Finance and Constitution Committee

Meeting date: Wednesday, June 26, 2019

Official Report 596KB pdf

---

Structural Fund Priorities (Post-Brexit Funding)

Good morning and welcome to the 16th meeting in 2019 of the Finance and Constitution Committee. For this meeting, George Adam is substituting for Angela Constance.

Agenda item 1 is our final evidence session in our inquiry into European Union structural funds in Scotland. I welcome to the meeting Ivan McKee, who is the Minister for Trade, Investment and Innovation. From the Scottish Government I welcome Hilary Pearce, who is the deputy director of the European structural funds and state aid division, and Susan Tamburrini, who is team leader of smart growth in the European structural funds division.

I invite the minister to make a short opening statement, if he wishes to do so.

I thank the committee for inviting me to contribute to its inquiry into the funding of EU structural fund priorities in Scotland post-Brexit. I know that the committee is keenly aware of how important European structural funds are to Scotland’s economy and society, particularly in rural areas and smaller communities where attracting private investment can be difficult. It is difficult to think of a sector or region in Scotland that has not benefited from structural funds since we joined the EU in 1973, which is why it is deeply regrettable that Scotland is set to lose out on that much-needed funding as a result of the United Kingdom’s exit from the EU.

Regarding the current programme, the EU’s aim of smart, sustainable and inclusive growth towards the Europe 2020 targets and the Scottish Government’s ambition of sustainable, inclusive growth, as set out in the national performance framework, are neatly aligned. We are using the European social fund to develop the skills of our workforce, to alleviate poverty and to increase social inclusion. The European regional development fund is supporting small and medium-sized enterprises and is developing energy-efficient renewables technologies to help Scotland’s transition to a low-carbon economy.

Looking to the future, this committee is aware that the UK Government promised to publish its consultation on the shared prosperity fund by the end of last year, but we are still waiting for it. In our dialogue with the UK Government on the shared prosperity fund, we have consistently reiterated five key principles: first, that Scotland should not lose out financially compared with the current level of funding that it receives from the EU; secondly, that the devolution settlement must be respected and the UK Government must make no attempt to take back powers that the Scottish Government has rightfully executed to date; thirdly, that the Scottish Government must be an equal partner in development of the shared prosperity fund; fourthly, that the current level of flexibility in allocation of funds should not be reduced; and fifthly, that the replacement scheme should be operational in time to be implemented in early 2021, so that our stakeholders do not suffer difficulties as a result of funding gaps.

Members will be aware that we are running out of time to provide certainty about future funding to our stakeholders. It is difficult to plan when the UK Government is providing no information, especially on simple questions such as what the value of the shared prosperity fund will be. We cannot wait for the UK Government any longer, which is why I have agreed with the Cabinet Secretary for Finance, Economy and Fair Work on a proposal to hold our own consultation exercise on future funding.

I intend to establish a steering group that will be made up of a range of stakeholders, including lead partners, delivery organisations and end users and beneficiaries of European structural funds. The steering group will ask key questions on future funding for Scotland and will identify possible priorities, administration practices, methods of allocation and funding periods. The group will also collate existing research, including the evidence that the committee has obtained, to inform the structure of the future programme. That work will generate interest not just across our huge range of stakeholders but across ministerial portfolios. I will be happy to provide an update to the committee, as that exercise progresses.

I am happy to answer questions.

Thank you, minister. Thank you for telling us about the steering group. You are right—some of the evidence that we have taken from around the country will be very useful to the steering group. We have had some extremely useful contributions from many organisations.

In Scotland, the structural funds are currently worth €872 million across the seven-year EU budget period. The Scottish Government is the sole managing authority and the largest delivery agent. How does it see its role in relation to managing funding post-Brexit? How is the Scottish Government preparing for the transition from EU structural funds to new funding arrangements?

We foresee the Scottish Government continuing in its role as the managing authority. That is the most effective and sensible way to continue. It will allow us to co-ordinate with the strategic priorities of the Scottish Government and to identify priorities for the deployment of funds.

On the question of transition, if we take a step back and look at the wider context of Brexit, we are not even sure that we are leaving the EU, never mind under what terms we might leave. We are not sure whether there is to be an implementation period. Even at that macro level, there is huge uncertainty.

We are having to watch all the bases. We continue to engage with the European Commission to ensure that, in the eventuality that we stay in the European Union and continue with these programmes, we are up to speed. We are pushing the UK Government hard to understand more information about the shared prosperity fund. It is unfortunate that little has been forthcoming. It is difficult to look at the transition in any great detail. As I said, the time has come when we can wait no longer. The purpose of the consultation will be to understand what the future programmes should look like in Scotland, from our perspective and the perspective of users and beneficiaries in Scotland, and what that transition might look like.

Emma Harper will ask about the allocation of funding.

I am interested in how funding will be allocated. There might be a UK pot, then some money will come to the Scottish Government and then it will be further devolved to, for instance, local authorities. How will it be allocated? Will the allocation be based on needs or on population, or will it be done on a rural versus urban basis?

The consultation will look at those issues. That is a core part of what it will do. When it comes to the overall picture, our red lines are that Scotland should not receive any less money than it receives under the current programmes or than it would otherwise have received, for example, under any future EU programmes. We are very clear on that. The mechanism for the distribution of that money in Scotland at the moment is through the lead partner structure down to individual projects. Applications come forward from projects through lead partners to enable us to disburse that money. The consultation exercise will look at the mechanics of how we do that. As you say, it will also look at the most effective way to do that to deliver benefits across Scotland. At the moment, as a transition area, the Highlands and Islands is a separate area and, in the EU process, it operates under slightly different rules on matched-funding percentages. All that will be considered as part of the consultation.

Is there a risk to funding if the UK Government retains that money? We have already seen how £160 million of convergence uplift money that was due to Scottish farmers was not delivered. Is there a risk to funding in the future if the UK Government controls everything?

Yes, of course. There is always a risk of that. The other point to bear in mind is that the size and scale of the shared prosperity fund will be considered as part of the comprehensive spending review at UK Government level later this year. That is one of the reasons for the delay. It also talks to that fund being wrapped up in other spending issues that will be considered at UK Government level. The context is not as clear as we would like. As you say, there is always a risk, but our position is clear. Reflecting on the evidence that you have heard over the previous two sessions, I note that the vast majority of the witnesses have been clear that these decisions should be made in Scotland, that the money should come to Scotland and that that is where we should decide what the priorities are.

Other members might want to come back to the allocation of funding later but, given that the minister mentioned the relationship with the UK Government a number of times, it is probably better for us to get into that area now.

You said that there is still very little information coming to you about the shared prosperity fund. I was going to ask whether the situation had moved on and whether the Scottish Government had been given any more insight, but the answer to that seems to be no.

That is correct, unless it has happened in the past 10 minutes.

You also said that there will be a consultation and that an expert group or working group—I cannot remember exactly—will be set up.

It is a steering group.

What is the relationship between the two? Will the steering group receive the outcome of the consultation and decide what to do?

There are two consultations. There is the UK Government consultation that was promised at the end of last year but which has not happened yet—we are still waiting for it. The process for the Scottish Government’s consultation is that, in the next few weeks, we will set up the steering group which, as I said, will have input from all groups that are engaged in the process so that we get a breadth of expertise. We have initial ideas on the areas that it may want to consider, which are the fairly obvious ones that we have talked about, such as regionality, the needs-based approach, the length of the funding period and the balance between flexibility and control of public funds.

The steering group will consider those questions and formulate a consultation exercise, which will then be put to public consultation in the autumn. The feedback will come back to the steering group, which will have a look at it and then the Scottish Government will engage to see how we want to take that forward in our position on what the shared prosperity fund should look like in Scotland. We hope to have that wrapped up in the early part of next year to give us time to move forward to the future funding arrangements.

So the timeline is that the steering group will be set up, it will develop the consultation, the consultation exercise will be carried out and then ministers will decide. Will ministers then make proposals to Parliament or will they simply announce their preferred way forward?

I expect that that will be done through a statement or an announcement of some kind. I am happy to come back to the committee to talk through that when we have clarity on where we are going. As I said, I am happy to keep the committee up to date on how we progress through the process.

I get the feeling from the people we have spoken to in Scotland that it will not be hugely difficult or controversial to arrive at a sense of how we want the fund to operate. The difficulty will be trying to achieve that outcome with the UK Government. Has the Scottish Government spoken to the UK Government about its intention to consult and has it sought any engagement on that?

We continue to talk to the UK Government. My ministerial colleague Ben Macpherson spoke about the issue on 13 June at the joint ministerial committee and pressed the UK Government for a solution back in March, the cabinet secretary Derek Mackay pressed for details in a letter to Philip Hammond—et cetera, et cetera. There has been a series of interactions at ministerial level and many more at official level in which we have sought clarification from the UK Government on what the process will look like. To an extent, it is important that we do that work on our own in Scotland so that we understand the balance that we want to strike between flexibility and strategic intent and so on. However, you are absolutely right that the engagement process with the UK Government has not proved to be as fast moving as we would like, and that could be challenging.

We all realise that it will be difficult to get policy changes immediately from the UK Government given the current situation, but you said that the consultation is to be in the autumn and it is reasonable to expect that, by that point, we will be able to get an indication of the policy intention of the incoming Administration and newly formed Cabinet. When does Scotland need to have that clarity?

We needed it months ago, because the clock is ticking. There is a UK Government briefing paper that indicates that it wants the fund to be based on the UK industrial strategy, with a focus on productivity as a mechanism for rebalancing and for assisting areas that need to benefit from inclusive growth. That is the broad outline statement, but the real challenge is on the funding magnitude. As I said, we understand that that is now tied up with a comprehensive spending review. There is also an issue with the mechanics. You have heard from witnesses about the structures that we adopt at the moment compared with the structures that we adopted in previous programmes relating to issues such as the audit regime and the level of paperwork required.

There is a series of issues that are built on the EU regulations. Clearly, in relation to where the UK Government is going with the shared prosperity fund, an important issue is how much scope we will have to define it ourselves. Will it be constrained in the same way as it was constrained under the Commission, or will a different mechanism be used?

All that very much informs the mechanics and the focus of the structure that we are able to design in Scotland.

09:45  

Good morning, minister. If I understood what you said in response to Patrick Harvie, there will be a steering group over the course of the summer and a consultation in the autumn, and that will pave the way for the Scottish ministers to design, deliver and administer a Scottish prosperity fund that will be announced to Parliament by ministerial statement. Is that correct?

You have to remember that this is in the context of the shared prosperity fund. We are laying out the Government’s position on how the shared prosperity fund should operate. It is the UK Government’s fund—it is designing the fund and putting the money into it. Clearly, our red lines are that the funding should come to Scotland and we should be able to operate in relation to it. However, we have to work in the context that we are in. We had hoped that there would be a framework that we could work within, but there is nothing. In effect, we are starting with a blank sheet of paper and saying what we would do if we had free rein to design what we wanted.

I am curious about how the approach fits in with what the Scotland Acts say about devolved competence and reserved competence. You seem to be saying that the UK will design the fund and the Scottish ministers will deliver it on the ground in Scotland. Is that right?

No, what I am saying is that, as we exit the EU, the funding that previously went from the UK Government to the EU in order to fund the budget that funded the programmes and which, typically, flowed back to Scotland to allow us to run programmes here will now be with the UK Government, because it will no longer be sending it to Brussels. The UK Government has said that it will set up a shared prosperity fund, and that is pretty much all that we know about it. We need to understand the framework within which that will operate but, clearly, our red lines are that there should be no detriment in terms of the funding that comes to Scotland and that decisions about that funding should be made in Scotland, because of the impact that the way in which that funding has been operating up to now has had on devolved areas.

Do you foresee that primary legislation will be required in this Parliament? At the moment, the authority under which the money is disbursed in Scotland is authority that comes from EU law. You have just put your hand on a thick pile of papers and said “EU regulations”—I do not know what is in that file, but it may very well be a fragment of EU regulations. Once the United Kingdom leaves the European Union, there is no guarantee that those EU regulations will continue to have any legal effect. That depends on the terms of the withdrawal agreement, if there is one.

You can take this question literally: do you foresee that there is a possibility, probability or likelihood that there might be a requirement for legislation to give the Scottish ministers the legal authority to act in this area?

To be honest, it is not something that we have considered. Our expectation is that there will be a funding stream that flows to the Scottish Government, which will design a programme to use the money. However, I will look further into the issue to decide whether there might need to be legislation.

That would be helpful. We know that there are disagreements between the Scottish Government and the UK Government about where certain legal powers will fall after Brexit. For example, there does not appear to be any agreement about whether state aid regulations will be reserved or devolved.

In terms of the legal authority that underpins the interventions that the Government can make to support prosperity in the form of EU structural funds or a Scottish or UK shared prosperity fund, it would be helpful to have a clearer sense than I currently do of the legal framework, and how the Scottish Government foresees that legal framework rolling out.

We will certainly consider and reflect on that. It is clear that many funding streams operate without primary legislation being needed. We will reflect on the question.

I have a question about reporting requirements. Before we started to take evidence, there was probably a belief in the committee that a lot of the bureaucracy around reporting requirements originated in Brussels. However, we saw that the reality was slightly different as we got into the issue. A lot of the bureaucracy seems to be home grown and created by the Scottish Government.

South West Aberdeenshire Citizens Advice Bureau, which is in my constituency, came to see me last week. It is still awaiting clarification from the Government on what the new reporting requirements will be for moneys that it paid out in 2017. That seems to be very much a case of not just moving the goalposts but moving them after the game has finished and everyone has gone home. Are you aware of such issues? What have you learned from them in considering how you would construct a new system?

I do not accept that the Scottish Government invents bureaucracy for no good reason. It operates within the regime that we have from the European Union, which determines what we have to deliver. That regime and its execution are tightly audited at all levels, and we have to comply with it. Therefore, I do not accept the premise of the question that the Scottish Government is inventing unnecessary bureaucracy or is putting in place barriers that do not need to be there.

I know that there are specific issues relating to the citizens advice bureau that Alexander Burnett mentioned, and I know that there are issues to do with its funding relationship and challenges in its communication with Aberdeenshire Council but, as the council is the lead delivery partner for these programmes and projects, it is the council and not the Government that is having conversations with the CAB. It is important to understand that it is the lead delivery partner that moves the matter forward.

The general point about the bureaucracy is that it is about striking a balance between ensuring that we spend public money correctly—as everyone would want—and allowing as much flexibility as possible for organisations to deliver. All of that has to sit within the context of the European regulations. If there are specifics that the CAB wants us to look at, we can go into the regulations and the Scottish Government’s management system chapter and verse to understand exactly what the problem is.

That is the context that we are operating within. I do not know whether Hilary Pearce wants to add anything.

For context, it is important to be clear that the managing authority, which is my team in the Scottish Government, manages the funds through the lead partners. There are 45 lead partners throughout Scotland, including all 32 councils. They, in turn, deliver the projects through the delivery agents, such as citizens advice bureaux, which do very valuable work. It is for us in the managing authority to ensure that the lead partners comply with the monitoring, reporting, compliance and audit regime that all member states have to comply with for the European Commission. That is audited by the audit authority on behalf of the European Commission and also directly by the European Commission.

You have said that it is all being directed by the European Union. You might want to go back and consider some of the evidence that we have heard. When a lot of the delivery teams that we have spoken to have met delivery teams in other European countries, they have been surprised by the different levels of bureaucracy that have been imposed on them. There seemed to be an element of choice in what the Scottish Government was doing in comparison with the reporting requirements that Governments in other countries were imposing on delivery teams. You might want to look at that.

You must remember that, in different countries and for different programmes, different structures will have been designed to suit their requirements, so there will be differences in the ways in which things are done. That is the nature of the different types of projects and programmes that are being executed. However, if delivery teams have specific examples from other countries where things are done differently and they believe that there is something unnecessarily cumbersome in how the Scottish Government is managing things, we will be happy to look into it.

I have a supplementary question on the allocation of funding and the processes for that. I see that £22 million of funds was frozen recently, and there was a suggestion that that was due to issues with the audit process. Can you give us some background on that?

Yes—there is currently a pre-suspension in place on the ESF funds. I do not recognise the figure of £22 million; £9.6 million is the amount of money that has been claimed by the lead partners in the process but the Scottish Government is currently unable to claim that back from the EU.

There are a number of issues, which speaks to the complexity of the regime that we are working under. There are four main issues; one is to do with flat-rate costing and the other three are procurement issues. There is some confusion around the definition of public versus private; another issue is to do with the definition and interpretation of grant awards versus the public procurement process; and there is also an issue to do with match funding and the level at which that operates within the structure. There are a number of complex technical issues in there. The EU looked at it from an audit perspective and had some questions. As a consequence of that, the pre-suspension is in place, but we are confident that that will get cleared in the next few weeks and we will be able to move on.

Just to be clear, you are saying that the EU had issues with some of the processes that the Scottish Government was working through and that is why the money was suspended.

Yes. The lead partners are continuing to pay delivery agents. It is important to understand that non-payment of the delivery agents will not be a consequence of the pre-suspension.

You have given some general commentary, but it is a matter of concern that that money has been frozen. What specific action is the Scottish Government taking to address the issue and to ensure that the funds get released?

The solution to all of the four issues that were raised by the audit is a move to a unit cost system. That has been agreed in principle by the EU and we are working through the details of how that would operate in the Scottish context. The EU made a change recently that allowed us to move from a system whereby we had to list a specific national unit cost structure to an off-the-shelf unit cost system that is available across the whole of the EU. That change has allowed us to move much more easily towards that unit cost system, which will allow us to clear the blockages in relation to all four of the process issues that I have identified.

The conversations with the EU are moving forward and officials are engaged almost on a weekly basis. We are certainly expecting this to be cleared before November, but it should all be resolved prior to that. It will be resolved within that timeframe.

As I said, the important point to recognise is that it is to do with the flow of funds from the EU to the Scottish Government to the lead partners. The flow from the lead partners to the delivery agents on the ground has continued and has not been affected by the pre-suspension.

From the point of view of an organisation receiving funding, it will receive a block of money, so how does a unit cost system apply to that?

It works on the outputs. For example, if you are training a number of individuals, it will be based on a certain amount per individual you have trained. The current system has typically involved flat costs, so it has been either the actual costs or the costs for the number of people who are employed directly with a percentage add-on on top of that for indirect costs. The unit cost system is a change in the structure, but it resolves a number of the audit issues because there was misinterpretation of how that flat cost system operates in the current context.

The unit cost system is the solution, because the EU has recently changed the process and rules for that. That has allowed us to move towards that system, which will clear the audit issues. That has been agreed in principle with the EU and we are just working through the mechanics of how to roll it out.

10:00  

Neil Bibby also has a question on that area.

Yes, it is on the issue of ESF money being suspended. I have asked in a written question for a list of projects in the west of Scotland that are affected by that suspension. I do not expect you to list them today, but when can I expect an answer?

In terms of delivery bodies on the ground, the answer is none, because, as I said, the flow of funds from the lead partners to those local organisations is continuing.

Thank you.

Willie Coffey has some questions on outcomes.

Minister, you talked earlier about having to get the process under way in the absence of any guidance on the shared prosperity fund and what is potentially in it, and you are right to do that. You also talked about how the EU 2020 targets neatly align with Scottish Government targets. What happens if we proceed down the road of developing the approach that we would prefer to take and at some stage get presented with an entirely different approach by the UK Government? It sounds as though there could be a pretty major moving of the goalposts at that stage. What is your view of that and how might we try to resolve such differences if they occur?

It is unfortunate. I reiterate that we are moving forward with the consultation and steering group at this point because we have waited, asking and encouraging the UK Government to give us more detail so that we would know the context within which we would be working. In effect, we are starting with a blank piece of paper and having to design something from the ground up, but Willie Coffey is right that, at any point during the process over the next few months, the UK Government could say, “This is what we think it should look like.”

The UK Government has said that it will go through a consultation, which I suspect may run in parallel with its process—who knows? We will see how that goes. However, it could at some point tell us how it sees the structure of the shared prosperity fund working at UK level. We have laid our red lines and, in that context, there will clearly need to be a discussion. Even if all the red lines, which are on aspects such as the funding value and the level of control, are accepted, the UK Government could come along with its own rulebook, equivalent to the EU book, and we would have to figure out how it would work, taking what we think the fund should look like in the context of the rulebook that the UK wanted to implement. It could be messy at a number of levels, from very detailed up to more overarching considerations.

Are you getting any indication that the UK Government is willing to continue to embrace the principles of cohesion and social inclusion that we are familiar with in a lot of the programmes, or are you getting a sense that it is diverging from those principles?

As I said, what we know from the UK Government’s statements is that it will be based on the UK industrial strategy and focus on productivity as a mechanism to support and help to develop less well-developed communities. That is the overarching focus but, as we go into the detail, the question will be how well that aligns with the Scottish Government’s focus on inclusive growth, our economic strategy and our focus on climate change and low carbon. That is part of the drive in the current programme and I do not doubt that it will be a large part of what we do in future. The question is how that will gel with the UK Government’s focus and there are potential points of discussion.

Finally, can you gaze into your crystal ball and give the committee some idea of when you might know?

I would not care to comment.

Your crystal ball is cloudy.

If we know anybody who is able to do this—and we know some—we might encourage them to go along to one of the Conservative Party leadership hustings and ask the candidates for their view on the shared prosperity fund and how they see it moving forward. The reality is that we are stuck until a lot of those larger issues shake down and we understand where we are in the bigger context.

George Adam had a question on the allocation of funds. Has that already been answered?

It has more or less been answered.

Minister, we have spoken to some groups who are very passionate about the way in which they deliver the European funding, including the LEADER group. We have also taken a fair bit of evidence on LEADER funding. Will representatives of LEADER be on your steering group?

To be clear, the LEADER group falls outside my portfolio; it comes under the rural portfolio. We will have a discussion with ministerial colleagues about whether the scope of the consultation should encompass that. I am only empowered to set up a consultation that includes the ESF and ERDF funds. That discussion with ministerial colleagues will be part of setting up the terms of reference under which the steering group will operate.

There are two ways to look at that. If LEADER funding is in scope and rural colleagues are comfortable with that approach, there will clearly be an input. I also take the point that there could be learnings from the way that LEADER funding has operated that could add value, in a generic sense, to the work that we are doing. We will certainly consider whether there are individuals in that group who could add value to our consideration.

I am assuming that you will write to the committee when the steering group and its terms of reference are in place, so that we can understand where we have got to on that journey.

Indeed.

As there are no other questions, I thank the minister and other witnesses.

10:06 Meeting suspended.  

10:15 On resuming—