lagging regions. An important proviso is that the regions have the necessary flexibility and social institutions to take advantage of these opportunities. Thus the rapid growth of many of the poorer regions, or Member States, could be largely due to greater integration with European and world markets and have very little to do with the Structural and Cohesion Funds. On the other hand, agglomeration and other economies of scale mean that increased integration could be to the detriment of the lagging (often peripheral) regions.[35] In these circumstances, there is a trade off between equity and efficiency. The view of Mr Ahner, Director General, DG Regional Policy is that economic growth should be spread evenly throughout the EU (Q 250). In his view, the concentration of growth in just a few areas brings with it problems of such as increased congestion and pollution and loss from the growth potential of the lagging regions (Q 250).

42. There are other reasons why it is difficult accurately to assess the effectiveness of the Funds. For example, many of the funded projects such as those improving the skills of the labour force or increasing the infrastructure may have a long lead time before they have any marked impact on the growth of GDP per head. The experience of national regional policies, including that of the United Kingdom, shows just how difficult it is to achieve a rapid convergence in regional prosperity. Many of the earlier studies on the effectiveness of the Funds use figures that are now somewhat dated. The Funds may have a much greater effect on the new Member States, given that their regions have levels of GDP per head that are lower than the lagging regions in the richer Member States (see Table 1). Consequently, they may have more scope for catching up, aided by the Funds.

43. Despite these problems, the effectiveness of the Funds has been extensively analysed. The Commission itself undertakes regular assessments of the impact of the Funds including detailed evaluations at the project level. These have used a bottom-up technique and attempt to assess the degree of employment creation at the local level, using data generated by the programme and from surveys. The Commission has also used a more aggregative approach through macro-economic simulation models. Other studies have used statistical techniques which attempt to estimate the effect of the Funds, controlling for the effect of other factors such as the impact of the single market. Some of the evidence is more anecdotal: Mr Meadows (Q 226) claimed that that the revival in fortunes of Cornwall could be traced to when it was given Objective 1 status.

44. One approach to assessing the impact of the EU's regional policy is to compare the performance of the Member States and regions that have received funds either with those that are not eligible or with the EU average. The period since the accession of new Member States is too short for any evaluation to be meaningful, but it is possible to consider the performance of the original Cohesion countries: Greece, Spain, Ireland and Portugal. During the period 1995-2005, Ireland grew at four percentage points above the EU15 average, and the country now has the second highest GDP per head in the EU. Spain and Greece have also exceeded the EU15 average growth rate by 0.7 and 1.5 percentage points respectively. The only disappointment has been Portugal, which recorded a growth rate above the EU average until 1999, but which since has grown at a rate well below the EU average. In 2005 it had a level of GDP per head below that of the Czech Republic and Slovenia[36]. At a regional level, there were 50 lagging regions for the EU15 (i.e. regions with a per head income below 75% of the EU average) in 1995 and by 2004 12 of these with a combined population of 10 million had moved above 75% of EU average GNI per head. Against this must be set the fact that five regions (with a population of 6 million) had slipped below 75%.[37] The Commission also points out that in spite of the convergence of low income countries, regional disparities within countries still remain large[38] (see Table 1).

45. Open Europe stated that convergence was very slow, with 43 of 44 regions originally granted Objective One status in 1989 still eligible for such funding in 2003 (p 19). The Government pointed out that the position had greatly improved in recent years: Mr McFadden MP, Minister of State for Employment Relations and Postal Affairs, provided detailed data indicating that by the 2007-13 programme only 30 of the 44 regions remained eligible for funding under the convergence objective and 9 of these were under the transitional arrangements (p 71). However, as noted in paragraph 44, some regions had become eligible for funding for the first time. Dr Robert Leonardi, London School of Economics, also provided evidence highlighting high growth rates in Member States whose regions were receiving funding (Q 122).

46. An alternative method of assessing the effectiveness of the use of the Funds could include the levels of private inward investment, which would reflect the market's confidence in the new Member State. Open Europe described an absence of evidence to date to support any "added value" delivered by the Funds (p 18). The Commission told us that they were currently studying the impact of the Funds on inward investment and we look forward to seeing the result of their research (Q 288).

47. We agree with those witnesses who argue that the Funds have helped to reduce disparities in Europe. We welcome work to measure the impact of European regional policy on levels of private inward investment.

Spending priorities

48. Professor Bachtler argued that some of the spending under the Funds in the past may not have been the most appropriate means of investment, with an excessive emphasis on infrastructure at the expense of education and human capital (Q 103). Dr Bradley and Professor Untiedt, Economic Modelling and Development Systems, agreed (p 122). They compared favourably the Irish Structural and Cohesion Funds, which were used in a programme of expenditure first weighted towards education and only subsequently infrastructure, with the Portuguese use of the Funds. The emphasis of the latter was primarily on infrastructure, notwithstanding the low level of education in Portugal. But we also heard from witnesses that a basic level of transport infrastructure is a necessary prerequisite for the attraction of new firms and inward investment (Q 286, p 109).

49. As discussed in Chapter 1, under the 2007-13 Financial Perspective regional policy is linked explicitly to the Lisbon Agenda. The Structural and Cohesion Funds are seen by the Commission as a key instrument in the implementation of the re-launched growth and jobs strategy. EU15 Member States are required to earmark 60% of the expenditure under the Convergence Objective and 75% under the Regional Competitiveness and Employment Objective for Lisbon objectives. In the United Kingdom, this amounts to € 964 million per year (2008 prices). As Mr Boijmans, Deputy Head of Unit, Poland, at DG Regio, pointed out, even in the case of Poland where there is an acute need for improvements in infrastructure, the country has also "committed itself to the objectives of the Lisbon Strategy to create wealth and jobs and to have a more forward looking strategy than purely building roads and sewerage plants. It has allocated almost 64 per cent of its budget to Lisbon-relevant areas of expenditure which is quite high taking into account the size of Poland, the size of the budget and the situation the budget is in" (Q 286).

50. In the fourth report on Economic and Social Cohesion[39], the Commission identifies new challenges that may have an uneven impact and widen social and economic disparities. The Government explained that, in their view, the National Integrated Guidelines for Jobs and Growth and the National Reform Programmes set out the challenges the EU faces and "there is no need for a separate set of challenges to be identified for cohesion policy" (p 57). The Minister wrote that "Cohesion Policy should remain focussed on achieving sustainable growth and jobs. If the scope of Cohesion Policy were widened [to include issues such as climate and demographic change] then this could result in a shift in resources away from addressing disparities in economic development" (p 59).

51. We believe that allowing the regions to draw up regional spending plans, emphasising local infrastructure or education priorities, reflects the fact that one policy does not fit all.

52. While the reduction in discrepancies in citizens' prosperity should be the policy's primary focus, we welcome integration with the Lisbon Strategy. Given the importance of innovation and human capital in the knowledge economy, if lagging regions and Member States are to accelerate their growth, improvements in these areas will be important. We are encouraged to learn that new Member States are also taking account of the strategy in their regional plans. However, the major impetus for the implementation of the Lisbon Agenda must come at the Member State level—the contribution to the Agenda under the Competitiveness Objective is marginal when compared with national public expenditure but can attract project finance from other sources. The problem of increasing the competitiveness of the European Union is of course greater than can be addressed solely by regional policy.

53. On broader issues such as climate change, we agree with the Government that the Structural and Cohesion Funds should not be used other than for reducing regional disparities.

Absorption Cap and co-financing

54. The 2008 EC budget allocates €47.3 billion[40] to the Funds: this represents 36.1% of the total EC Budget and 0.38% of EU GNI. For comparison, BERR's total budget in the United Kingdom equates to approximately 0.2% of UK GNI.

55. As explained in paragraph 35, nearly all the new Member States find that their receipts from the Structural and Cohesion Funds are capped. This has reduced the amount that some of the new Member States would otherwise have received by about half. Mr Ahner stated that at present the least developed regions in the EU are not able to absorb more than is already allocated to them (QQ 273, 275). Ms Lorens, Head of Delegation for the Regional Representation for Lubelskie in Poland, told us that in the period 2004-06 her region could use only 80% of its allocation of funds, but that they expected a higher utilisation rate in the current budgetary period. Lack of management expertise was the principal limit to using even more (QQ 26, 300-303). This example illustrates the argument of several witnesses, including the Government, that increasing the share of funds that the new Member States receive of itself is not a sufficient prerequisite for increasing their economic performance (pp 57, 109, 122, 125, QQ 104, 206, 271).

56. Evidence has shown[41] that fraud and mismanagement occur predominantly at the national rather than the EU level. The Polish regions highlighted the difficulties that they have faced: in Wielkopolska the Funds are administered by 80 understandably inexperienced officials which increases the likelihood of low absorption and mismanagement of projects funded by the EU budget (QQ 316-317). The Polish witnesses also highlighted the regular departure of public sector administrators in Poland to higher paid positions in the private sector (Q 318).

57. Steps are being taken to alleviate some problems: the Commission uses its experience to provide advice on audit and project management[42], while richer Member States provide training and advice in areas where they have particular expertise: for example, the Office of National Statistics has advised Eastern European countries on the collection of statistics.[43] However, Commissioner Hübner explained that increasing administrative capacity would not by itself lead to a removal of the absorption cap as the Commission also examined the impact of the Funds on the region's macro-economic situation; for example, the Commission examined whether the region's labour market could support additional spending (Q 376).

58. We support assistance with, and expenditure on, raising administrative capacity which will lead to long-term benefits.

59. Witnesses told us that co-financing should continue, even for the poorest Member States (p 78). The need to provide national funds for a project provides an added incentive (in addition to the formal monitoring procedures) to ensure that the money is well spent. We agree that co-financing should continue.

Relationship with other policies

60. Understandably, witnesses representing regions would be happy were the regional policy budget to increase (Q 303, p 109). Other witnesses expressed concerns: as well as the issue of absorption capacity (discussed above), witnesses argued that there were several other measures that the Commission could use to support growth. Dr Bradley and Professor Untiedt noted that as the budget is a political decision, the share of the budget allocated to regional support "might be reduced compared to the Lisbon Strategy forms of interventions (for example non-spatial bounded support for R&D)" (p 125).

61. Mr Boyfield stated that the policy "is bribing citizens of the EU with their own money" (p 43) and argued that the size of the Funds should be reduced. Open Europe suggested that the Structural and Cohesion Funds are treated as a "'political sweetener' rather than a development tool" (p 14).

62. We heard no calls for an increase in the size of the EU's total budget and we consider that no pressure should be placed on the Own Resources or the budget ceiling. Any additional money for the Structural and Cohesion Funds would therefore have to come at the expense of other policies. Global Vision described the possibility of CAP funding reducing to zero as "highly unlikely" (p 135); we agree. Instead, as argued in our recent report The Future of the Common Agricultural Policy,[44] we would prefer to see increased funding for the European Agricultural Fund for Rural Development (EAFRD) at the expense of agricultural price support.

63. As we concluded in that report, the types of admissible actions currently organised around the three axes of the EAFRD should be recast more broadly to include more non-agricultural measures. Funds might thus be used to improve communications, infrastructure, and amenities in rural areas so as to ensure that rural communities are not disadvantaged by their rurality. The ultimate aim would be to ensure that environmental and economic objectives are available to improve the economic viability of rural areas. A recast Pillar II[45] such as we envisage in the report could be used to tackle the relative deprivation of rural areas compared to urban areas even in relatively rich Member States, and to target pockets of deprivation in otherwise wealthy rural areas. In practice, this would mean that all Member States would continue to benefit from access to CAP funds.

64. We hope that the 2008/09 Budget Review will result in a reduction of spending on agricultural price support and increased support for the EAFRD, and at the same time increased coordination between European regional policy and rural development policy.

Concentration of funding

65. The issue of allocating part of the budget to prosperous regions, or to pockets of deprivation within the most developed Member States of the EU, is a contentious one and was raised by nearly all witnesses, many of whom opposed the practice. At present 100 regions[46] out of the 268 EU NUTS2 regions receive about 80% of the total budget dedicated to Structural Funds. The remaining 20% is available to all the other EU regions.

66. Global Vision argued that the principle of subsidiarity strongly suggested that the most developed Member States should take responsibility for their regional policy (p 134). Other witnesses disagreed, describing the pan-European character of the policy Objectives (Q 261, pp 76-77, 135-137). Economic challenges—such as loss of competitiveness, unemployment, and lack of investment in innovation—occur in less developed regions across the EU irrespective of whether they are in a rich or poor Member States. Mr Meadows cast doubt on whether Member States would be able or willing to administer common actions inter-governmentally in the absence of supranational co-ordination (Q 231). We were also told that that the requirements of EU regional policy—in terms of audit, financial management, control and monitoring—are forcing changes to domestic systems of policy and governance, helping to reform public management and institutional operation both in Member States that lacked experience and know-how before accession (Q 104) and in the EU15 (QQ 138, 217). Mr Ahner told us that he was not convinced that it was acceptable to divide countries into donors and recipients (Q 275).

67. Professor Tarschys, Stockholm University, dismissed the idea of the Structural and Cohesion Funds as a unifying policy: "if we understand cohesion to mean a sense of togetherness, then it seems likely that all EU policies make some modest contributions towards this goal, but it is not self-evident that the Structural Funds are more efficient in this respect than other policies. To find measures that give particular value for money in pursuing the sense of European community, one should probably look to such fields as education, culture, mass media, sports and youth mobility" (p 137). This, however, understates the Treaty-based aim of the Funds to reduce discrepancies in citizens' prosperity.

68. Mr Meadows argued that the seven-year implementation period that is applied to projects funded by the Structural Funds offers the advantage of continuity beyond regional or national electoral cycles and medium-term stability to design and deliver projects. He added that this might be lost if Member States administered their own policies (p 77); we are not wholly convinced. Mr Meadows also noted that the adoption of common themes and objectives at the EU level for projects that are executed in regions within different Member States across the EU offers the possibility to exchange information and knowledge. Regional actors as well as the Commission learn from best practice in other parts of the EU (p 77). EU funded projects also allow for synergies, especially for regions in the same geographical area that are separated by national borders but suffer from similar structural disadvantages due to their geographical location. In addition, the Commission's evidence suggests "about a quarter" of the money spent in the poorer regions is recycled via trade to the richer regions (Q 250).

69. Some witnesses referred to the cost of administration, the risk of fraud and the time-consuming bureaucracy in applying and distributing the grants as good reasons for returning control of policy to the national level in richer Member States (Q 37, pp 16-17, 43, 134). However, as we discuss in Chapter 4, the cost of administration, relative to the total size of the budget, is not significant. The European Court of Auditors has found that mismanagement of EU funds happens mostly at Member State level and that the weaknesses in the management structures that lead to fraud or misallocation of funds occur in richer Member States as much as they do in poorer.[47] The cost of administering Structural Funds in the richer countries is not by itself a compelling argument in favour of ending Structural Fund programmes in richer Member States.

70. In their written evidence, the Government stated that "in line with the principle of subsidiarity, those Member States which have the institutional and financial strength to fully develop and pursue their own devolved and decentralised regional policies in support of these objectives should be encouraged and enabled to do so" (p 58). In oral evidence, Pat McFadden MP, Minister of State in the Department for Business, Enterprise and Regulatory Reform, supplemented that statement. He told us that the Government would like to see a greater share of Structural Funds spent on the Member States and regions that really need it (i.e. the poorer Member States) (Q 184). In evidence to another inquiry, Kitty Ussher MP, Economic Secretary to HM Treasury, stated that the Government believed wealthier Member States have ways of addressing fundamental economic disparities which are not available to poorer Member States. The Minister added that wealthier Member States should take a "broader principled view" and give up some of their receipts.[48]

71. This is a position that we have previously argued for: in 2005 we concluded that "EU regional expenditure should focus on those economic and social areas where it is best able to make a contribution to growth and solidarity in Europe. In the period from 2007 to 2013 the potential for adding most value will lie in the new Member States. However, even in the new Member States, EU cohesion spending should remain transitional, time-limited and geographically focused … Support should be tapered and should not become a permanent policy instrument."[49] We also concluded that the richest thirteen Member States should not receive any regional funds.

72. During this inquiry we have carefully examined this conclusion and the potential financial consequences. We have also examined a more nuanced suggestion: that the funding currently allocated to the Competitiveness Objective of the rich Member States to be diverted to the Convergence Objective, thus expanding the latter's reach. This proposal would mean that poor regions in otherwise rich Member States would remain eligible for funding, and all countries would continue to qualify for the small amount of funding allocated to the European Territorial Cooperation Objective. Table 5 sets out the funding that the rich Member States would lose had this change occurred before the start of the current Financial Perspective and the amount saved instead used to increase the funding to the existing roster of Convergence Objective regions and Member States. It should be noted that this loss differs from the current value of the Regional Competitiveness and Employment funding (including phasing in funding). This is because an adjustment has been made for the additional funding the convergence regions of the rich Member States would now receive.

TABLE 5

Net loss to Member States if Competitiveness Objective funds are transferred to Convergence Objective funding, 2007-2013[50]

Country	Value, € millions	Value as % of Member State's EU regional policy income
Belgium	1,281	59
Denmark	491	83
Germany	6,777	27
France	9, 429	68
Ireland	738	84
Italy	3, 031	11
Luxembourg	49	78
Netherlands	1,600	87
Austria	965	68
Finland	1,545	93
Sweden	1,566	86
United Kingdom	6, 336	62

73. Had all EU regional funding (except the European Territorial Cooperation Objective) in the rich Member States been channelled into the Cohesion Objective during the current Financial Perspective the cost to the United Kingdom would have been around € 905 million per year at 2008 prices.

74. The Commission highlighted the leverage effects of allocating funds to wealthier regions and argued that the objectives of geographically balanced and environmentally sustainable development supported the current approach to distribution (QQ 261-262, 264-268). Mr Dufeil, Head of Unit, Spain at DG Regio, gave the example of Baden-Wurttemberg where the Commission had used the leverage of its €20 million annual allocation to the region to achieve "an upper level of efficiency" by encouraging the region to support pilots and projects that might be applicable to other areas of the EU (QQ 264).

75. The political reasons advanced are not by themselves compelling enough to agree with the concept of distributing EU funds within Member Sates which are net contributors to the EU budget. In principle, we agree with the Government: funding should be concentrated in the poorest regions and should reflect the principle of subsidiarity. The sums involved in the Competitiveness Objective are too small to have significant behavioural and financial leverage effects.

76. We recognise that some Member States, including the United Kingdom, would as a consequence lose much of their income from the Structural and Cohesion Funds. Such a significant change would arouse opposition even in the wealthier Member states but it is a change that should be explored in the context of a satisfactory outcome (involving substantial CAP Reform) to the imminent strategic review of the EU Budget and of EU policies on Economic and Social Cohesion.

77. The eligibility criterion for the convergence objective is otherwise suitable. We continue to expect that richer Member States should remain responsible for the majority of their own regional funding. In addition, as we have already outlined (paragraph 64), an expanded EAFRD could work alongside the Structural and Cohesion funds to tackle deprivation in rural areas in all Member States.

78. Further fine tuning is needed for those regions which are just above the borderline for support and do not receive significant rural development funding. Dr Garcia-Duran and Dr Millet, University of Barcelona, described these as "medium rural medium income" regions and suggested that they receive support "either … from the Structural Funds or from a reviewed and adapted Research and Development Policy" (p 133). Mr Meadows expressed concern about regions which did not have sustainable growth and which "leave eligibility and then bounce back into it, like planes which do not take off" (Q 234). We support continuation of the principle of phasing in and phasing out payments for regions around the boundary rather than a simple line between full eligibility and none.

Regions and the measurement of wealth

79. As discussed in Box 2, the size of an NUTS2 region varies across the European Union. It is possible for pockets of deprivation to exist within an otherwise wealthy region, but distributing European Funds at the NUTS3 level would not necessarily help: Hastings and Thanet were cited as examples of urban deprivation in an otherwise wealthy NUTS2 region (South East England), but both are also relatively poorer than their NUTS3 regions (East Sussex CC and Kent CC, respectively) (p 21). METREX also highlighted issues arising from the relationship between a city and its hinterland; they suggested that up to 80% of the larger City regions[51] "are weak or have unrealised potential" (p 3). We were relieved to hear from Mr Meadows that it is no longer possible to manipulate regional boundaries to make areas eligible for funds (QQ 235-236).

80. Similarly, witnesses also outlined problems with the current measures used to calculate the wealth of a region: Dr Bradley and Professor Untiedt noted that the "main problem introduced by using the NUTS2 classification is that areas where people have their home and work outside the region (or abroad) are favoured" (p 126).

81. Some redesignation is needed in the definition of regions to ensure, as far as possible, that regions at each level of the NUTS hierarchy have broadly similar characteristics. When the quality of the statistics allows, we would support an improvement in the methodology used for calculating a region's prosperity in order better to reflect the impact of the funds. We do not support the creation of additional levels of bureaucracy, but we recognise the need for enhanced cooperation between urban areas and their rural peripheries to promote sustainable and balanced economic growth.

35 There is now considerable theoretical and empirical literature on this issue. Introductions to the various approaches may be found in Armstrong, H., and Taylor, J., Regional Economics and Policy, Blackwell, 2000; Barro, R.J., and Sala-i-Martin, X., Economic Growth, MIT (2^nd ed,) 2003; and Brakman, S., Garretsen, H and van Marrewijk, C., An Introduction to Geographical Economics, Trade Location and Growth, Cambridge University Press, 2001. Back

36 COM(2007) 273. European Commission, Growing Regions, Growing Europe. Fourth Report on Economic and Social Cohesion. May 2007 (p 5). Back

37 Ibid. (p 7). Back

38 Ibid. Back

39 COM(2007) 273. Back

40 At 2008 prices: SEC (2008) 514. Back

41 European Union Committee, Fiftieth Report (2005-06) Financial Management and Fraud in the European Union: Perceptions, Facts and Proposals (HL 270). Back

42 Under our scrutiny remit, the Committee has examined: the Court of Auditors' Report on the 2006 Budget (OJ C 273, 15 November 2007, p 1), and Member States' responses (7210/08); the Commission's action plan to strengthen its supervision of the distribution of funds (7323/08); and the Commission's response to the Court of Auditors' Report on the management of major projects financed by the Funds (7487/08). Back

43 European Union Committee, Twelfth Report (2006-07) Funding the European Union (HL 64). Back

44 European Union Committee, 7th Report (2007-08) (HL 54). Back

45 The CAP is split into two pillars. Pillar I encompasses Direct Payments and Market Support and Pillar II is Rural Development. Back

46 84 Convergence Regions and 16 Phasing Out Regions. Back