Meeting resumed in public.
We now move back into public session. I am pleased to welcome, as part of our inquiry into European structural funding, Dr Gillian Bristow, from University of Cardiff business school, and Dr Nigel Blewitt, from the Institute of Welsh Affairs. Thank you for sparing the time to assist us in our inquiry. Dr Bristow will read an opening statement. We have received the papers that you circulated, which are very helpful, and we welcome your statement.
Dr Blewitt and I will speak jointly on the paper that has been circulated.
That is fine.
Dr Blewitt will begin.
We are delighted to have been invited here today, to assist you in your inquiry into structural funds. That issue has exercised our minds for some time, over the past year or so.
A main objective of the paper is to explain how European structural funds are administered through the centralised public expenditure system in the UK. We felt that such an explanation was necessary to enable people to understand how the funds interact with that system. In giving a context and an introduction, we believe that it is important to define clearly the different elements of European funding as they are considered in the public expenditure system.
We all know that, for the foreseeable future, the annual changes in the block grants to Wales and Scotland will continue to be determined by the Barnett formula. The important point for the committee is the fact that many elements of European funding are treated as comparable programmes within the assigned budget. Therefore, if there is a spending increase on a programme in England, or an increase in cover in England of, for example, European regional development funding, there will be knock-on effects in Wales and Scotland through the Barnett formula. The key point is tying the matter down and considering comparability between what is in Scotland, what is in Wales and what is England, in terms of public expenditure cover on programmes.
The different elements of European funding and the way in which they interact with the public expenditure allocations to Wales and Scotland through the block grant raise significant questions about whether structural funds are additional to existing expenditure in the block grant.
Thank you very much. We are well aware of the work that you have both done on those matters, and of the political hot potato that the issue has become in Wales. It might or might not become such a hot potato in Scotland—time will tell.
The UK Government treats the two as interchangeable. The more that can be raised from the private sector, the better.
In Wales, roughly what percentage is the £30 million per annum of the match funding?
About a quarter.
In the second paragraph on additionality in your brief, you set out what European regulations require:
I am not clear about this: if additionality is measured year on year within a project's development, how is it measured in the first year of a project? What is it measured against if there are no previous examples against which to do so?
I am not sure that I can answer that question. I think that additionality is measured based upon the whole programming period. I do not think that that assessment is made.
Therefore, it is not done on a project basis.
The measurement refers to the complete programme.
Even if it is taken over the previous programming period. What if an area has just gained objective 1 status and there is nothing to look back on for the purposes of measurement? For example, parts of Wales that have just qualified have not previously had objective 1 status. How would you measure that?
The Government would have to compare expenditure with programmes that were previously in that area—for example, economic and industrial development, or employment and training programmes. It would examine the average expenditure over the previous six or seven years, in real terms. It would compare that with the figure that is being made available from 2000 onwards. If that figure is higher, it seems that there is additionality. While one cannot compare an objective 1 programme exactly with what has gone before, one has to check that expenditure in similar areas has not fallen. One cannot compare the two periods directly.
That is my point. There seems to be potential for the Government to choose comparators that suit it.
Of course.
No one from the European Commission could say, "No, that is not an appropriate comparison." The Government has the discretion to make those choices, so it sets the baseline on which it is judged thereafter.
Negotiations must take place as to the suitability of the baseline that the Government has chosen. The emphasis is on the UK Government coming up with that baseline.
I see. I have other points to make, but do any other members want to ask about additionality or match funding?
Thank you for the reasonably comprehensive briefing paper.
The need to examine volumes of provision within the block over the previous programming period up to the current period and to compare that with the allocations contained in the agreed single programme document is critical. One would need to compare the Scottish entitlement with what the Treasury had allocated through the public expenditure block grant system—the Barnett formula.
That suggests that we should request a note from the Treasury on how the European element of the Barnett formula has been calculated and allocated. I cannot find that information at present. Convener, can we take advice on how best to obtain that information? It strikes me that it would be useful to know the Treasury version of that calculation before we hear evidence from the Treasury.
We can write to the Treasury to ask for information on that.
Thank you for allowing me to take part in this morning's proceedings. I hope that the questions that I ask you will not be repeated at the European Committee this afternoon, although I suspect that we will have to cover some of the same ground.
The primary statement from article 11 of the rules on additionality says:
Yes. The debate in Wales has focused on the issue of how to define additionality and how that criterion can be satisfied; the point that you make about the need to demonstrate that there is a net economic benefit or impact is critical. That is uppermost in the European Commission's mind and is something that the Welsh Assembly sees as critical in ensuring that the objective 1 programme makes a difference in Wales.
We have also received a note from the Minister for Finance in Scotland about the way in which structural funds are treated within the block. It is a short paragraph, which I will read for you:
The statement that you quoted suggests that there is switching within the block to make room for the structural funds. This relates to Nigel Blewitt's point about how the budget has to be altered. Money has to be put into or taken out of provision within the assigned budget to make room for structural fund payments. It is difficult to say definitively whether that constitutes non-additionality. As I said, it is necessary to have a bit more information about precisely how much provision is being made available.
That is an important point, which could be raised when the Minister for Finance appears before the committee or before the European Committee.
In your opening statement, you referred—understandably—to the Barnett formula. Obviously, we will also want to address the conclusions that you reached on that. I was concerned about the comparability percentage that is used for ERDF. The comparability percentage is 6 per cent in Wales and 10.34 per cent in Scotland. How is that applied in relation to ERDF? Is there any negotiation with the Treasury on that point, or is it set hard and fast that that is the figure and there is no room for movement?
The degree of comparability is 100 per cent. The population ratios are applied. ERDF is one of the programmes that are applied by the Department of Trade and Industry or the Department of the Environment, Transport and the Regions, and Scotland and Wales have comparable allocations. The programme passes through the Barnett formula and the outcome is known—the money is added to the assigned budget.
What you describe in Wales clearly follows on from the Welsh select committee report, which recommended separation.
I think that it should be reasonably straightforward. Other elements of European funding are ring-fenced—some aspects of common agricultural policy funding, such as certain livestock subsidy schemes, are ring-fenced.
Is some of the social fund not ring-fenced?
Yes. Those elements are included in the assigned budget but are not subject to the Barnett formula. I have found no reason why ERDF should be subject to the Barnett formula. All the logic suggests that it should not be and that it should be ring-fenced. It is clear that the amounts are directly comparable with the allocation that is contained in agreed programming documents.
Does that apply only to objective 1 programmes?
It applies to all the programmes.
Our rationale is that the European structural funds are allocated on the basis of need, according to the relative prosperity and development of the regions, but if money is being passed through the Barnett formula, the allocation is based purely on population. There is a contradiction in the allocation of moneys.
That was useful as it leads to the point that I was about to make. Perhaps I am wrong, but I detect a slight difference between what you say in "Unravelling the Knot"—the Gordian knot—and your opening statement. "Unravelling the Knot" begins by saying that the funding mechanism should be based on a needs assessment; you mention the Australian model. You go on to say that the argument has been raised in the Welsh Assembly that funds should be ring-fenced and excluded from the operation of the Barnett formula. What is the point of making a recommendation about the Barnett formula if you are taking the Barnett formula out of European expenditure? You seem to be having it both ways. It is as if the idea of ring fencing came out of the Assembly and the Welsh select committee report, but you had gone partly down the route of changing the Barnett formula to make it more sensitive and responsive, through needs assessment.
The report covers other issues and debates about the Barnett formula, which we have not raised today because we did not regard them as being directly relevant. One might argue that there are certain tensions between reviewing the Barnett formula and changing the way in which European funds are allocated.
You are saying that, if you cannot win the ring-fencing argument, you will fall back on the position of calling for the Barnett formula to be based on needs assessment.
We think that the structural funds should be treated separately, whatever else is decided. It is a completely separate issue and should be treated as such. An examination of the Barnett formula and any possible needs assessment review would be much longer-term actions, which would require co-operation between all the devolved Governments and the UK Treasury. It would probably take several years to carry out the needs assessment, put in place formulae and set up an independent commission. The structural funds are such a pressing issue that they need to be considered now. I do not want to speak for the Assembly, but I think that it is quite keen to consider structural funds outside the Barnett formula arrangements.
I will pick up on something that you said about the CAP—I declare an interest as a farmer. The CAP does not work quite as you describe. It works on a population basis. It works on the headage rates of animals in the different sectors—where one is in Scotland, for example, is almost irrelevant to that. There is a difference between less favoured areas and others, but it is very much based on headage.
That might be a bit difficult to answer—I think Mr Davidson asked three questions there.
As we have said, if the European Commission has agreed particular objectives or programmes with the UK Government and any undevolved bodies, each region should be assured that it will get its entitlement to European money to maximise regional development benefits. Does that answer your question?
I was just trying to tease out your position on the matter. Like Keith, I think that you are coming at the argument from two sides. We are trying to find out how we can apply certain financial mechanisms in a more understandable way, because one of the big issues surrounding European funding programmes is that people on the street do not understand them. They do not seem to realise that the Government needs to match European funding and that tension will exist when a Government of any persuasion attempts to match funding for all agreed programmes at the same time as it tries to fulfil other commitments in its country. One of the reasons why you are here is to suggest ways of examining that issue.
It is very difficult to get evidence that proves the impact of the rebate, other than to illustrate that the mechanism is a disincentive to drawing European moneys down. The logic is that the greater the allocation of structural funds in the UK, the smaller the rebate will be. However, the rebate can be distributed as the UK Government sees fit, rather than being allocated to specific programmes. Perhaps that reflects the tension that you mentioned in striking a balance between giving money to allocated structural fund programmes and benefiting from a rebate that can be distributed as the Government sees fit.
Is there evidence of how other countries deal with that tension?
Other countries do not receive rebates.
You said that no work had been done on the rebate. Governments prefer to allocate money in their own way, because they operate in a Machiavellian way. However, is there any evidence to show that—during, for example, recessions in public spending—the Government has drawn down less European funding so that it can use the rebate to cushion any possible reduction in public spending?
We cannot provide any direct evidence—we have not examined that matter.
It seems logical, however.
It might seem logical, but we should emphasise the importance the Government attaches to the rebate. The fact that both the previous Conservative Administration and the new Labour Administration have defended the UK rebate suggests that Governments believe that it has an important role to play. In the paper, we also point out that, after discussing the rebate, the Treasury's public expenditure statement says that the Treasury will
I want to tease out a small issue regarding whether, because of the Barnett formula, Wales or Scotland will get the maximum impact from European structural funds. David Davidson was right to say that the Barnett formula is not completely centred on population, but it is driven primarily by population and Scotland's share works out at 10 per cent of expenditure in the UK.
Yes.
You have suggested some alternatives. Can we learn any lessons from structural funds allocations to areas in other major European member states, such as the autonomous regions in Spain, the German Länder and the French or Italian regions?
I must admit that we have not examined the ways in which other European states draw down funds and allocate them to their regions. The model that we have suggested in the paper is based on Australia, which is, obviously, outside the European Union. Such an examination would be an important piece of work; there must be experts from other countries in Scotland who would be able to answer questions on how funds were allocated in their countries. We are a little bit ignorant about that issue. Our case was based purely on the mechanisms and formulae in the UK.
In a sense, your study has been ring-fenced in the UK.
Yes.
Do you know whether there is evidence that the regions—if we can use the term loosely—and countries of the UK are less favourably treated than the regions of Spain or Germany?
No.
Do you have any anecdotal evidence on whether that is the case?
No.
Such comparisons will be important to us, but I take it that that is not your field.
No.
Fair enough.
It is probably worth mentioning that there is no European formula that compares with the Barnett formula—that is unique to this country.
With respect, that was not my question, which was about what other countries do.
By definition, no other region will allocate funds through the Barnett formula—no other region has such a funding mechanism.
I am not sure—I think that the Spanish system has similarities. However, we will have to consider that matter at another session.
I want to ask about the contrasts between the Welsh and Scottish positions. In a former life, I was a Welsh MP—not that that means that I know anything about the situation now.
We have never had objective 1 status in Wales and objective 2 and objective 5b status are just coming to an end. Objective 1 will cover 65 per cent of the population.
What happened previously?
Previously, objective 2 and objective 5b covered industrial south Wales—which includes the valleys communities—and some of the rural parts of west Wales. Considerably less of the area was covered by European structural funds.
When I interviewed Monika Wolf-Mathies, the whole Irish Republic had objective 1 status and, with its ferry connections, the Welsh always looked enviously at the Irish Republic. For every punt that the Irish put into Brussels, they got four punts back, which might have had something to do with their 10.5 per cent annual growth rate. How did a country that was relatively poorer operate the system of match funding and additionality?
My knowledge of Ireland is not detailed, but I think that the Irish were very up-front about match funding. Because the money was ready to spend as the programme got under way, there was no worry whether there was enough money in other budgets to finance match funding year on year.
Perhaps I did not make myself clear. Where did the Irish Republic get the money? Given that the whole country had objective 1 status, I would have thought that they would have had a considerable struggle finding that money.
One would think so. That is a question for the Irish officials. Perhaps we could do some work on that and drop the committee a note.
I would like to make a final point. I do not want to go back, but my question is on the Scottish-Welsh contrast. You talked about the difficulty of estimating additionality. The areas covered by the Development Board for Rural Wales and the Mid-Wales Development Board—or whatever it is called—covers quite a bit of the objective 1 area. Presumably there was considerable extra spending on projects there, some of which would have gone into the objective 1 area and some which would not. It must be difficult to get a detailed estimate for additionality purposes, considering that a lot of the expenditure was cross-boundary.
That is one of the principal problems of additionality. There is not only a problem in defining comparable programmes—which could be compared before and after—there is an issue about the population that is covered and where the geographical boundary is drawn with regard to the provision of public expenditure. That was picked up by the European Court of Auditors in its review of additionality, which was published recently throughout the member states.
Boundaries are now different—the objective 1 boundary is unique and data will not, therefore, necessarily fit it.
I will continue the comparison between Wales and Scotland. Scotland does not now qualify for objective 1 funding. Under the current system, do you think that Scotland will miss out on European funding? Will we have full additionality?
That question is difficult to answer. We made it clear in our briefing paper that we have not looked at the detailed figures relating to Scotland, so we do not know, for example, how much money Scotland will be eligible for in the current programming period. We understand that there is, in principle, transition funding for, for example, the Highlands and Islands. That funding is almost equivalent to the amount of money that was available under objective 1. We can comment only on the principles and the funding mechanisms that apply. Following the logic of those mechanisms, we suggest that there is a significant question mark over whether the full benefit of structural funds is being captured in Scotland. As you say, there are certain key pieces of information that it is necessary to have in order to make a fuller assessment.
You pointed out that the Highlands and Islands is enjoying transitional funding arrangements at the moment. Are any areas likely to miss out? If there are problems, they seem to be specifically focused on objective 1 funding, rather than on other regional funds. Is that interpretation wrong?
Problems seem to focus on objective 1 programmes simply because of the scale of funding, which draws attention to the issue. It is not clear how the money is being treated, or whether it is additional funding. As I said, however, if one followed the principles and the logic—given that European money seems to be included in existing public expenditure allocations—one could argue that the problem applied to all Europe-funded programmes throughout Scotland.
Are there types of projects within the structural funds areas that seem to win, and others that do not? Are there any comparisons in your research between types of projects that clearly get support and others that you would raise questions about?
That would also be beyond the scope of our examination. That is very much a macro-perspective issue and such issues would be for the monitoring committees and the evaluation committees. If the projects tied in with the strategy in the single programme document, it would be more of an issue. Funding for types of projects is obviously a significant issue when projects cannot get match funding to take a project forward. The question then would be: where are the funds for match funding? Perhaps the issue drives the amount that is spent under different priorities. Perhaps business development can get more money than environmental projects can. I do not know—I am hazarding a guess.
This issue was important in Wales in the previous programming period when—for example, under the objective 5b programme for rural Wales—there was a significant problem in getting public sector match funding. Perhaps the problem relates specifically to match funding. You might be able to demonstrate that certain projects are able to get match funding more easily than others.
I would like to ask a question about the mechanism. You say in your briefing:
The paying authority, which will be the Welsh Assembly or the Scottish Parliament, will accumulate receipts for the costs that are incurred by the programmes. It will then charge those against the accounts. Once the money is passed down, it becomes public expenditure. As far as we are aware, there is no delay in getting that money to the Assembly or the Parliament when the money is needed to pay out to project sponsors. That is not the issue; the issue is the cover within the block grant itself. Money will be drawn down, but, effectively, the Assembly or the Parliament will have to pay for that grant out of their budgets, because they will have gone over the baseline provision.
So there is no evidence of delay with either the Welsh Assembly or the Scottish Parliament. For how long has this carry-over procedure operated?
It is the same with any spending programme. There is end-year flexibility to carry over.
End-year flexibility is a relatively new phenomenon in UK public finance. Has it always applied to European funds?
I think so, yes.
I will be brief, because we are coming close to the cut-off guillotine. To summarise your position again—because it is an area of significant complexity for everyone here—could you focus specifically on the question of additionality to the Scottish block, and compare the position with Wales? That is what the committee is keen to do. The general principle is that it is irrelevant whether funding is objective 1 or not. What is important is whether it is structural funding.
That is a tricky one. It would probably be too much to ask the Treasury to give any region full match funding for its projects. There needs to be some kind of financial commitment from the people who are involved, so that they will take charge of the project. If they simply get extra money from the Treasury, they might not be so keen to follow the programme through. If they know that some of the money will come from their budgets, they will ensure that that money is spent properly. In our paper, we did not argue for full match funding for every programme that comes within the Parliament's remit, but that there should be sufficient match funding to prevent the creation of too many tensions within the budgets. That is the key point about match funding.
I want to return to the issue of additionality, which is a difficult concept to grasp. You say that the Barnett formula does not work when it is applied to regional funding. If Scotland or Wales does proportionately better out of Europe than England or Ireland, the Barnett formula does not reflect that difference. Is that correct?
Absolutely.
Yes.
That is particularly well illustrated when one sees that 65 per cent of a country such as Wales qualifies for objective 1 funding. Scotland has never been in that position, unfortunately—or fortunately. Have you calculated the proportions? Have you worked out whether Scotland does proportionately better out of Europe than England or Wales? Have you worked out the difference, now that the Highlands qualify for transitional relief? I do not know the difference between the funding that Scotland receives from Europe and that which the rest of the United Kingdom receives. Is there a huge difference? Are we losing out because of the Barnett formula?
We are trying to get hold of further information on the way in which the allocations to the English regions are made, the level of those funds and whether they reflect what is in England's single programme documents. We know that the baseline provision for Wales—the amount that is allocated every year—is £20 million, but that £90 million of objective 1 funding is needed. We know the situation in Wales because of the step change, but we need to consider the way in which the funds are being allocated to the English regions. We could then undertake a like-with-like comparison.
In theory, although Scotland might be losing out—and we do not know that at the moment—the UK as a whole is not. The money is probably being allocated elsewhere and England is benefiting. The areas that should not qualify as well as Scotland or Wales are gaining. Is that correct?
It would seem that the money simply stays in the Treasury and is not passed on. I do not think that England does better out of it than Scotland.
The English regions could be benefiting. I take your point about the money remaining in the Treasury, but it could be allocated disproportionately to the English regions.
We do not know that.
The Treasury is demonstrating additionality to Europe. Additionality is taking place.
It is certainly happening at a UK level, but additionality is a UK concept at the moment.
You made the point earlier—in reference to something that Andrew Wilson said, although it was not a direct response to what he said—that objective 1 status is irrelevant and that European structural funds are important. However, contrasting the Welsh and Scottish situations in respect of objective 1 funding is not irrelevant, because of the scale of the problem in Wales and Scotland. The issue has become controversial in Wales and, perhaps, some people in this room want to import that controversy and its electoral possibilities into the Scottish scene. Could you address that issue again? You mentioned earlier that objective 1 status is not irrelevant.
Objective 1 covers two thirds of the population and two thirds of the area of Wales and there is a significant interaction between European moneys and the block grant. Annually, the figure for objective 1 money is about twice the amount of European money that Wales is eligible to receive each year: it is double the interaction between European money and the block grant.
Is that the reason for the huge controversy?
Yes.
You must remember that the Welsh block is smaller than the Scottish block, so there is a much bigger impact.
Thank you. Your evidence has been very helpful, although it is slightly unnerving to be faced with two respected academics whose combined ages are, apparently, the same as mine. [Laughter.] The information that you have provided, both written and oral, has been very helpful and we thank you very much.
Meeting closed at 12:00.