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SCOTTISH EUROPEAN STRUCTURAL FUNDS FORUM

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SCOTTISH EUROPEAN STRUCTURAL FUNDS FORUM

UPDATE TO THE ANALYTICAL WORKING GROUP'S INITIAL REPORT ON THE EUROPEAN COMMISSION'S PROPOSALS FOR STRUCTURAL FUNDS REFORM: IMPLICATIONS FOR SCOTLAND

Introduction

1. This paper updates the Analytical Working Group's initial report (of May 2004) to take account of more recent developments relating to the European Commission's proposals for Structural Funds after 2006. The Analytical Working Group was set up by the Structural Funds Forum to report on the financial implications of the Commission's proposals for Scotland. The emphasis of this paper, like that of the initial report, continues to be on the implications for Scotland of these proposals. It does not repeat the sections of the initial report that summarised the Commission's 3 ^rd Cohesion Report's account of recent Cohesion trends, the rationale for the Commission's proposed regime, or issues arising from the 3 ^rd Cohesion Report that were identified by the Analytical Group. Nor does it examine the connection between the proposals for EU regional policy and regional State Aids. Rather, it updates the sections dealing with the proposals for a new regime and the associated modelling of financial implications.

The Commission's proposals

2. The Commission's proposals for Structural and Cohesion Funds 2007-13 have been refined since the Analytical Group initially reported. In the intervening period, the Commission has given more detail on its initial proposals in the Third Cohesion Report, though the proposals themselves have not changed substantially. There have been two major developments since the Analytical Working Group's initial report. First, the Commission published its draft General Council Regulation on 14 ^th July 2004 along with four other regulations on the Structural Funds. This has been supplemented by documents outlining the Commission's methodology for calculating different funding allocations through Fiche Nos 15 (Convergence), 17 (Capping of Resources), 26 (Regional Competitiveness and Employment), and 28 (Cooperation). The key elements are described below, and Annex C gives a graphical summary.

3. The total budget over the period 2007-13 is set at €336.2 billion (2004 prices). This total budget is still the subject of debate between Member States; the Commission's proposed budget is at the upper end of the spectrum of views on what the total budget should be. Any final agreement on the total budget could, clearly, affect the breakdown of funding for different elements and the forecasts that are made later in this report.

Convergence objective (€264.0 billion) comprising:

• Full Convergence: €177.88 billion

4. Distributed between NUTS II regions that have GDP per head below 75% of the EU25 average. Fiche No 15 sets out the allocation method, including the relative weights of the different criteria: eligible population, regional GDP per head, national GNI per head, and regional unemployment.

• Statistical Phasing-Out (so-called 'Statistical Effect'): €22.11 billion

5. Distributed between NUTS II regions which are below 75% of EU15 average GDP per head but above 75% of the EU25 average GDP per head (i.e. they narrowly fail to qualify for full Convergence funding). As above, allocations to Member States would take account of the eligible population, regional and national GDP per head, and regional unemployment. Fiche No 15 states that "a similar approach" would be used for Statistical Phasing-Out as for Convergence regions. However the Fiche gives less detail about the allocation method than it does for full Convergence regions.

6. The Fiche states that, as a general rule, the aid intensity for each Statistical Phasing-Out region in 2007 should not be higher than 85% of the aid intensity received in 2006 under Objective 1. For regions that do not receive Objective 1 funding in 2006 and for regions of the new Member States there would be "a specific and fair treatment". The Fiche does not say what constitutes a specific and fair treatment, although more detail on this issue is currently being sought from the Commission. Aid intensity would be the same in 2008 as in 2007 and then fall by 5% each year.

• Cohesion funding: €63.00 billion

7. This would go to Member States that have GNI per head below 90% of the EU25 average. Allocations would take account of eligible population, the level of GNI per head, change in GNI per head over a previous period, and the area of the Member State. There is no indication yet of the relative weights for these factors.

8. €1.11 billion is earmarked for the Outermost Regions , (Guadeloupe, French Guiana, Martinique, Reunion, Azores, Madeira and the Canary Islands).

Regional Competitiveness and Employment objective (€57.9 billion) comprising:

• Mainstream Competitiveness: €48.33 billion

9. All NUTS I or II regions that do not qualify for Full Convergence, Statistical Phasing-Out or Competitiveness Phasing-In funding (see paragraph 10) would be eligible for mainstream Competitiveness funding. Fiche No 26 sets out the allocation criteria: eligible population, unemployment (which, unlike the other regional criteria, would be measured at NUTS III level), regional employment rate, regional low educational attainment, regional population density, and regional GDP per head. The Fiche gives weights for each of the criteria.

• Competitiveness Phasing-In: €9.66 billion

10. This would go to NUTS II regions that currently receive Objective 1 funding but which would not be eligible for Full Convergence or Statistical Phasing-Out funding in the new programme, i.e. their level of prosperity has grown appreciably. Fiche No 15 states that "a similar approach" would be used for Phasing-In regions as for mainstream Competitiveness regions, but it does not spell this out.

11. As with Statistical Phasing-Out regions there would be limits to the level of funding that Phasing-In regions could receive, but there are some differences. For each Phasing-In region the level of aid in 2007 cannot, as a general rule, be more than 75% of the level of aid it receives in 2006 from Objective 1. For regions of the new Member States which do not receive Objective 1 in 2006 the treatment would be "specific and fair" but this is not spelt out. From 2008 the level of aid would fall linearly so that, in 2011, it reaches the level of mainstream Competitiveness support, and this level would continue in 2012 and 2013.

European Territorial Cooperation objective (€13.2 billion) comprising:

• Cross-Border Cooperation (€4.7. billion) and ERDF contribution to the cross-border strand of the European Neighbourhood and Partnership Instrument and of the Instrument for Pre-Accession (€1.6 billion)

12. Eligible population would be the population of NUTS III regions along internal or external borders of the EU or in maritime border areas (internal or external) separated by not more than 150 kms to ensure the coherence and continuity of existing cooperation areas.

• Transnational Cooperation (€6.3 billion): The allocation criterion would be the population of Member States. All NUTS II regions would be eligible.
• Cooperation Networks (€0.6 billion)

Technical Assistance

13. €0.8 billion would be allocated for Commission expenditure on Technical Assistance.

Absorption Limit

14. An absorption limit is set on Structural and Cohesion Funds (including the relevant parts of the European Agricultural Fund for Rural Development and the European Fund for Fisheries): they should not exceed 4% of a Member State's GDP as estimated when agreement is reached on the EU budget. If the financial allocation exceeds 4%, then proportional reductions are made to the allocations for each Objective (Convergence, Competitiveness, etc). Fiche No 17 makes it clear that funding withheld by the absorption rule is not redistributed among Member States.

15. Annex C provides a summary graph of the key elements of the Convergence, Competitiveness and Cooperation objectives.

Summary of Changes

16. It is helpful to summarise the key refinements that have been made in the Commission's proposals since the Analytical Working Group last reported.

17. The total budget is unchanged and there have been only slight adjustments to its distribution between the 3 main strands, but much more detail is given on how it would be apportioned to different funding elements within the strands.

18. The proposals are now more specific about indicators (and their weights) that would be taken into account in apportioning the budget for certain funding elements:

• Previously the proposals simply said that the allocation of funding for mainstream Competitiveness would be on the basis of "economic, social and territorial criteria". As noted in the previous section, these are now specified as (in addition to eligible population) regional GDP per head, regional employment, regional unemployment, regional low educational attainment, and regional population density.
• Previously the proposals did not mention any indicators for the allocation of Statistical Phasing-Out funding other than eligible population. Now, as noted in paragraph 5, these are now specified as national and regional GDP per head and regional unemployment, in addition to eligible population.
• It is now made clear that the allocation of funding for Phasing-In regions would be based on eligible population, regional and national prosperity, and regional unemployment, as noted in paragraph 10.
• The basis of allocations for full Convergence funding is now fully specified. As well as eligible population, account would be taken of regional and national prosperity, and regional unemployment, as noted in paragraph 4.
• The basis of allocation of the Cohesion Fund is more fully specified. As well as eligible population, it is now proposed that account would be taken of the level and change of national GNI per head, and of the area of the Member State. However the weights for these different factors are not yet known, as noted in paragraph 7.

Implications for Scotland

19. The bullet points below set out which parts of the proposed regime would be relevant to Scotland:

• Cohesion: The UK would not qualify for the Cohesion Fund.
• Convergence Funding: None of the Scottish NUTS II regions are expected to qualify for full Convergence funding.
• Statistical Phasing-Out: The Highlands & Islands NUTS II region could qualify for Statistical Phasing-Out funding (although this is not certain until the precise time when eligibility is determined). Because the Highlands & Islands would not receive full Objective 1 funding in 2006, should it qualify for Statistical Phasing-Out funding it would be one of the regions for which the allocation in 2007 would be "objective and fair" rather than simply lower than the level of funding anticipated for 2006 (see paragraph 6 above).
• In the initial report the possibility of the South of Scotland (which has similar levels of GDP per head to the Highlands & Islands) qualifying for Statistical Phasing-Out funding was considered. However, the Commission's Financial Framework of July 2004 clearly specifies that entitlement for Statistical Phasing-Out funding would be calculated at NUTS II level. The South of Scotland consists of two NUTS III areas which separately form part of the Eastern Scotland NUTS II area and the South Western Scotland NUTS II area. Consequently, the South of Scotland would consequently not receive Statistical Phasing-Out funding. A review of NUTS II boundaries will not be completed before the end of 2007 so, in this report, it is assumed that the South of Scotland would, instead, potentially qualify for Competitiveness funding.
• Competitiveness Phasing-In funding: No Scottish region would qualify for Competitiveness Phasing-In funding because none currently receives Objective 1 funding. With the exception of the Highlands & Islands, however, all would be eligible for mainstream Competitiveness funding, though it is still not clear how programmes would be defined within lowlands Scotland.
• Cooperation funding: Scotland would have an interest in funding of the Trans-national and Network strands of the Cooperation theme.

Revision to Estimated Funding Receipts for Scotland

20. Based on the developments reported above, we have calculated a revised set of Scottish funding estimates. The Commission proposes that financial envelopes would be allocated to Member States. These allocations would largely be based on eligibility for different funding elements at regional intra-Member State level. However, the Member States would themselves decide on the final allocation of their national envelopes within their territories. In order to forecast what the implications of the Commission's proposals would be for Scotland, we have assumed that the value of allocations would be passed directly from the EU to Scottish regions and we have used the methods which the Commission has proposed for determining the national envelopes. In reality though, the allocation criteria used by the UK government would be an important influence on the level of Structural Funds received by Scotland. It should be emphasised that there are still many uncertainties in these forecasts.

• The estimates are based on 2001 data, whereas the final allocations would be based on the latest data available.
• In the previous Scottish funding estimates the indicators were not fully specified and we had to make assumptions about their relative weights. The indicators and relevant weights are now generally available, although there are still some uncertainties remaining. Pending further information about how it would be determined, we have not applied a ceiling to the estimate of Statistical Phasing-Out funding for the Highlands & Islands. We have also made an assumption about Scottish eligibility for Cooperation funds (detailed in paragraph 19). These estimates are presented under two scenarios now, rather than the original three: newly-defined 'high' and 'low' scenarios.
• When calculating the Cooperation funding in the initial report, forecasts were based upon a straight population allocation and used for the entire EU25 population, giving a funding per head figure of € 4 per annum. However, with the additional information on this funding programme (as described in paragraph 12) for the purpose of these calculations we expect that Scotland would not qualify for the cross-border element of Cooperation funding, but it may be eligible for the trans-national and Cooperation Network elements. Thus calculations are now based on a straight population allocation from these funding strands only.

Estimated Scottish Structural Funding

21. Using the method described in Annex A, the following estimated funding totals are calculated:

Table 1.1. Scottish Funding Estimates

High Scenario

22. The high scenario now assumes only the Highlands & Islands would qualify for Statistical Phasing Out funding. The estimated total funding figure for Scotland (2007-13) of €1.3 billion at 2004 prices would be about a 15% reduction in real terms compared to the level of funding in the 2000-06 period.

Low Scenario

23. The low scenario assumes the Highlands & Islands would not qualify for Statistical Phasing Out funding, thus being eligible only for mainstream Competitiveness funding. The estimated total funding figure for Scotland (2007-13) of around €849 million at 2004 prices would be about a 50% reduction in real terms compared to the level of funding in the 2000-06 period.

24. The change in forecast funding levels compared to the May report (shown in Table 1.2 below) can be attributed to the following factors;

• Estimated Statistical Phasing-Out funding per head has increased from € 184 to € 189 p.a, due to a change in the percentage allocation detailed in the Commission's Financial Framework (July).
• The indicator adjustments, which were not made in the previous report but are made in the present estimates, increase the total funding estimates by around 5% for the High Scenario and 16% for the Low Scenario. These increases are partly offset by other factors.
• Cooperation funding is now allocated using different assumptions to the previous calculations. Scotland is now assumed to be eligible for only part of the Cooperation budget (see paragraph 19).

25. The updated High Scenario estimates are about 10% higher than those in the Analytical group's initial report, i.e. the decrease compared to funding in 2000-06 is about 10% less. The Low scenario estimates remain broadly similar.

Table 1.2. Comparison of Initial and Updated Estimates

Note: The Middle Scenario is used from the May report because, like the High Scenario in this report, it assumed that the South of Scotland would not qualify for Statistical Phasing-Out funding.

26. Both the May and the updated estimates point to a potentially smaller decrease in Structural funding to Scotland than has been widely anticipated. This can, in part, be attributed to the substantial increase in the EU budget which the Commission proposes, and partly to the fact that, in the high scenario, the Highlands & Islands is assumed to qualify for generous Phasing-Out funding without, at present, any ceiling applied, rather than general Competitiveness funding.

Indicators for Allocation of Structural Funds within the UK

27. The estimates given above assume that all elements of funding would be allocated directly from the EU to Scotland. This is not realistic. For Competitiveness funding, while the Commission proposals calculate indicative funding envelopes on a regional basis, the Commission is clear that it is up to the Member States to develop their own methodologies for determining programmes and allocating funding between the different Competitiveness programmes. Allocations for Convergence funding would pass directly to the regional programmes concerned. As for Cooperation funding, Member States would have flexibility at the margin in how they distribute the allocations between the cross-border and the transnational components.

28. The way the UK decides to allocate Competitiveness funding would therefore be important for Scotland. Different criteria may affect Scotland's share of the UK total. The Scotland-rest of UK comparison of various indicators (which was included in the Analytical Group's initial report) is therefore repeated as Annex B in this paper. It shows which indicators would be more, and which less, favourable to Scotland. Work on this is unlikely to begin until 2005 at a UK level, although the Scottish Executive would be closely involved.

29. The indicators shown are mostly taken from Eurostat. Other possibly relevant indicators would be available for Scotland-rest of UK comparisons using sources other than Eurostat.

Summary and Conclusions

30. The Commission's proposed regime for Structural Funds 2007-13 has become clearer since the Analytical Group's initial report in May 2004. Our best estimate is that, under the Commission's current proposals, and assuming for operational purposes that funds were allocated directly to Scotland, Scotland would receive about 15% less funds in real terms in the 2007-13 period than in 2000-06.

31. This estimate would be affected by any reduction to the overall budget for Structural Funds proposed by the Commission or by a redistribution of the total budget between the 3 different strands. It would also be significantly reduced if the Highlands & Islands were not in fact to qualify for Statistical Phasing-Out funding but, instead, only for general Competitiveness funding.

32. If the Commission's proposed regime is adopted, then the choice of criteria used by the UK government to allocate Structural Funds within the UK could have a significant effect on Scotland.

33 Finally, with the updating of this report, the Analytical Working Group's immediate tasks are now complete. As discussed in paper 3 for the 6 December meeting of the Forum, the Structural Funds negotiations are at an early stage and it is not clear whether - and when - any counter proposals may be made by the Commission or other Member States. When such concrete proposals are put forward, the Group will make appropriate analysis and report to the Forum.

Scottish European Structural Funds Analytical Working Group

November 2004

ANNEX A

COMMISSION PROPOSALS: FUNDING 2007-13

FORECASTING THE IMPLICATIONS FOR SCOTLAND

The following annex outlines how the Commission's methodology for calculating allocations under the three proposed strands can be applied to Scotland. It draws heavily on the methodology described in the Commission's supplementary Fiches, but also makes assumptions in the continuing absence of critical information for making fully robust estimates.

Step 1: Funding of different strands

1. Use the budgets given in the Financial Framework:

Total Budget: € 336.2 bn

• Convergence: € 264.1 bn

• Competitiveness: € 57.9 bn

• Cooperation: € 13.2 bn

Step 2: Statistical Phasing-Out

1. Calculate the "development gap" between the GDP per head of each Statistical Phasing-Out region and 75% of the average GDP per head of EU15. Fiche No 15 says that the level of prosperity of these regions "is assimilated to that of a region whose per capita GDP is 75% of the Community average". We assume that the Community average in fact means EU15 average; EU25 would not make sense given that all Statistical Phasing-Out regions have GDP per head above 75% of the EU25 average.

2. From the scale given in Fiche No 15, apply the appropriate % assistance rate (3% in the case of the UK) to the development gap of each relevant region to give funding per head per year.

3. Compare the unemployment rate of each relevant region with the average for the group as a whole and calculate the numbers of any "excess unemployed" in individual relevant regions.

4. Multiply any excess unemployed by €100 per person to give additional funding per year. (We assume that the same rate applies to Statistical Phasing-Out funding as Fiche No 15 indicates for Convergence funding).

5. For each relevant region add development gap funding and excess unemployment funding and multiply the sum by 7 to give funding for the whole Programme period.

6. Compare the total forecast funding with the budget of €22.1 bn, and make any uniform adjustment that is necessary for funding to match budget.

7. The level of funding in 2007 should be subject to a ceiling based on a "specific and fair treatment". We do not yet know what the nature of this would be and have therefore not applied a ceiling.

Step 3: General Competitiveness

1. NUTS II regions eligible for General Competitiveness are those not eligible for (a) Full Convergence funding, or (b) Statistical Phasing-Out, or (c) Competitiveness Phasing-In funding. We assume that regions within Member States qualifying for the Cohesion Fund remain eligible for general Competitiveness funding providing they do not qualify for (a), (b), or (c).

2. Allocation of the budget for general Competitiveness funding is based on each relevant region's weighted population. The factors and their weights are specified in Fiche No 26.

• Simple total population is weighted 0.6.
• The numbers of excess unemployed in the NUTS III areas making up the NUTS II region are weighted 0.15. Excess unemployed should be calculated by comparing the unemployment rate in each NUTS III area with the average for all NUTS iii areas in relevant NUTS II regions. However Eurostat has yet to make available unemployment data at NUTS III level. We have therefore calculated excess unemployment at NUTS II level.
• The numbers of additional employed people in the NUTS II region that would be required to achieve an employment rate of 70% are weighted 0.1. This applies only to regions that have an employment rate below 70%. The employment rate data we have relates to the population aged 15-64. The same age group should be used in the calculation of deficit numbers of employed people. However Eurostat is not currently making available data on population age groups at NUTS II level. In order to calculate deficit numbers of employed people, we have therefore resorted to using the total population.
• The excess number of employed people in the NUTS II region that have low education are weighted 0.1. The % of people with low educational attainment in the region are compared with the average % for all Competitiveness regions. Fiche No 26 does not define the variable "Number of employed people with low education". We have used data on the % of persons aged 25-64 whose educational attainment is "low". As for the employment rate we have had to use total population to calculate excess numbers rather than population aged 25-64 (which is not yet available at NUTS II level from Eurostat).
• The numbers of additional people in the NUTS II region required to reach the average density of population are weighted 0.05. Population density in the region is compared with the average for all Competitiveness regions.

3. Using the method set out above, the total weighted populations attributable to the different indicators do not correspond to the weights set out in Fiche No 26 (deficit population density accounts for nearly all the total weighted population). At this stage, therefore, we impose the weights set by the EC: eg if simple population is to have a weight of 0.6, then the weighted population attributable to excess unemployment should amount to a quarter of this (because its weight within the total is 0.15).

4. Finally, after the set relative weights have been imposed, the weighted population of each region is increased by 5% if the NUTS II region's GDP per head is below the average GDP per head of all relevant regions; or it is reduced by 5% if the region's GDP per head is above the average. There is no scale to this adjustment: the adjustment is +5%, -5%, or 0 (if the region exactly matches the average).

5. The total budget for general Competitiveness is allocated to relevant NUTS II regions according to their shares of total weighted population.

Step 4: Cooperation

1. It is not expected that Scotland would qualify for the cross-border element of Cooperation funding, but it would be eligible for the trans-national and Cooperation Network elements. The total budget for these 2 elements amounts to €6.9 billion, equivalent to €15.18 per head of EU25 population over the Programme period..

2. Forecast allocation to Scotland over the Programme period is €15.18 x Scotland's population.

N.B. The steps detailed above are sufficient to estimate funding receipts for Scotland if allocations were made direct to Scotland rather than via the UK.

Other regions require estimates to be made also for elements of funding for which Scotland is not expected to be eligible: Cohesion Fund, Convergence Fund, Competitiveness Phasing-In funding, and the Absorption Limit to be applied where necessary.

ANNEX B

INDICATORS: SCOTLAND vs UK COMPARISON

1. The attached potential Indicator Chart (which is repeated from the Analytical Group's report) compares Scotland with the rest of the UK on various indicators taken from Eurostat. For most of the indicators any regions expected to qualify for full Convergence or for Statistical Phasing-Out funding are excluded from the rest of the UK figures. The Scottish figures do, however, include the Highlands & Islands.

2. These exclusions are made because it is assumed that Member States would pass on the allocation for Convergence funding determined by the EC, whereas they would have more discretion about the allocation of non-Convergence funding determined by the EC. In the case of Scotland this would relate principally to mainstream Competitiveness funding.

3. The indicators are ranked by the degree to which they would be favourable to Scotland, in an intra-UK allocation.

• Thus population density appears at the top: if allowance were made for population sparsity, this would be very much to the favour of Scotland because 100% of Scotland's population live in NUTS II regions which are more sparsely populated than any of the non-Convergence NUTS II regions in the rest of the UK.
• At the other end of the scale, making allowance for the level of provision of health personnel (in relation to size of population) would not be to Scotland's advantage: 68% of the population in the rest of the UK live in regions where the level of health personnel provision is lower than the levels in Scottish regions.

4. In brief, any indicator with more than 50% shown to the right of the vertical line would be favourable to Scotland, and the higher the figure is the more favourable it would be.

It should be noted, though, that a high value to the right of the vertical line does not mean that Scotland has a high value of that indicator. It all depends on what the indicator is and whether having a high value of it is likely to attract more allocation of funds.

• For example Scotland has a relatively low rate of business start-ups, which is a disadvantage for Scotland's economy but would mean that Scotland's allocation would be increased if account were taken of it. Thus more of the horizontal bar for this indicator is shown to the right of the vertical line: 78% of the population in the rest of the UK live in regions where the rate of business start-ups is higher than the levels in Scottish regions.

ANNEX C