Select Committee on European Union Minutes of Evidence

Examination of Witnesses (Questions 80-99)

Mr Neil O'Brian and Mr Mats Persson

15 JANUARY 2008

  Q80  Chairman: Can we perhaps ask you to write about that as to where it came from?

  Mr Persson: I can forward you the name and the title and the status of the person that reported that number. That is no problem at all.

  Q81  Lord Steinberg: As you are dispensing this, can you tell us how much of the allocation has been spent?

  Mr Persson: In Northern Ireland and Scotland?

  Q82  Lord Steinberg: Yes?

  Mr Persson: I am not sure. I know the overall number for the UK for 2000-2006 period is something like 83 per cent.

Chairman: We would be very grateful for a bit of writing on that too. I would now like to move on and ask Lord Haskins.

  Q83  Lord Haskins: You give, as always happens in these cases, a number of examples of some exotic investments, up Vesuvius and such like, implying that this is the responsibility of the Commission in the EU for this waste of money. If there is waste of money there, and obviously there is to an extent, is that not more a reflection of national Member States and their attitude towards it? If you pursued the mood of subsidiarity, then you must, by the nature of things, give people at local level discretion over how that money is spent and to what might look to be—and obviously from a point of view in Vesuvius—quite meaningful to the people who live around Vesuvius. It is a problem for Member States rather than for the Commission.

  Mr O'Brian: I expect Mats probably wants to answer that.

  Mr Persson: First of all, the one does not necessarily have to exclude the other; that the projects are poorly targeted or that there is poor project selection can mean a number of things. As we have pointed out in the report, there are some fundamental flaws in the system that facilitate poor project selection. One would be that the funds are allocated at a level that is very far away from the recipients who are actually affected by the funds. A second point is the N+2 rule, which means that there is enormous pressure on spending fast rather than spending wisely; you have to get the money out of the door. That could negatively impact the kind of projects that are being funded. Thirdly, we argue that there are complex EU regulations involved here that are specific to the EU level, which could deter particularly smaller projects; those projects that are in most need of the funds, that are struggling, that do not have the resources to absorb the cost involved in applying, these are the projects that could be neglected in the process. There are also regulations that limit the capacity of national, regional and local actors to apply for the funds. There are a number of issues here not specific to the EU level that, we argue, lead, in the extension, to poor project selection.

  Mr O'Brian: One way of expressing that is to say that it manages to combine the worst effects of the top-down and bottom-up system because effectively you have large sums of money that have been allocated to a region burning a hole in the pocket of the people in charge of getting the money out of the door, so there is pressure to spend, which is a problem with top-down systems, and yet at the same time it is not a command and control system, so you need to find local people who will bid for the money. You have the kinds of problems you sometimes have with bottom-up systems.

  Q84  Lord Haskins: That happens in national government here too.

  Mr O'Brian: Absolutely, I agree with you that it is quite possible for national governments and local governments to make mistakes too. The question I pose is: is it more likely to make mistakes with the system we have at the moment which does clearly create pressure to spend the money? I think it is more likely that you will make mistakes and select bad projects, given that you have these problems with N+2 and so on.

  Mr Persson: This is not particularly an odd point to say that there is pressure to spend money fast. That has been pointed out in several different Member States. The Court of Auditors made that point very strongly, that this is a major flaw in the structure.

  Q85  Lord Haskins: They may deplore all public expenditure right across the Commission; that happens in every Member State as far as I know?

  Mr O'Brian: I think there is a particular problem here that you recognise.

  Q86  Chairman: Can I ask you to comment on this? There is a recent report to the DTI from ODPM which found that over 80 per cent of the sample of stakeholders found structural fund programmes offered additional benefits compared to domestic ones, which rather goes against your point. Over half also thought they brought additional costs, which also follows your point, but that on balance the positive views seem to outweigh negative ones. They thought the structural funds did different things depending on your own national region.

  Mr O'Brian: I think I would want to have a look at that report. What you are saying about there being additional costs and additional benefits sounded rather confusing. We do cite some polling data of recipients in our report as well, which found that by a margin of I think something like 60 per cent to 5 per cent people found the structural funds more difficult to deal with and more burdensome administratively than national policies. I think that kind of fair question is probably more reflective of the opinions of the recipients.

  Q87  Chairman: Could we turn smartly to the future? To what extent do you consider the simplification in the 2007-2013 programme of the administrative processes together with the principle of proportionality would make some difference to the problems you identify?

  Mr Persson: It would be interesting to know exactly what reforms you had in mind there. You mention the proportionality principle. What other reforms?

  Mr O'Brian: There was a slew of different things that the UK and other Member States were trying to achieve in 2003. There were many different attempts to change the system slightly. I do not know if there is anything that you want us to focus on particularly.

  Q88  Chairman: It is the self-certification on small projects and the minor but no doubt useful administrative reforms that we are after.

  Mr Persson: On self-certification of projects, it is quite puzzling to try to find out exactly what type of reforms and what kind of practical difference they will make. If you talk to the people involved in the process, particularly the civil servants, they are not quite confident in talking about exactly what kind of practical difference this will make on the ground. In terms of simplification of the whole programme, I understand that the number of programme steps have been reduced. What that simply means is that, according to our understanding, the Government Office used to have to produce this report called a programme complement, and that has now been taken away. That document was intended, ahead of the last financial period, as a simplification, because in the mind of the Commission this would give the Government Offices, the regional actors, more ownership of the process. Obviously, as is the case with most of these types of EU reforms, it only led to more paperwork and additional administrative burdens. So they took that away. That is failed simplification. If you want to call it simplification, that is fair enough but it is not really going to do anything because it was just a failed reform to start with.

  Mr O'Brian: I might also put it into the context that we do present rather a long table in our report of all the different steps involved in administering the SCF and it is a fiendishly complicated process. Whether the overall level of complexity has been significantly impacted by the reforms between the last period and this one, I do not really know. There were certainly some clear and good ideas. I think the UK Government did attempt to get a relaxation for small projects of the rules about holding accounting records for 12 years but I do not think they succeeded in getting that agreed or certainly if it was agreed, it was then reversed. There are things we can do to make the system slightly better but I am not sure whether this tinkering with reforms is really fundamentally going to change the problems with the administrative complexity and costs that we are identifying.

  Mr Persson: In terms of the proportionality principle, I am not sure it applies. I think what you have in mind here is Article 74 of the Structural Funds Regulations.

  Q89  Chairman: The administrative costs should be brought into line with the value of the project?

  Mr Persson: Yes. Does that apply to the ESF for example? Does it apply to ERDF in England or the UK? I am not sure. I have been in touch with DWP, CLG and BERR and no-one has said that is going to have any effect in the UK in terms of programmes being able to opt out. This is not about projects; this is about the programmes. Our suggestion is that the opt-outs should be project-based and that there should be more focus on projects; they should be able to opt out if they are small enough. But the reforms have to do with programmes. They do not make any difference and they do not apply to the ESF. To my knowledge, they do not apply to the European Regional Development Fund either. Again, no-one knows, so we are not sure, but I am not confident that this will make any difference.

Chairman: I do not think we can take that any further. We are running out of time. I will ask Lord Watson to ask his question.

  Q90  Lord Watson of Richmond: My question follows from Lord Haskins's question quite closely. You have highlighted the concerns of the European Court of Auditors over the substantial errors in reimbursement of structural fund projects, but as the day-to-day controls over these are actually the responsibility of the Member States and not of the Commission, could this failing really point far more directly into the procedures of the Member States than those of the Commission? Does it follow therefore, if that is the case, that repatriation of regional policy will not necessarily reduce the problem at all because the problems are at the Member State level rather than at the EU level? I think that is a relevant question.

  Mr O'Brian: I thought the operative word in what you said, and basically I agree with what you are saying, is "necessarily". It is certainly true that if you were to continue to run the funds in exactly the same way by having to renationalise them, you would have many of the same problems. One of the interesting things is that if you are going to return overall regional policy to the UK or Member State level, you have the opportunity to do things in a fundamentally different way. For example, if you have, say, a targeted tax cut for a particularly deprived region, you do not have any of these problems with spending money; you do not have levels of administrative complexity. You sweep away all the problems.

  Q91  Lord Watson of Richmond: I think, Mr O'Brian, what has become clear during your evidence is that really the main thrust of your attack is against regional policy per se.

  Mr O'Brian: I would not agree with you on that.

  Q92  Lord Watson of Richmond: Let me finish. Really the only regional policy in which you would be interested is regional policy which uses as its main mechanism tax relief and has as its main target relatively isolated bits of poverty. That is a totally legitimate position.

  Mr O'Brian: Again, I think you are putting words in my mouth.

  Q93  Lord Watson of Richmond: It seems a bit odd in terms of the criticism of what exists now.

  Mr O'Brian: I do not agree with the way you are characterising my position. I think politically we will inevitably continue to spend money anyway with some kind of spending programmes, even if we did renationalise it. I think there may well even be a case for doing that. You will continue to spend money on project-based regeneration. I am not completely against that. I am saying that perhaps the balance between these things should change. I do not believe in no regional spending. Let us be fairly clear about that. I think the attraction of returning control of these things to Member States is that it allows you to explore these other options and, even if we do continue to have essentially project-based regional spending, I believe we could run it in a better way if we got rid of some of the problems that we have inherent in the SCF system.

  Q94  Lord Watson of Richmond: Do you accept, because it is quite important to your argument, that repatriation is not in itself going to solve the major problems that you are concerned with?

  Mr O'Brian: It gives you the opportunity to solve those problems. It does not necessarily solve them.

  Q95  Lord Moser: So much of what we have been talking about ultimately depends on how you measure regional prosperity. I was rather struck and slightly surprised by how severely critical you are of the current measures which, as I understand it, is basically GDP per head. Your criticism seemed to be that GDP depends largely on GVA plus taxes and subsidies, et cetera. Supposing those are the poor measures. The measures that ONS, which I used to run, recommend as substitutes do not seem all that fundamentally different to me. You end up almost saying that the data are so poor that there is really no way of doing this thing properly on the ground, which is rather negative.

  Mr Persson: Yes, it is rather negative but when you have a situation with a region, Lüneburg, outside Hamburg getting €900 million, although it is one of the wealthiest regions in Germany, then something is fundamentally flawed. If you mess a little bit with the measures and the last two regions end up in very different positions in terms of prosperity, then something is wrong and something needs to happen. It seems to us, without necessarily having the expertise in the area of statistics at that detailed level, that it would be more appropriate to have something that would measure, for example, the prosperity of the residents, so that wealth statistics would count towards the people who actually live there, rather than the workplace. That is a fundamental point. You do not have to be particularly involved in order to figure out that there is something flawed with these measures.

  Mr O'Brian: I do not think it is one of the most negative things in the report really. Broadly speaking, looking at the academic literature, I think there is a fairly broad consensus that the measure could be improved on in a relatively simple way that would give you better targeting. Even if we did very little else in the way of reform, that is one area that we could pick off as relatively straightforward.

  Q96  Lord Moser: I am all in favour of trying to improve the basis, but the way it reads, it almost ends up as if the thing is so unmeasurable, and you cannot end up like that unless you say "drop regional policy". What at the moment is your best recommendation for how to judge on the ground what should be used?

  Mr O'Brian: I thought that the ONS proposal seems like the reasonable one. I think they make a good case.

  Q97  Lord Moser: That still depends on GVA.

  Mr O'Brian: But also you are bringing together a number of different measures rather than simply having one club, if you see what I mean.

  Mr Persson: You have regional GVA per full-time employee, for example. That makes a difference. You can also bring in regional gross household disposable income, which is appropriate because, as you say and as has been pointed out, obviously one of the main things about the structural funds is that they are supposed to add value to public policies, and to us disposable income seems most appropriate for measuring if they in fact do. There is a main concern with measures because they have to be internationally comparatively and also internationally meaningful. As I understand it, household disposable income on the regional level is only available in nine Member States. So it would be very hard to change this while the structural funds are at the EU level. In extension, this would obviously be an argument for repatriation of the structural funds. I do not know if you have noticed, that is our main point.

  Q98  Chairman: We need to stop, having exhausted both witnesses and ourselves. If I have managed not to let one of my colleagues ask a burning question, please do feel free. If we have not let you say anything which you are absolutely burning to say, please say it.

  Mr Persson: I just want to make a general point, and we have pointed to this many times. And it is about the availability of data in terms of the structural funds, which is not the way it is supposed to be. I come from a culture of political transparency and this lack of availability is something that needs to be addressed immediately. In terms of value for taxpayers' money and in terms of transparency, this is not acceptable. You have to be able to know where the funds are going. That is a fundamental criticism. You cannot spend half the year trying to figure out basic issues such as how much money goes to this particular area. One region in the UK holds detailed data on where the money is going in terms of postcodes. That is the South East Region and they have been the most accommodating. Even the central government is very unwilling to provide the information. This is something that I would challenge you to really pick up on and do something about.

  Q99  Lord Kerr of Kinlochard: I think that is a very interesting admission of defeat. There are a number of statements in the evidence and in the press releases about the evidence which are, I think we have established, guesstimates; they are speculative. The list of horror stories is sourced to newspapers. I think one needs to be told facts rather than reports like I very much fear one will read perhaps in The Mail on Sunday, that £670 million must be the UK cost of running the structural funds because it is in "evidence" given to a House of Lords committee. I think this is very dangerous.

  Mr O'Brian: Would you like a final statement from me? It will be very brief. I do not think for a second this is an admission of defeat. It is a challenge to you to go and find better data on all these different issues. I think the case we are making is a strong one, which is also the case which the UK Government makes and accepts. These issues will return, I am sure, when the next financial framework is negotiated. I think a good report from this Committee finding more data and challenging these points would be very welcome.

Chairman: Thank you very much.

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