Examination of Witnesses (Questions 180-199)
Mr Pat McFadden, Mr Andrew Steele and Mr Neil Bond
26 FEBRUARY 2008
Q180 Lord Kerr of Kinlochard: When
John Hutton wrote to the Commission about the present review of
Cohesion Policy, he stressed the need to respect the principle
that the EU should only act where there was clear additional benefit
from a collective effort—or EU added value—that EU
action should also be proportionate and flexible and that sound
financial management should be applied. I am sure this Committee
agrees with that. The first principle, which he put at the top
of the list, was the requirement for EU added value, which is
another way of saying that it is necessary to satisfy the subsidiarity
test. The Lisbon Treaty spells out the subsidiarity test clearly:
the Union shall act only if and in so far as the objectives of
the proposed action cannot be sufficiently achieved by the Member
States, either at central level or at regional or local level,
but can rather by reason of the scale or effect of the proposed
action be better achieved at Union level. Was Mr Hutton saying,
and do you say, that the present Structural Funds respect that
principle, or was Mr Hutton calling for a reform of the Structural
Funds better to reflect that principle? Is there an added value
test? Is it sufficiently applied? If not, could not the same Cohesion
objectives be achieved by Member State management of the distribution
of the money?
Mr McFadden: That is a very good question. What
the Government means by the statement that you read out, which
is also repeated in the Global Europe pamphlet, is probably more
towards the latter of the two positions that you offered, that
this issue of EU added value probably becomes more true in the
poorer Member States, where there is the most catching up to do,
and probably less true in the richer Member States, which is why
we have argued that a greater proportion of these Funds should
be allocated to the poorer Member States. It is easier to see
the EU added value in those circumstances and that is the trend
that we supported with the current round of expenditure from 2007-2013.
I would expect that is also the trend that we would support in
future consideration of the Funds.
Lord Kerr of Kinlochard: That is a very
interesting answer. But I will defer to Lord Haskins on the natural
follow-up to what you have just said.
Q181 Lord Haskins: I understand that
two or three years ago the merit of rich countries putting money
into the budget in order to take the same amount of money back
was questioned. The Commission's response was that this was an
excellent PR exercise for the Commission -that people in rich
countries would feel that the EU was doing something good for
them. Not a tremendously convincing argument to me. On the other
hand, I am a board member of Yorkshire Forward Regional Development
Agency, and there are people there who would say that if this
money was not being redirected by the European Union, maybe Her
Majesty's Treasury would be less generous about these Funds than
the European Union is. Would you like to comment on either of
those points?
Mr McFadden: There would be people in Yorkshire
who say that and, indeed, in other parts of the country. How these
Funds are viewed is perhaps affected by where in the country you
live. For example, if I lived in West Wales and the Valleys, or
in Cornwall, where there is proportionately a lot of help from
these Funds, I would probably see them as very valuable and important.
But I think there is a question of scale in this; in the current
round of expenditure, the UK will receive something like 9.5 billion
euros over seven years. That is worth having; it is nice to have
but compared to public expenditure as a whole, compared even to
the Yorkshire Forward's budget over seven years, it is not a vast
amount. That does not mean it is not worth having or that I do
not value the projects on which this money is spent—I am
sure we will go on to talk about some of those—but for a
country like the UK, I think it is worth keeping a sense of proportion
about the added impact of these Funds over a seven-year period.
I agree with you that if you are a beneficiary in the Yorkshire
area, you would say that this is a good thing, but I would not
want to overstate the impact of this expenditure compared to the
annual expenditure of Central Government, RDA expenditure or,
for example, the expenditure of the devolved administrations which
would be vastly greater.
Q182 Lord Haskins: It is difficult
for me to understand why Cornwall or South Yorkshire benefit from
the scale or the added value that the European Union gives, which
a British Government should not be able to supply itself.
Mr McFadden: In theory, it could; I am not saying
that would be impossible, but we were allocated the Funds for
this current round of expenditure; those programmes are being
implemented and they will add value. What I am saying is that
there is a question of scale here compared to say, what Poland
is getting from these Funds over this current round of expenditure,
where they are responsible for a fifth of the total; we are a
few per cent of the total. So there is an important question of
scale when you consider the added value. It goes back to Lord
Kerr's question about whether these funds match the principle
of subsidiarity and how we see that added value. I think scale
matters here and the impact and the difference that these Funds
can make compared to where you are starting from also has an impact
on that. There is not a uniform answer to that question of where
you see the added value throughout the European Union.
Q183 Lord Kerr of Kinlochard: I would
like to come back on that. You are quite close to suggesting that
the EU added value is in respect of expenditure in the poorer
Member States only. I do see the added value in that the standards
and rules which are laid down by the Funds will be helpful to
those stumping up the money in ensuring that the money is, for
the most part, properly spent on the right kind of things in the
poorer countries. You are not saying, Minister, that these rules
and standards, which perhaps cover translators, paperwork, hassle
and bureaucracy, if you look at it the other way round, are unnecessary
and inappropriate to this country. You are not saying that there
is no EU added value in having projects in West Wales.
Mr McFadden: No, I am not saying that there
is no EU added value, I am very careful not to say that. As I
said, if I lived in West Wales, I would see the benefit from these
Funds. In the debate on 6 February, when the new treaty was being
debated, several Welsh Members spoke and said that these Funds
have had a significant impact; my colleague Nia Griffith, the
Member for Llanelli, talked about the projects in her constituency.
So, I see the value. What I am saying is that there is a question
of scale on both counts, both the jobs and growth economic impacts,
which will obviously be greater in somewhere like Poland, which
is receiving about one-fifth of the total allocation for this
current round of expenditure. And on the question of institutional
capability, you mentioned both ends of this lens, is it good stewardship
or is it paperwork and bureaucracy. Good stewardship is important—this
is public money in one sense or another—it is important
that we have sound financial management, that is also one of the
things that we set out in Global Europe. Again, where you have—probably
less true over time—relatively new democracies there probably
is added EU value in terms of stewardship, of Funds, of project
management, of partnership working, which are going to have a
greater impact than, hopefully, in the richer Member States where
some of these systems have been developed and have been in place
for some time. So, I am not saying there is no added value in
the UK, but I am saying on a scale both on the economic side and
on the institutional side it is probably less than in the newer
and poorer Member States.
Q184 Chairman: May I press you on
this basic question of whether richer Member States should receive
any funding at all, in principle. In paragraph 16 of the written
evidence to the Committee, the Minister argues that "In line
with ... subsidiarity, Member States which have the institutions
and financial strength to fully develop and pursue their own devolved
and decentralised regional policies ... should be encouraged and
enabled to do so. Other Member States which have not yet reached
this position will continue, for some time, to benefit from assistance".
Is that not very close to saying that richer countries do not
need these kind of Funds—they have got the financial strength;
they have got the capability to get on with their own policies.
Is that not what the written evidence to us says?
Mr McFadden: It is certainly a question of scale
and I hope the Committee does not think that I am being repetitive
in coming back to the same point a few times, but it does apply
here. Let us be honest about how this would be viewed in the next
round of negotiations on these things at EU level, there will
be richer Member States that want to hang on to some of these
Funds for particular regions within their countries, and I understand
that. That is what happened the last time, in the run-up to the
current round of expenditure. What we are saying in that paragraph
is that there is less of a need in richer Member States—to
go back to the discussions we have just had with Lord Kerr and
Lord Haskins—for reasons of economic development having
developed at a greater pace over the years, and for the institutional
capability. Now, does that mean that richer Member States should
not get a penny? No, I am not saying that, but what I am saying
is that proportionately we want to see a situation where most
of these Funds, and a greater proportion of these Funds, is spent
on the Member States and the regions that really need it, and
those are the poorer Member States.
Chairman: That leads us on to Lord Moser.
Thirty-six per cent of the Funds currently do not go to the poorer
countries. That is not negligible; that is a very substantial
proportion.
Q185 Lord Moser: You said in your
evidence that you favour an increase in that figure—not
the 36 per cent, but the 64 per cent—to 67 per cent. That
seems a rather modest forecast. Looking at the other side of it,
is there a worry in the Government's mind, or your mind, that
the poorer countries cannot cope with more anyhow, that they cannot
absorb more than that? Is that one argument for not going either
the whole hog for the poorer countries, or rather more than a
3 per cent increase?
Mr McFadden: There are two points there and
I will bring Mr Steele in in a second. On the 64 per cent and
67 per cent, I should clarify that. The 67 per cent is where we
think we can get to within the current round of expenditure between
2007-2013; that does not refer to a long-term target after that
for the next round of expenditure, that is a prediction of where
we can get to.
Q186 Lord Moser: If I can interrupt
you. Why is that the limit, why is that all you can get to?
Mr McFadden: That relates to the second part
of your question. There is an absorption cap which is around the
proportion of GDP, it varies between 3 per cent and 4 per cent
of GDP in individual Member States. Part of that is about additionality
because, of course, these Funds have to be matched by expenditure
from within the Member State that receives them. It is also partly
based on experience about how Member States can absorb and use
these Funds. I am happy to bring Mr Steele in on this.
Mr Steele: To be clear about the 64 per cent
and the 67 per cent: the 64 per cent is an average over the period
2007-2013. It starts lower, at something like 57 per cent, but
finishes higher in 2013 at 67 per cent. The 64 per cent is an
average over that seven-year period. That is largely caused by
the phasing out in existing richer Member States of some of the
regions that were Objective 1 in the previous period that are
no longer Objective 1, but which are getting tapered funds at
the moment, but tapering down, so that by 2013 they will be at
the regional competitive and employment levels. That I hope explains
what the Minister said about a rising trend in favour of the poorer
Member States over the current period; but our ambition goes beyond
that for the future period.
Q187 Lord Moser: Beyond 67 per cent?
Mr Steele: Yes.
Q188 Lord Moser: How many countries
are we talking about when we talk about the poorer, as opposed
to the richer countries?
Mr McFadden: We tend to focus on the newer Member
States who have joined in the last few years, although there may
be regions within other Member States. If you wanted to refer
to "old Europe"—to use Donald Rumsfeld's phrase—Greece
and Portugal were the two States that tended to be regarded as
poorer Member States. Many of the newer Member States have significantly
below average GDP per head, and the European Union uses the definition
itself of Member States where GDP per head is less than 90 per
cent of the EU average, and most of the new Member States, if
not all of them, come into that bracket.
Q189 Lord Haskins: Concerning the
absorption point, having spent my life in the private sector and
spent the last five years in the public sector, this obsession
with absorbing public money at the end of the financial year has
always intrigued me—the "hockey stick" effect—it
is not only a problem for Bulgaria, it is a problem for Yorkshire
also. Is this a serious issue that places like Bulgaria simply
are not in the position to spend the money that is available for
them because they do not have the structures and disciplines and
they cannot pass the tests that are needed? Is that a real problem
and how are we going to get around that?
Mr McFadden: That is one issue. But there is
also the issue of them perhaps having to borrow to meet the matched
funding. We do not want to have a perverse effect, where the Funds
that are meant to help poorer countries, end up getting them into
huge debt because of borrowing in order to make up the matched
funding. My colleagues will correct me if I am wrong but one of
the reasons the absorption caps have been set is also with an
eye on the level of financial commitment that is needed from the
receiving Member States, as well as the institutional capability.
Q190 Chairman: Does that lead to
the thought that co-financing should be changed, or moderated,
if one of the problems is that a poor country might have to borrow
to co-finance, to relax the co-financing? If there really is poverty
and there are difficulties, why is not the funding on a more generous
basis?
Mr McFadden: By co-financing, you mean the requirement
to match Funds?
Q191 Chairman: Yes.
Mr McFadden: We have taken the view that this
is probably the right principle that the receiving Member State
should have a stake in this too. We have not always thought that
you could just have a basic grant system, where there is no requirement
required on behalf of the receiving Member State.
Q192 Lord Steinberg: Concerning the
comment that you made about Bulgaria, which you said was one of
the weaker countries, on which we all agree. You are saying that
they have not got the structure or the ability to spend the money
that was being allocated to them. Is it not slightly immoral that
we offer them a carrot which they are unable to take? Should we
not be working rather to try and improve their structure, rather
than purely offering them money which we know they cannot take.
Mr McFadden: I do not think it is as stark as
that. If you look at the table of the beneficiaries for example,
of the expenditure in 2007-2013, there is -as we were talking
about percentages a few moments ago—most of this is going
to the poorer Member States. I agree with you that part of the
ethos of being in the European Union is that we should try to
work to improve the performance, improve the quality of life and
improve the economic development of those countries that have
joined which, for one reason or another, are not in the same position
as the majority of countries in the EU. These Funds are supposed
to be an important weapon in that. So I agree with the general
premise and, as we said in the paper which we sent to you, we
also want to see a greater proportion of these Funds going to
the poorer Member States. We have also said that this should be
done in a way that means sound financial management and is properly
run and managed. When you are dealing with the stewardship of
public funds, that is always a principle that should be borne
in mind. I agree with the general premise of what you are saying,
but I am not sure it is as stark as us offering money and saying
that there are so many strings on this that it is not really a
benefit to you. It is a matter of getting the right management
and stewardship in place.
Q193 Lord Maclennan of Rogart: I
am a little puzzled, Minister, why the Union should take the view
that the totality of the Funds should go in a higher proportion
to the Member States that are catching up, but that the conditions
and terms on which the money is made available should not be variable
across the Member States regardless of their needs. Prudent financial
management does not mean that the contribution should be necessarily
required to be the same.
Mr McFadden: They are variable to some extent.
There has always been a requirement of these Funds that there
is also a commitment shown on behalf of the receiving Member State.
It does not operate quite as uniformly throughout the European
Union but perhaps Mr Steele can say a bit more about that.
Mr Steele: There are different co-financing
rates in the regulations depending on where you are in the league
table of relative wealth, so the poorer Member States have a lower
co-financing rate, broadly speaking, than the richer ones do so
they have to provide less matched funding in absolute terms.
Q194 Lord Maclennan of Rogart: Could
you give us any indication as to what the significances are and
where these differences operate?
Mr Steele: I will send you a note on that, if
I may. Broadly speaking, from memory, the co-financing rate is
about 25 per cent.
Q195 Chairman: It would be very helpful
if you could do a note on this.
Mr Steele: Yes, certainly.
Lord Kerr of Kinlochard: I would like
to bring in a note of mild dissent if—not you, Minister—but
if we were arguing about a co-financing rate of zero. The free
good is not valued and is very dangerous. I have never believed
in the absorbtive capacity arguments; Spain disproves them totally.
We debated at great length in the 1980s how much Structural Funds
money Spain could absorb. In the end, Spain acquired much more
than we, in London, thought was absorbable in Spain. The huge
take-off of the Spanish economy in the 1990s had very little to
do with the Structural Funds; the country was absorbing an enormous
amount of investment and shooting up the per capita GNP league
tables, with the kick-start of the Structural Funds helping a
bit; of course, the co-financing rate was quite high.
Q196 Lord Trimble: I turn to the
question of the eligibility tests for the Structural Funds. What
view do you take of the eligibility tests; do you think they are
fair, reasonable, or what?
Mr McFadden: This goes back to my first answer.
The eligibility tests are essentially economic and we think that
is right and that should continue.
Q197 Lord Trimble: This is the percentage
of GDP that is still at 75 per cent for Objective 1?
Mr McFadden: Yes, there is also a definition
of a poor Member State, which is that the whole Member State is
beneath 90 per cent. There is a regional impact of being 75 per
cent or less.
Q198 Lord Trimble: I am curious about
the interrelationship between this uniform criterion, which you
define throughout and the way in which you are dividing them between
the EU 13 and the rest; one-third going to the EU 13 and two-thirds
to the others. How does that work out? Does it not result in a
situation that within the EU 13—the originals, minus Greece
and Portugal—that there is expenditure that would not be
justified on the criteria that apply to the poorer States?
Mr McFadden: They certainly would not say that.
There are two or three things in play here; there are regions,
which will have, for example, in West Wales and the Valleys in
the UK, where you have a GDP per head of less than 75 per cent
of the average. That would be true in whole Member States in the
eastern side of the European Union. There are also those whole
Member States which have less than 90 per cent of GDP—that
applies to the Cohesion Fund, not to the other two—and all
these factors come into play.
Q199 Lord Trimble: What do you think
should happen after 2013?
Mr McFadden: As you know, the Commission have
launched a consultation on the EU budget. This will be part of
that. We, as a Government, will make a submission on our views
on that later this year. These Funds will still be part of the
future but—I am not trying to duck the question—until
we have a broader discussion of the EU budget for that period,
it is difficult to predict with any accuracy how much they will
be, or what proportion of the budget. It has been a longstanding
position of the UK Government that less of the European Union
budget should be spent on agriculture and more on other things;
that will continue to be part of the position. Again, if you look
at the Global Europe pamphlet, beyond the Structural Funds we
set out a number of issues around competitiveness and other areas
which we thought were priorities for the European Union in the
future. All these things will be reflected in our submission to
that consultation on the EU budget. Structural Funds will be a
part of that and I would not want to start predicting numbers.
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