REFORM OF THE STRUCTURAL FUNDS

  102.    The reform of the Structural Funds is now a pressing matter. The Commission's package, with its three themes of greater concentration, simplification and cost savings, is well considered, and we support the general thrust of the Commission's proposals. Reducing the number of Objectives from seven to three is, by itself, likely to improve the efficient management of the Structural Funds, as is the case also with the restriction in the number of Community Initiatives, although here we think that the proposed reduction from 14 to three may be a cut too far. We also agree with the proposed concentration of the Structural Funds by reducing their coverage from roughly half of the EU15's population to around 35-40 per cent.

  103.    Cuts in the Structural Funds received by existing Member States are inevitable unless enlargement is accompanied by an increase in the EU Budget share, which we would not welcome. The important point is to ensure that the cuts are fair. Eligibility criteria for the two regional objectives are bound to lead to recriminations and special pleading. We support the Commission in its aim of trying to establish transparent rules, but are concerned that some elements of the proposals will have inequitable outcomes. For Objective 1, the 75 per cent of GDP criterion which the Commission proposes is tough but just. We recognise that concentration of assistance is desirable. Tinkering with the margins of any cut off will undermine this aim. We conclude that the 75 per cent of GDP criterion for Objective 1 eligibility should be strictly enforced.

  104.    For Objective 2, the evidence we received persuaded us that United Kingdom regions will be particularly disadvantaged because of the weight to be given to unemployment as the principal eligibility criterion. Unemployment is an unreliable criterion of need for at least three reasons. First, there are difficulties in comparing unemployment statistics between Member States. Second, countries and regions may be at different stages in their economic cycles. Last, and possibly most important, unemployment is only one indicator of poverty. The Committee therefore supports calls for a wider range of socio-economic indicators to be used by Member States to designate regions.

  105.    The Commission states that "the most remote regions . . . form a special group, given their many combined structural problems". We agree. Under the Commission's proposals Objective 6, for the development of sparsely populated regions, will be abolished. However, the Commission proposes that the regions currently eligible under Objective 6 which have a per capita GDP of less than the 75 per cent threshold will be eligible in their entirety under Objective 1, and "the other currently existing Objective 6 areas will be eligible for Objective 1 and will receive fair financial treatment".[22] Objective 6 was created after the admission of the Nordic Member States, and has covered only the northern-most parts of Finland and Sweden. We agree that it is right for the Structural Funds to recognise the particular problems created by the combination of geographical remoteness and sparsity of population, and that the former Objective 6 regions should be absorbed into Objective 1.

  106.    The Highlands and Islands of Scotland have similar problems to those of the current Objective 6 regions. Indeed in many ways northern Scotland is more remote than northern Sweden and Finland, partly because of the remoteness of some of the islands, and partly because this region forms a boundary with the sea. It also has a lower GDP per head. Moreover, the average GDP per head in this area is distorted by some very high salaries in the oil industry sector—salaries which would be unthinkable for the crofting farmers who have inhabited the area for centuries. In the past, the Highlands and Islands have qualified for Objective 1 status, and there was therefore no need for them to form part of Objective 6. We consider it essential for the Highlands and Islands of Scotland to continue to receive Objective 1 support, as the somewhat similar regions in Sweden and Finland will under the Commission's present proposals.

  107.    The Commission's proposed new Objective 3 (part-funded by the European Social Fund) will support the adaptation and modernisation of policies and systems relating to education, training and employment. It will fund this outside the areas concerned by Objectives 1 and 2. Although we specifically included this part of the Commission's proposals in our terms of reference, we received little evidence on it.[23] This is disappointing, particularly since the United Kingdom could benefit from using this new Objective to the full in its efforts to train a more highly-skilled workforce. We call on the Government to publicise the aims of the proposed new Objective 3 (development of human resources), and to encourage the maximum uptake of funding under this new Objective in the United Kingdom.

ADMINISTRATIVE ISSUES

  108.    The proposals to decentralise the administration of the Funds and to improve monitoring and evaluation are welcome, but some witnesses have cast doubt on whether these improvements will happen in practice. The Committee urges the Commission and the Member States to make every effort to ensure that the bureaucratic procedures associated with EU structural operations are kept to the minimum consistent with effective controls.

  109.    The main concern about the Community Initiatives is that their administrative costs are excessive in relation to the resources distributed, so that the Commission is justified in reducing them substantially. However, one of the advantages of the Initiatives is that they can be used in regions not designated as Objective 1 or 2. We support the calls for a Community Initiative—RESTRUCT—that can be used to deal with new problems of industrial decline.

  110.    The insistence that the Structural Funds should respect "additionality" is sound in principle, but we note that this is often hard to demonstrate in practice. In our view, the Commission should have included clear and manageable statistical and operational measurements of additionality as part of its current proposals. We therefore call on the Commission to clarify the application of the additionality rule and to make the requirements more transparent.

  111.    The Commission proposes that, in future, the maps for the Structural Funds and for the use of state aids under Article 92(3) should coincide. The policies have different aims and we consequently see no justification for this proposal.

  112.    In the past some have argued, in the interests of greater simplification and avoidance of bureaucracy, for the renationalisation of those Funds currently received by the net contributor Member States. The idea of renationalising the Structural Funds was resoundingly rejected by all our witnesses who expressed a view on the subject, and we do not support it.

THE PEACE AND RECONCILIATION PROGRAMME IN NORTHERN IRELAND

  113.    The proposed reform of the Structural Funds would also potentially have a severe impact on Northern Ireland. In this Committee's view, no-one could dispute the impact of the Peace and Reconciliation Community Initiative in Northern Ireland. In many ways this Initiative has been a showcase for the good use of the Funds. Indeed, a Commission official described it to us in evidence as "perhaps the biggest exercise in bottom-up involvement that we have ever had" (Q 245). The Presidency Conclusions of the Cardiff European Council give us hope that Northern Ireland will continue to receive generous practical help. These conclusions contain the following statement:

  "The European Council . . . reaffirms the conclusion of the General Affairs Council that the Union should continue to play an active part in promoting lasting peace and prosperity in Northern Ireland. It notes the Parliament's request to the Council and Commission to consider as a matter of urgency how the Agreement can be supported in practical terms, and the Commission's commitment to go on finding new, creative ways to support the fresh opportunities which the Peace Agreement will bring. It invites the Commission to make proposals accordingly."

  114.    Cutting the Peace and Reconciliation programme at this critical stage of the Peace Process could be little short of disastrous. Whenever the Structural Funds package is finally agreed, the Peace and Reconciliation Programme should be part of it.

COHESION FUND

  115.    In addition to the Structural Funds, the Cohesion Fund has been overwhelmingly successful in raising the economic performance of the beneficiary Member States. Indeed, Ireland, Spain and Portugal have managed to meet the convergence criteria for Economic and Monetary Union. The success has been such that it is impossible to justify the continued receipt of money from the Fund for the Cohesion countries, with the exception of Greece. If Member States have met the convergence criteria, how can continued cohesion funding be justified? We consider that those Member States which have joined the single currency should no longer be eligible for Cohesion Fund receipts, although we would recommend that these should be phased out in the period up to 2006, as should the Fund itself.

  116.    In the past, concern has been expressed about the arrangements for the management of the Cohesion Fund. Unlike the Structural Funds, Cohesion funding is transferred directly to Member States. We consider it essential that improved management arrangements are put in place to bring the financial control of the Cohesion Fund into line with that under the Structural Funds.

ENLARGEMENT

  117.    Although the proposals are a skilful attempt to prepare the ground for the accession of the much poorer Central and Eastern European Countries (CEECs), much of what is proposed for 2000-06 is about maintaining the Structural Funds broadly as they are at present. Little thought appears to have been given to the difficult questions of how the Funds might be deployed in the CEECs. The Commission and the Council should already be considering how the Funds need to be adapted to be effective in the CEECs.

  118.    The Commission's proposals are based on a working assumption that certain CEECs will accede to the EU in 2002 and the expenditure plans are framed accordingly. The Committee considers that the 2002 accession target is optimistic, and that the Commission should be asked to explain its current thinking on what will happen to the Structural Funds if, as is widely expected, enlargement occurs later than 2002.

FINANCIAL MANAGEMENT

  119.    The total amount of money which it is proposed to allocate to the Structural Funds is, by any measure, a significant sum. Funds of such a size need careful financial management. The Committee warmly welcomes the Commission's intention to improve the financial management of the Structural Funds. Past misuse of a small proportion of the Funds, identified by successive reports by the Court of Auditors, has given the impression of financial mismanagement which is out of proportion to the facts. But for many European citizens the Structural Funds and the Cohesion Fund are a large part of the public face of the European Union. For those communities which benefit from these Funds—and those which do not but which look enviously at those which do—it is important that their financial management is above reproach.

  120.    The simplification of the Funds, including the reduction in the number of initiatives and the streamlining of administrative procedures are likely of themselves to facilitate improved financial management.

  121.    We support the Commission's proposal to de-commit funds which have not been used within three years. This is probably the most important of the proposed changes to financial management put forward by the Commission as part of the present package. It would not only encourage the prompt use of funds by communities which are genuinely able to use them, but would also facilitate the Commission's own financial management.

  122.    We have serious doubts about the second of the Commission's key proposals, the 10 per cent "performance reserve" to reward good performance. This is a very large amount of money—more than the entire Cohesion Fund. We appreciate the good intention behind the proposal. But rewarding good financial management is usually fraught with difficulties. First, by its nature, any measure of good performance is bound to be subjective: what is "good" performance? Secondly, if the Funds are to be used to lasting effect, their emphasis should be on long-term results, not a succession of superficial quick fixes which the performance reserve would inevitably tend to encourage. Thirdly, we find it hard to see how the reserve could be made to apply to transnational programmes, including those spanning both sides of the Irish border, despite the obvious importance of such programmes. But above all, the Structural Funds and the Cohesion Fund should be allocated on the basis of need: the most needy areas will not necessarily be those who are best able to spend the funds speedily. We conclude that, despite its virtuous intention, the Commission's performance reserve proposal would be unworkable, and should be dropped.

  123.    The aim of improving financial management is, however, a commendable one. We recommend that, rather than using the blunt instrument of the 10 per cent performance reserve, increased efforts should be made to encourage best practice by Member States. In particular, we recommend an improved evaluation process, including the publication of evaluation reports. Improved financial management may become especially important as part of the preparations for the enlargement of the Union.

  124.    In our view, the appropriate reward for improved financial management by Member States would be a reduction in the cash flow problems in receiving European funding about which the Local Government Association complained. However, we accept the Commission's evidence to us that in many cases these delays occur within Member States themselves (Q 338).

ENVIRONMENTAL ISSUES

  125.    The Cardiff European Council noted the Commission's efforts to integrate environmental concerns in all Community policies and the need to evaluate this in individual decisions, including on Agenda 2000.[24] The impact, for better and for worse, of projects financed through the Structural Funds is very considerable. It is thus with some sadness that we consider it necessary to re-iterate our comments in the Committee's report on the last proposals for reform. We repeat that policies designed to strengthen economic and social cohesion in the Community can only be lasting if "environmental considerations are taken into account and seen as an essential part of economic and social development." We also remain of the opinion that "it would clearly be wrong for Community funds to be spent on programmes that conflict with the agreed policies of the Community."[25]

  126.    The best way of avoiding the negative environmental impacts of Structural Funds expenditure is for environmental considerations to be taken fully into account when projects are drawn up. We recommend that environmental authorities should be mentioned as key members of the "partnership" in Article 8 of the Structural Funds Regulation on "Complementarity and Partnership". We consider that environmental authorities should be re-introduced into the system as core partners in the Structural Funds at all stages, and that they should be included in the management authorities for Community Support Frameworks, Operational Programmes and Single Programming Documents.

  127.    We also support the idea of a specific linking of environmental protection and improvement activities with employment creation programmes.

CONCLUSION

  128.    The Structural Funds are one of the most visible signs of the European Union. To many, the use of these Funds—for better or for worse—is of great significance. Everyone concerned in the negotiations on the Commission's package of proposals has an interest in a successful outcome.

  129.    The timetable for agreeing both the Financial Perspective and the new Structural Funds regulations now appears to be very tight. We are persuaded by the testimony of several witnesses that, in view of the effect of the co-decision procedure on the Commission's package of proposals, a failure to reach agreement before the European Parliament[26] elections next year would have serious consequences for regeneration programmes in those regions which will continue to receive support from the Funds. Furthermore, complete failure to reach agreement would have negative consequences for the enlargement of the Community.[27] We call on all concerned to intensify their efforts to reach agreement on the reform of the Structural Funds and the Cohesion Fund so that the narrow window of opportunity to reach agreement by the spring of 1999 is not missed.

23   One of the few witnesses to comment on the new Objective 3 was Sr Arias Cañete, who suggested that it should be applied on a national basis (Q 301). Back

24   Presidency Conclusions, Cardiff, 15 and 16 June 1998, paragraph 33. Back

25   4th Report of session 1991-92 (HL Paper 20), EEC Regional Development Policy, paragraph 131.  Back

26   Sr Arias Cañete explained in detail the European Parliament timetable (Q 280). Back

27   A point made in evidence by Dr Schönfelder (Q 371). Back