European and External Relations Committee, 16 Mar 2004

Meeting date: Tuesday, March 16, 2004

Official Report 290KB pdf

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Regional Development Funding Inquiry

The first item on the agenda is our continuing inquiry into the future of regional development funds in Scotland. I extend a warm welcome to the Deputy First Minister and Minister for Enterprise and Lifelong Learning, Jim Wallace, who is with us to give evidence, and colleagues from his department.

Our inquiry focuses on the review of regional funding that the United Kingdom Government has proposed and on the changes that have been proposed by the Commission in the light of enlargement of the European Union. As we all know, £1 billion of funds for Scotland are at stake and we are keen to hear the Executive's thinking on the future of regional funding. We have a written submission from the minister, on which we hope he will elaborate today. The minister has agreed to give a short opening statement for a few minutes, after which I will invite questions from committee members.

Thank you very much, convener. It is a pleasure to be back before the European and External Relations Committee, which has a somewhat different constitution to that which it had when I had responsibility for Europe and external affairs. I introduce my officials Diane McLafferty and Lynn Henni from the Scottish Executive's European structural funds division.

I welcome the opportunity to discuss with the committee the important issue of the future of structural funds. It is widely recognised that, along with domestic regional policy, structural funds have played a key part in promoting sustainable economic growth throughout Scotland. As the committee will be aware, the important debate on what happens when the current programmes cease in 2006 was initiated by the European Commission back in 2001, when it published its second cohesion report. The pace has picked up since then and a number of member states have put forward their views. Last year, as the committee knows, the UK Government announced its proposals, which include a proposal on an EU framework for devolved regional policy.

As part of the contribution that we made to the debate last year, which was triggered by the UK Government's announcement, the Scottish European structural funds forum—of which the convener and the deputy convener, Irene Oldfather, are members—identified the key principles that future regional policy should address, regardless of how it might be funded. In particular, we agreed that it was necessary to acknowledge the continuing regional disparities in Scotland and to focus resources on tackling both regional and intraregional disparities. We also agreed that it would be important to promote competitiveness and innovation to support the Lisbon agenda of higher productivity and employment.

The future of structural funds was debated at the informal ministerial meeting on regional policy in Rome last autumn. The First Minister participated in that debate and was interested to hear at first hand the positions of member states and the accession countries. In November last year, I had a meeting with Commissioner Barnier to discuss his vision for structural funds in the 2007-13 programming period. More recently, the Commission published its third cohesion report, which examines progress towards economic and social cohesion throughout EU member states and the accession countries. It also outlines the Commission's plans for the future of structural funds.

I hope that members found useful the summary note, which we circulated not only to the committee but to other MSPs. Broadly, the Commission has proposed that EU regional policy should fund the three strands, which are convergence, competitiveness and co-operation; it is suggested that 78 per cent, 18 per cent and 4 per cent of the funding should be spent on those respectively. Spending on convergence, which makes up the largest part of the funding, would be concentrated on the poorest regions across all member states. The regional competitiveness and employment strand, which would take up nearly a fifth of the budget, would replace objectives 2 and 3 and would operate outside convergence regions; priorities would be chosen from a menu of themes. The small element of the budget that would be allocated to co-operation would build on the Interreg Community initiative.

The Commission has acknowledged the need for real simplification of EU regional policy. That point is dealt with in the UK proposals and is supported by a number of member states. Given the demanding challenge of meeting the N+2 targets last year, I hope that the commitment to simplification will not generate controversy.

There is much to digest from the cohesion report and it is widely recognised that it will take some time to work through the implications of the Commission's proposals. Therefore, we have set up an analytical working group of key partners to examine the report in detail on behalf of the Scottish European structural funds forum.

It is important that we understand fully the financial implications of the Commission's high-budget approach, which suggests an increase of more than 30 per cent in the structural and cohesion fund budget. It is important that everybody appreciates the cost of such an increase. Although it would allow for generous funding for poorer regions within member states, it would mean an increase in the United Kingdom's net contribution to the European Union budget. That could imply a reduction in the Scottish budget which, in turn, could mean that less funding would be available for domestic regional spending in Scotland.

We must also consider the purpose of the funds and how that fits with enlargement of the European Union. The funds exist to promote economic and social cohesion throughout Europe by tackling barriers to development and encouraging innovation. The structural fund programmes have indeed brought many benefits and have provided a catalyst to the promotion of economic development across Scotland over the past 25 years.

Many of the new member states have considerably greater development needs. If true cohesion is to be achieved across an enlarged Europe, and if we are to meet the goal that European leaders set in Lisbon of becoming the most competitive and dynamic economy by 2010, it is both logical and fair that future structural funds be concentrated largely in the new member states.

It is therefore important to make the best possible use of the available structural funds in order to provide benefits that will long outlive the current programmes. That said, I readily understand the concerns that many have about the future. I appreciate that there continue to be regional disparities and economic challenges; I also appreciate that we need effective policies to address them. The promotion of economic growth is the Executive's top priority. Our overarching strategy—in "A Smart, Successful Scotland: Ambitions for the Enterprise Networks" and "A Framework for Economic Development in Scotland"—provides the tools to push forward economic growth throughout Scotland.

In the meantime, the debate on the future of the funds has a long way to go. Draft regulations are expected to emanate from the European Commission in July. It is likely that that will be followed by up to 18 months of negotiations among member states. The Scottish Executive will, of course, work hard to influence the debate at UK and wider European level in order to seek our objective—namely, the best outcome for Scotland and her regions.

Thank you, minister. You acknowledged the scepticism that has been expressed by many organisations and local authorities in Scotland, particularly over the UK Government's proposal to repatriate regional funding to the UK. Have you expressed a view to the UK Government on that proposal?

The committee will be aware—indeed, I think that it has a copy—of the document that was submitted by the Scottish European structural funds forum, which my colleague Lewis Macdonald, the Deputy Minister for Enterprise and Lifelong Learning, chairs. That document sets out the forum's view and that of the large number of partners that are engaged in the forum. The covering letter, which I think is also in the public domain and which has also been made available to the committee, states:

"the Scottish Executive does support the principles behind an EU framework for devolved regional policy and is keen to hear more regarding the details of the proposed Framework."

The letter goes on to say:

"We also can see the benefits of developing regional support with UK funds within that framework. In an enlarged Europe, that could guarantee support for Scotland more effectively. However, the Forum has also asked for further clarification from the Government on the commitment expressed in the paper to ensure that the nations and regions of the UK would have sufficient resources to continue to be able to promote regional productivity and employment."

I think that it is fair to say that the letter highlighted to the United Kingdom Government that there is a wide range of views on the subject. I can assure the committee that discussions with the UK Government on the issues are continuing, both at official and ministerial level.

I will follow through on what Mr Wallace said. Paragraph 19 of the report says:

"The Forum supports a central role for the EU in regional policy although would not be able to support the UK's proposed EU Framework without further detailed discussion with UK Government officials on the precise implications of it."

I assume that that is what Mr Wallace is talking about just now.

Yes.

What kind of clarification are we looking for?

A host of questions are raised if we want to know precisely what kind of amounts we are talking about. Another issue is that the UK Government has indicated that any guarantee will be based on the current EU funding regime that will be applied to an enlarged Europe. Although it is impossible to put a figure on it at the moment, it is likely to be considerably less than current receipts. It is important that we tease out such details. Put quite simply, there is mention of a guarantee, but we need to tease out how the guarantee would work in practice.

I am trying to understand the figures a little. I understand that the UK has favoured a figure of around 1 per cent of gross national product and the European Commission is considering 1.2 per cent of GNP. Is there a possibility of meeting somewhere in the middle? I presume that that is what the discussions over the months to come will consider.

The Commission will have a cohesion forum in May. Is the Scottish Executive likely to be represented at that forum? I know that I will be able to attend. It will be an important opportunity to tease out some of the arguments.

The minister said that we might end up being net contributors with a new budget, but if the same sums are to be guaranteed in Scotland, the money must come from somewhere. At the end of the day, are we not looking at more money coming from some budget anyway? I am trying to clarify in my head how things will work.

I do not wish to be disrespectful, but everyone is trying to clarify things—that is our difficulty at the moment. Given the nature of the negotiations, that is not surprising. There will be a long iterative process. As I said, even after we have the draft regulations, the process is liable to continue for some 18 months. One issue is what the relative figures are. It is impossible to have an exact quantification of the figures at the moment, but that is one reason why the Scottish European structural funds forum has established an analytical group, which is modelling the financial implications of the different approaches that are being taken.

It is correct to say that the United Kingdom Government favours around 1 per cent of GNP. It is probably not alone in doing so. However, the question is not one of our becoming net contributors—we are already net contributors.

It is about our becoming bigger contributors.

Indeed, the question is the extent to which we would be bigger contributors. The United Kingdom Government's estimate in relation to the Commission's proposals is that it could cost the United Kingdom some €3 billion to €4 billion more over the period of the new regime from 2007 to 2014. It is not possible to predict that we could meet each other half way in negotiations. A long negotiation lies ahead, which is why we want to continue to engage with the United Kingdom Government. I am sure that this will not be my only appearance before the committee to discuss the matter because there is much more to come. That is why we keep in close contact with the Government and why an analytical working group has been set up.

I have one more question. One issue that has been raised with the committee by groups that are currently involved in accessing funding, and one of the attractions of the Commission's policy over the UK's policy, is the seven-year programming period, which will offer continuity and some stability and consistency. It would be helpful to put that on the table. Will there be any discussions with UK ministers on whether it might be possible to consider a longer programming period that would give stability to local projects?

I am not sure whether we have had a specific discussion with UK ministers on the length of the period—I can take advice on that. I do not think that the matter has been uppermost. However, as the committee has raised the issue, it can be raised in our engagements.

I have another point to make while I remember it. Lewis Macdonald will attend the cohesion forum in May, so the Executive will be represented at ministerial level.

We have tended to concentrate on the loss of funding through structural funding changes and we note that the Scottish Executive is rightly in favour of the idea of supporting new members where their levels of income against gross domestic product across Europe are very low. However, is there another aspect to the loss of qualification status that could affect us? If some financial support were to go, would there be changes in how central Government and the Scottish Executive support industry and business in various ways through structural funding?

I take it that Mr Gallie is talking about a situation in which there is what I think is termed renationalisation. Is that the case? Or generally, or even under the Commission's—

No. What I am saying is that, under the Commission's proposals, there will be a change in respect of the way in which structural funds are paid to Scotland—they will probably be withdrawn. I am asking whether that change will affect regions of Scotland in ways that the Government will not be able to address through providing any other support for business and industry in those areas to create economic growth.

I am grateful for that clarification. The second category in the Commission's proposals—competitiveness, which I said would provide about 18 per cent of the likely funding—is intended to replace the current objective 2 and objective 3 funding criteria. It would, therefore, deal with issues such as competitiveness, innovation, employability, skills and training issues that are currently covered by objective 2 and objective 3 funding.

It is not particularly clear what the process would be or what the commissioner would be looking for under that category, but there would have to be some sort of national programme that we would have to be engaged in. However, it is unclear how the funding for that would be allocated. Would it be allocated on a population basis? Certainly, in the United Kingdom, we would want to make a strong argument that, given Scotland's geography and relative disparities, we should get more than a population-based allocation; however, what would be chosen from the menu would be principally themed support.

What are the themes that would be looked at and what are the geographical areas that would qualify? Ostensibly, under the Commission's proposals, those could all be areas that were not receiving cohesion funding support although, in working up a national programme, the UK Government, in consultation with the devolved Administrations, would want to be more specific. Does it make sense to give an innovation grant to a company to allow it to locate in Cambridge when it was going to do that anyway? Such issues would have to be addressed if the Commission's proposals in their published form—with regard to giving support in areas outside any area that might qualify for cohesion funding support—were to come about.

The answer to the question is, therefore, yes. There will probably still be some scope for Government to support business; however, only a matter of weeks after the report has been published, it is impossible either to quantify or even to give a flavour of what the shape of that support is likely to be. That is something that the Executive would want to be engaged in, and I am sure that members of the committee will have views on that as well.

Thank you. On the basis of the comments that you have just made and earlier comments, one of the objectives for Europe and the Scottish Executive is to have sustained economic growth, while accepting that things are changing in industry and business, with the provision of different levels of expertise from different parts of Europe leading to cost savings. However, one area in which we have been fairly successful is the financial services industry. When we look at that industry, we recognise that there is still a need for infrastructure, particularly if we use outlying areas for the provision of such services. Can the minister tell us what effect other European legislation—for example, the investment services directive—may have on that?

Without having had notice of that question, I cannot provide a very detailed answer. I will willingly reply to the committee in detail later, however. As far as financial services are concerned, it is important to remember that Edinburgh, for example, does not qualify under any of the schemes. The growth of the financial services sector in Scotland over the past 10 years has been quite significant, especially in Edinburgh.

There are some things that we are able to do with regard to, for example, the telecommunications infrastructure, which—subject to state-aid rules—are easier to implement in the Highlands and Islands because of that area's transitional status than is the case in other parts of Scotland. There are one or two exceptions to that, however. There is a project in the Borders, which I launched about a month ago. There was market failure with respect to the more traditional exchange trigger routes and, because of the European rules, we have had to rely very much on a demand-led marketing campaign to try to extend broadband. As I said, it has been easier to facilitate development of the infrastructure in the Highlands and Islands than in other areas. I hope that, by 2006 or 2007, we will have made considerable progress on extending broadband.

The financial services industry is important to Scotland, and we would need to consider the ramifications should the Commission's proposal go ahead. We have been limited in what we were able to do—more so than we are at present.

I have just one more question. I promise it will be short.

I will bring you back in at the end.

All right.

I am trying to relate what is being said to what is happening on the ground. In your written submission, you make a point about regional disparities within Scotland. There are pockets of acute deprivation within regions. In my own region of Mid Scotland and Fife, there is Raploch, which you recently visited. There are also Alloa south-east, Buckhaven and Methil—and that is without going into the rural areas of deprivation. Even in Perth and Kinross, which is often regarded as being highly prosperous, there are pockets of acute deprivation.

I refer to the competitiveness strand and the menu of themes to which you referred—you may have partly answered this already in response to Mr Gallie. Could you say a little more about skills and training and using employment as a means of preventing social exclusion? How would that help on the ground with respect to the menu of themes?

As the committee will be aware, objective 3 funding currently allows us to develop a number of programmes to promote employability and to develop skills and training. The skills agenda is identified in "A Smart, Successful Scotland" as being a key pillar in improving economic development and in enabling people to take up employment. The kinds of skills that people are acquiring for employment, as well as what are called—unfortunately, I think—soft skills, meaning the qualities and attributes that make a person able to contribute more to a work venture, are absolutely essential for pursuing economic growth. We have the opportunity to support specific schemes under the European social fund and objective 3.

Under the Commission's proposal, that would be subsumed into the competitiveness strand. Under the thematic menu approach that is proposed by the Commission, competitive funding would be split equally: 50 per cent would be for national European social fund programmes that target skills and training; and 50 per cent would be for regional European regional development fund programmes that target accessibility, services of a general economic interest, the promotion of innovation and the promotion of the knowledge economy. Within what we have as part of the UK's distribution, 50 per cent is badged for—

How will that work in practice, on the ground? How will that dovetail with Scottish Enterprise Forth Valley, Scottish Enterprise Tayside and so on? Will they be involved? What about the further education sector? You are effectively feeding the funding down to the ground.

I will ask Diane McLafferty to add a word or two. It is early days to say how that would work. However, the important point to emerge is the involvement of the local enterprise companies, employers and the further and higher education sectors. It is fair to say that one feature of the delivery of structural funds programmes in Scotland has been a partnership approach. I very much hope that, in any developments under the new regime, although there might not be exactly the same structure as we have at the moment, that concept of partnership will be built on and fostered. Diane McLafferty may be able to add some detail.

The support for community economic development in the current programmes has been a particular success and has involved capacity building and generating local engagement in promoting economic development. We have received every indication from the Commission that that is important and something that it wants to be continued in any future funding regime.

There is also a hint—perhaps more than a hint—in the Commission's proposals that, in the context of monofund programmes, whereby European regional development funding and European social funding would be delivered in separate programmes, there would nevertheless be the flexibility to use ERDF in support of training and, conversely, ESF in support of infrastructure. We are prevented from using the funds in that way at the moment, which can inhibit some of the more creative community economic development proposals that we would want to take forward. On the face of it, that is an attractive proposal.

Yes, the point about flexibility is encouraging.

I have a final question for the minister. Annex A of the briefing paper states that

"there may also be changes in scope to fund national regional interventions, such as Regional Selective Assistance",

and that there are on-going discussions with the Department of Trade and Industry. Can the minister update us on that? Obviously, everything is in a state of flux, but it would be useful to know the current position.

Yes, the situation with that is in even more flux than the situation with the structural funds. As yet, we do not have formal proposals from the Commission, although I think that they are imminent. We cannot be absolutely certain what the outcome will be; it is a question of the extent to which the guidelines for state aids and regional selective assistance might impact on regional policy. Clearly, we are at an early stage and awaiting the Commission's proposals. Nevertheless, I assure the committee that the issue has been raised between Scottish ministers and United Kingdom ministers to ensure that, in any negotiations or dealings with the Commission, Scotland's specific interests are considered.

What outcome would you like to see? I do not expect you to explain your negotiating position, but what principles underlie the outcome that you would like to see?

We would like maximum flexibility in the state-aid rules to allow us to try to address regional disparities and pursue the policies that we have successfully pursued in using RSA to attract businesses. The committee will be aware that there has been a refocusing of RSA over recent times to support indigenous business as opposed to foreign inward investment—although we should not decry foreign inward investment when it comes. We would like to ensure, as best we can, that we will still have that degree of flexibility. It is an important policy lever in trying to overcome regional disparities. We would also like some of the distortive forms of aid that perhaps put us at a competitive disadvantage to be reformed.

I will return to the vexed question of the boundaries and which areas can access the funding under which part of the system. I think that, in reply to another question, the minister said that the city of Edinburgh could not get anything. That is understandable, because overall, under any statistical analysis, Edinburgh and the Lothians are pretty prosperous. However, as the minister well knows, there are pockets of acute poverty in parts of Edinburgh and outer Lothian. Conversely, although overall the Highlands and Islands is sufficiently badly off, statistically, to qualify, it has prosperous pockets. Is there any scope for more flexibility to enable the Scottish Executive to access any of the funding for the benefit of deprived areas in other parts of Scotland, for example, or will that be a no-no?

I do not think that there is any such scope under the existing scheme.

I realise that; I am looking to the future.

As far as the future is concerned, the NUTS II regions are there and I am not aware of any plans to revise them. That would have to be done at a UK level—we have no opportunity to revise them ourselves. I think that I am right in saying that RSA can be altered at ward boundary level; I seem to remember some very detailed discussions the last time that the boundary map was drawn.

To discuss that is almost to anticipate what kind of RSA there will be post-2006. As I have said, if the Commission's proposals go forward—the "if" is important, because we just do not know the shape of what will emerge—there could be more flexibility than there is at the moment, because such assistance would apply principally to non-cohesion areas. My understanding is that, at the moment, we use objective 3 funding throughout lowland Scotland but, in the future, we would expect a social justice agenda to be pursued there through European social fund intervention. The indications are that, under the Commission's proposals, there might be more flexibility than we have at present.

I am glad to hear that we are in a state of flux and a state of flexibility at the same time. I have found the discussion interesting. I read through annex A carefully but, in your responses, you have already covered some of the points that I intended to raise.

Given that it is not yet clear what the allocation among the various nations of the UK will be, what claim is the Scottish Executive going to make to access the funds for Scotland? How often does the Executive meet the DTI and the Commission, both of which are referred to in annex A?

John Home Robertson mentioned that there are pockets of deprivation in all parts of Scotland, of which we are all well aware. I am highly conscious of the income disparity, which does not seem to be dealt with in the annex. In many parts of Scotland, the level of income is low. In my area of Moray, the average weekly income is £239, which means that, for the second year in a row, we have the lowest weekly income of all the areas in Scotland. I wonder whether that argument could be used to consider ways of boosting the local economy so that additional funding can come into households.

I am not quite sure that low income would lend itself to direct supplement. Perhaps that is not quite what Mrs Ewing is suggesting.

I was suggesting that, with economic development, the wages might go up.

You mean generally, as part of the rising tide?

Yes.

There is no doubt that the promotion of cohesion is one of the principles that underlie structural funds. The Lisbon agenda sought to drive forward economic growth and employability within the Community as a whole, but the Community that we are looking forward to is much wider than it was at the time of the Lisbon agenda, which we all very much welcome—I do not think that there is much political dispute around the table about that.

There is a recognition that we will achieve some of the Lisbon objectives only if all parts of the Community are contributing and we are not just depending on a few honeypots in a limited number of countries. The objective—and, perhaps in the long term, what the whole system should be tested by—is the extent to which economic growth and prosperity can be driven up in some of the poorest regions of the Community.

What are we looking forward to? How are we engaged, how have we been engaged and how do we intend to be engaged in the future? We want to see what will be the best outcome for Scotland in net terms. The difficulty that I have now is that what might be perceived today as the best outcome for Scotland might not be perceived as the best outcome for Scotland in six months' time. We simply do not know what size the pot will be. A number of member states are uncomfortable—they might put it stronger than that—with the Commission's proposals, given the increase in the net contribution that they would be expected to make.

I am aware of the view that, given the challenge of achieving cohesion between the accession states and the existing member states, the Commission's proposals do not necessarily strike the right balance. Whatever levels of deprivation we might have in Scotland, there are levels of deprivation in some of the accession countries that I suspect would shock us. There is a widespread view that that must be addressed.

We want to develop a situation in which we can access a level of resources, matched by funding that we put in ourselves, that lets us tackle the disparities that exist in our country and through which we can raise levels of economic activity and growth in areas where that has not been done successfully before now. We want to be able to use funding to address important issues around training and skills. We need the flexibility to be able to direct the programmes so as to help those areas of Scotland that are in greatest need.

Although, overall, structural funds are intended to reduce disparities within the European Union, we recognise that there are disparities in Scotland, too, which we would want to reduce. We are working on that already and there are a number of programmes that we can implement by our own hand, but we want the necessary flexibility—and, whenever possible, the resources—with regard to any additional EU support programmes.

I fully appreciate all the issues around the size of the pot and the negotiations that must take place, but I asked how often the Scottish Executive meets representatives of the DTI and the Commission to discuss the various issues.

I could give you a detailed list of some of the ways in which we have been engaging with the DTI and with Europe. To give a more general answer, officials in my department are members of the UK steering group, which meets quarterly. Its next meeting is next week, when it will take stock of the Irish informal council on the issue, which took place last month.

Back in 2001, the Commission published its second report. Subsequently, Peter Peacock spoke at a cohesion forum when he was Deputy Minister for Finance and Local Government. Angus MacKay, the then Minister for Finance and Local Government, was part of the UK delegation to the Namur informal council in July 2001. Later that year, Angus MacKay met Commissioner Barnier to discuss the future of the funds. When Commissioner Barnier visited Scotland in May 2002, he met Peter Peacock. As I said, I met Commissioner Barnier last autumn and, as part of the UK delegation, the First Minister attended the informal regional policy council in Rome.

Moreover, last summer Lewis Macdonald participated in the cohesion conference, which Commissioner Barnier hosted. Again, in January of this year, Lewis Macdonald was involved in a Conference of Peripheral Maritime Regions of Europe on regional policy and he is to attend the cohesion forum that the Commission is organising in Brussels. In addition, there have been extensive phone calls, meetings and correspondence between UK ministers and Scottish ministers—and officials, too. The issue is not something that we have not engaged in.

Certainly, I do not want to undermine the work that is done by Scottish Executive officials, but I would like to know which ministers meet representatives of the DTI.

I can tell you. Following the election—I hope that this is a comprehensive note—Lewis Macdonald forwarded the structural funds forum response, from which I have quoted, to the DTI and the Secretary of State for Trade and Industry on 4 July. Following on from that, there was correspondence between the DTI, the secretary of state, the First Minister and the other devolved Administrations—

I think that the question was about face-to-face meetings, minister.

The First Minister met Jacqui Smith on 20 October; a videoconference was held between Lewis Macdonald and Jacqui Smith on 25 November; and a meeting between Lewis Macdonald and Jacqui Smith took place on 22 January. I had hoped to have a meeting with Patricia Hewitt when I attended the competitiveness council in November. However, the council overran considerably and the meeting was not able to take place. I have had phone calls with Jacqui Smith and Patricia Hewitt. There is a fair degree of engagement—indeed, my most recent discussions with Patricia Hewitt were a reaffirmation of her willingness to engage with Scottish ministers.

I seek clarification on a point that I am unsure about. I acknowledge what the minister said about the mountain that the new accession countries have to climb in relation to deprivation. However, I seem to recall that Commissioner Barnier mentioned somewhere that 50 per cent of regional funds would go to existing member states. Officials might have to clarify that. I also recall that particular recognition was given to areas with natural handicaps. I am not sure about that, but—

No, you are right or at least my understanding of the Commission's proposals that were published last month is of a split of about 50:50 between the accession states and existing member states. The point that I was making was that I am aware that some member states—and possibly some accession states—think that the balance is not right and that the emphasis should be more towards the accession states. There is no unanimity on whether the balance has been properly struck.

In your view, minister, is the split correct, or should it be changed?

That all depends on how the distribution takes place and what the available resource is. If a huge resource is available, one could more easily justify the 50:50 split. If the resource is more limited, it could be argued that, if the policy objective is to tackle deprivation in the accession countries, the balance should be switched more towards the accession countries and away from the existing member states.

So what should the resource be?

That is the whole difficulty in trying to discuss the issue. We know neither what the size of the cake will be nor how it will be divvied up—indeed, how it is to be divvied up internally within the United Kingdom. I am thinking of the situation in which we were to get funding from the three strands to which I have referred.

You suggest that the Executive's view on the split depends on the size of the resource, so what is the Executive's view on the size of the resource?

The difficulty that we have with that question is that we do not want to have a situation of "Heads, you win; tails, you lose." If getting a resource on one hand means that it is taken away on another, that is certainly not a win-win situation.

You will appreciate that we are just trying to get your view as part of our inquiry, which is a difficult one.

The point is that a larger budget would mean a higher net contribution from the United Kingdom—the UK Government would have to find resources for that somewhere, which could mean that Scotland would get a smaller block grant. We do not know what the figures will be or how the UK Government might fund a higher net contribution. It could fund it in ways that did not have negative Barnett consequences, in which case we might not be losers. However, if the outcome is that the UK contributes €3 billion to €4 billion more over a six or seven-year period, that could mean that fewer resources would come to Scotland.

My apologies for being late; I had a previous engagement.

When we received evidence previously on the possible repatriation of European funding, witnesses, including some from local authorities, argued in favour of the status quo because they felt that they knew where they were under the existing arrangements. Indeed, they seemed to put more trust in the judgment of the European Commission than they did in that of the UK Government or the Scottish Executive. They felt that they might lose out under new arrangements that would decentralise decision making on the allocation of funds. How do you respond to that, minister?

The devil you know is always better than the devil you do not know. I do not want to quibble about what the status quo is, but I do not believe that it is an option. The sheer fact of accession means that what we have had to date will not continue beyond 2006.

I am referring to how many people argued against repatriation.

I understand where that view comes from, but the same people probably also strongly supported the kind of partnership arrangement that we operate in Scotland, which Scottish ministers have nurtured, as did—to be fair—our predecessors in the Scottish Office. That partnership involves devolved administration and responsibility, which might also be the case under a repatriated system or under another of the Commission's proposals. A welcome aspect of the Commission's report is the indication that the Commission will be less keen to micromanage in future. I think that most people will be relieved to hear that.

I do not believe that the issue is just about whether the structural fund system emanates from Europe or is a repatriated one. The devil is in the detail in terms of how much the different routes would deliver and how they would deliver to allow us, as a devolved Administration, to have more control over, and flexibility in, delivering the funds locally. I honestly do not believe that any of us knows the answer to that at the moment. Therefore, it does not surprise me that people want to cling on to the existing system, which has worked reasonably well, by and large. However, the truth of the matter is that whatever comes after 2006 will not be a repeat of the present structural funds arrangement, particularly because of the arrival of the accession countries.

Have you discussed people's concerns, particularly local government's concerns, with the Convention of Scottish Local Authorities or the UK Government?

COSLA is, of course, represented on the Scottish European structural funds forum. I have not attended those meetings, as my deputy minister chairs the forum, but I am aware, from reports, that COSLA has engaged fully on the issue. Those concerns have been expressed to me in my talks with individual councils. Indeed, they are reflected in the submission that we made through the forum to the UK Government. It is also important to say that the forum is part of the Scottish delegation to the cohesion conference that the Commission is organising in May. As the delegation includes representatives from COSLA, COSLA will get the opportunity to express its views first hand at the cohesion conference.

My question follows on from Dennis Canavan's comments about repatriation and relates to the guarantees that can be offered by the present UK Government or successive UK Governments. If the UK Government fulfils its guarantee, what guarantee is there that the Scottish Executive will in turn use the money for the purpose for which it was used previously? If you are still the minister with responsibility for handling these matters in 2006-07 and the UK has repatriated the funds, would you ring fence the money that came from the UK Government?

Ring fencing is a subject that ministers think twice about before they commit themselves. I will therefore say, without using the term "ring fencing", that Scottish ministers recognise fully the importance of the objectives that the structural funds are intended to deliver—so much so, indeed, that match funding has been put in place. Given that our overall economic approach is to grow the Scottish economy and reduce regional disparities within Scotland, it is unthinkable that we should act differently. We would have a difficult job before the Parliament if money that had clearly been earmarked for structural funding was being spent on something different.

You referred to competitiveness, which, effectively, relates to objective 2 funding. Within that strand, reference is made to the targeting of the development fund on areas such as the environment and the prevention of risk. Given that Scotland is tied to a 20 per cent target on renewables, will consideration be given to that issue in the application of the second strand of competitiveness payments? In asking the question, I remind you that one of the objectives of the Lisbon agreement was to ensure the security of the electricity supply.

Although the objective of having 40 per cent of electricity generated from renewable sources by the year 2020 is an important Executive target, which we are intent on pursuing, I do not recall mention of it in any discussion on the future use of structural funds under the third cohesion report. Our objectives for renewables are being promoted in current programmes. I think that the competitiveness strand would give us the opportunity to continue that kind of support. Indeed, I understand that a number of the programmes for which we receive funding contribute to our renewables objectives. When the draft regulations appear, we might be able to see what is feasible in that regard.

I do not want to go too much further into this debate.

I am interested in the underlying principle in respect of how we achieve our European objectives in accordance with world trade requirements on the reduction of emissions, for example. On the basis that the renewables target is a European objective, should it not be allowed for?

As I said—

Just briefly, minister, as we want to move on.

As I said, in addition to the Lisbon agenda, the Gothenburg agreement had a strong emphasis on sustainability in relation to economic growth. Indeed, it could be said that that agreement has an environmental dimension. As I said, we fund some renewables objectives under the existing structural funds. That is something that we would want to bear in mind, looking at the detailed regulations of any new schemes. Mr Gallie rightly says that an overall objective is to meet targets for the reduction of CO2 emissions. The development of renewable energy brings opportunities in relation not only to the environmental aspect, but to the jobs that go with that development, both in electricity generation and in manufacturing—for example, in the manufacture of turbines. As we have seen, such jobs can be delivered in areas that have not enjoyed economic growth on the same scale as other areas have, so there is a contribution to be made in terms of economic growth.

You mentioned that the working group would undertake an analysis of the Commission's proposals. In that context, will there be an assessment of the strengths, weaknesses, opportunities and threats—a SWOT analysis—of various scenarios that might arise during the next 12 months and what they might mean for Scotland? Also, what is the timescale for the group's report? Obviously, the report will be crucial to the committee's deliberations and to discussions that will take place in Brussels during the next six to 12 months.

Ministers established the working group on behalf of the Scottish European structural funds forum. It includes partner organisations that are involved in the forum and economists from those organisations and it will primarily consider the implications of the third cohesion report. I understand that it will also model other options.

What about the timescale for reporting back?

I think that the group will make its initial report to the forum in May, but I doubt that it will have completed its work by then. Perhaps Diane McLafferty can give some indication of its work pattern.

It is fair to say that quite a bit of work is in prospect, so the group will give an interim report to the forum in May. Probably by that time there will have been some shifts in position and perhaps more information will have emerged from the Commission to inform that work.

David Patel, who is head of the analytical services division in the Executive's Finance and Central Services Department, is chairing the group. He is present in the public gallery today and I am sure that he is noting the points that have been made.

I have a final, brief question. I understand that the forum's submission to the UK Government, which you provided to the committee in annex A, was made quite a few months ago. Since then, there has been a statement in the House of Commons from the DTI. Has the Scottish Executive made no further submissions to the DTI?

The forum provided the submission as part of its response to the UK Government's consultation. As I think that I indicated when I was speaking about the engagement that there has been between Scottish ministers and the UK Government, there has been correspondence on the matter, but as you will readily recognise, the nature of such ministerial exchanges is confidential. I am aware of other correspondence between ministers prior to the statement that the Secretary of State for Trade and Industry made in the House of Commons. If I were to check back, I suspect that I would find that some oral conversations took place before that statement was made.

I am sure that the committee will want to pursue the content of that correspondence.

I have a final question.

Not another one.

We have not been able to secure a UK minister, either from the DTI or from the Treasury, to give evidence to the committee. Such evidence would greatly help our inquiry, so we hope to send a delegation from the committee to London to meet ministers on their own turf. Do you think that the UK Government has an open mind on the arguments for and against repatriation? My feeling is that it certainly does not.

Coalition government in Scotland is one thing, but you are asking me to answer a question on behalf of the UK Government and I am probably not the right person to ask. It would be improper for me to answer questions on matters that are essentially for the UK Government.

I understand that the steering group to which I referred earlier, which involves the devolved Administrations as well as the UK Government and which is due to meet on 23 March, will take stock of the position in the light of the informal discussion that took place last month in Ireland.

Okay. If ministers grant us a meeting in London, we will certainly put my question directly to them.

Thank you for coming to today's meeting. We will take on board everything that you said and no doubt we will pursue some of the issues with you before we conclude our inquiry.

We will take a short comfort break while the new witnesses take their places.

Meeting suspended.

On resuming—