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3. POLICY BACKGROUND

3.1 Policy Context

To be fully effective, the ERDF Programme must not only address the challenges set out in the analysis of the socio-economic background section, but link these to a range of policy actions in order to maximise the value added of the Structural Funds. These links must be established at different levels to ensure funding not only complements but builds on existing policy at different levels. Specifically, the Programme should fit within and alongside:

• the Community Strategic Guidelines, which sets the indicative framework for the Cohesion Policy in support of the EU's growth and jobs commitments;
• the UK's National Strategic Reference Framework, as specified in Article 25 of the General Regulation, in which the chapter on Scottish Structural Funds goals provides the overall framework within which the ERDF Programme must fit;
• the UK's National Reform Programme ( NRP), detailing how the UK as a whole is addressing the challenges and targets developed as part of the wider Lisbon Agenda, to which the Structural Funds are intended to contribute; and, lastly,
• the array of domestic policy initiatives available in the region.

The diagram below illustrates how these different policy tiers should combine in the ERDF programme.

The following section presents the key links between the challenges identified in the socio-economic background with these different tiers of policy guidelines and actions to ensure consistency of approach. It will form the basis of the priority structure set out below. The socio-economic analysis considered the region from three perspectives: the enterprise sector; communities; and underlying key sources of infrastructure. The following section shows how the existing policy framework addresses these issues currently.

Enterprise sector

The socio-economic background highlighted several key enterprise development challenges for the Highlands & Islands region. The required actions to meet these challenges are consistent with the use of Structural Funds under three of the Community Strategic Guidelines that apply across the EU:

• Facilitate innovation and promote entrepreneurship. The Guideline notes that there is a widespread need to encourage entrepreneurs to set up businesses as well as to provide a support environment for their start-up and growth.
• Increase and improve investment in RTD. The Guideline outlines the importance of strengthening co-operation amongst businesses and research centres, supporting RTD undertaken by SMEs and developing the overall RTD capacity of the region.
• Improve access to finance. The Guideline acknowledges that Cohesion Policy can contribute to regional economic growth by improving access to private equity and venture capital.

The use of Structural Funds to address these challenges in the Highlands and Islands is entirely consistent with the economic development strategies that have been established at both the UK and Scotland levels. In the National Reform Programme, the UK Government's overall approach to encouraging national economic growth is based on improving productivity performance through an integrated series of policy measures. One of the key drivers of productivity is the capacity to generate and make full economic use of science and innovation. In pursuit of this goal, the National Reform Programme highlights the need to encourage greater private and public investment in RTD, particularly in the business sector, as well as investing in a research base that is responsive to the economy. As part of the goal of promoting productivity growth, the National Reform Programme also emphasises the need to improve entrepreneurship and access to finance, particularly for SMEs.

The goal of improving RTD and innovation performance in Scotland is central to the Scottish Executive's key strategies supporting economic development. The Framework for Economic Development in Scotland ( FEDS), refreshed in 2004, sets the overall strategy for developing the Scottish economy, including its component regions such as the Highlands and Islands. Its vision is:

to raise the quality of life of the Scottish people through increasing the economic opportunities for all on a socially and environmentally sustainable basis.

To achieve this, FEDS has four key outcomes:

• economic growth: with growth accelerated and sustained through greater competitiveness in the global economy;
• regional development: with economic growth a pre-requisite for all regions to enjoy the same economic opportunities, and with regional development itself contributing to national economic prosperity;
• closing the opportunity gap: with economic growth a pre-requisite for all in society to enjoy enhanced economic opportunities, and with social development in turn contributing to national economic prosperity; and
• sustainable development: in economic, social and environmental terms.

Central to these four outcomes is a long-term strategy to improve the productivity of the Scottish economy. As in the wider UK strategy, one of the key factors in this is the generation and full economic use of knowledge; FEDS acknowledges that Scotland needs to adapt to knowledge-intensive global markets rather than the labour-intensive markets in which it has successfully competed in the past.

The Scottish Executive's policy for economic development through the enterprise sector in the Highlands and Islands is set out in A Smart Successful Highlands & Islands, which was also refreshed in November 2004. The strategy has a vision consisting of four outcomes:

• strengthening communities;
• developing skills;
• growing businesses; and
• global connections.

As part of the third outcome, the challenge of increased commercialisation of research and innovation is explicitly defined with the need to increase levels of research and development spending in the corporate sector as central to improving the regional economy. The strategy also notes the particular difficulties in developing and sustaining entrepreneurship, recognising in particular the gaps that can exist in the Scottish capital market for financing companies with high growth potential.

Given the strong links between specific industries and business RTD investment, the industries and clusters fostered in the Highlands & Islands will have a major impact on the region's RTD performance. In HIE's Operating Plan 2006-09, the key sectors for the region are life sciences, renewables and the creative industries.

• Life Sciences .HIE are developing the Centre for Health Science which will co-locate healthcare and medical-related organisations in Inverness. A HIE Life Science Strategy is also due to be launched.
• Renewables. The Scottish Executive published a new sustainable development strategy in 2005. The Scottish Executive has set a target that 18% of electricity generated should come from renewable sources by 2010 and 40% should come from renewable sources by 2020 (Scottish Executive, 2003). Given that the figure for 2003 was 9%, these are ambitious targets significantly exceeding the European Commission target of 12% by 2010. Significant investment in renewables RTD will be needed to help meet these targets. Given the massive natural renewable resources across the Highlands & Islands, the renewables industry offers the region a critical, but time-limited, opportunity to develop a world leading industry.
• Creative Industries . A Centre for Creative and Cultural Industries will be built at the Sabhal Mor Ostaig campus in Skye, which will also provide business incubator and commercial letting space. The Highlands & Islands cultural profile will also be raised through the Scottish Year of Highland Culture in 2007 .

Consequently, within the National Strategic Reference Framework, these challenges are identified as key objectives for the use of Structural Funds in the Highlands and Islands in 2007-13. An improved performance on RTD/innovation is recognised as critical to the overall goal of improving the economic and employment growth potential of the region and, therefore, this will be one of the priority goals for ERDF activity under the Convergence Objective.

It will be seen in Chapter 5 below that the enterprise development objective in the Highlands & Islands is consistent with the programme's horizontal themes, especially the key environmental sustainability dimension. The Scottish Green Jobs Strategy outlines how Scotland should seize the business opportunities and advantages arising from sustainable development with a view to creating a vibrant, low-carbon economy and the country being a location for green enterprise. This would be achieved through a combination of support for the economic opportunities arising from a commitment to environment sustainability - such as renewables technologies and economic efficiencies arising from waste recycling - as well as more general information-raising and skills improvements in mainstreaming environmental issues into economic activity. In this context, there are significant opportunities in the Highlands & Islands.

Communities

In Scotland, economic development challenges have a strong spatial component. This is particularly evident in communities where a combination of factors have hindered their economic development and where the problems can only be tackled by a holistic, integrated policy approach. The socio-economic analysis drew attention to these problems being particularly acute in some parts of the Highlands & Islands region. Three key issues have led to these areas experiencing significant economic development problems:

• the concentration of deprivation in some communities, exacerbated in the case of the Highlands & Islands by peripherality and population sparsity;
• the challenge of providing targeted and distinctive support for enterprise development in these areas; and
• the importance of linking areas of particular deprivation with areas of opportunity.

Regeneration can be defined as the sustainable economic, physical, social and environmental transformation of areas with particular disadvantage. In the Lisbon perspective, it is essential that regeneration is pursued so that all areas can contribute to the jobs and economic growth agenda. The Community Strategic Guidelines recognise the distinctiveness of these challenges. The need to address community regeneration acts as a cross-cutting theme across all the Guidelines. It is explicitly noted that within the Structural Funds, " actions supported [should] include measures to promote entrepreneurship, local employment and community development". The Guidelines also point to the importance of contributing to plans for urban regeneration within the designated areas, although, given the nature of the area this is of limited application to the Highlands & Islands.

This is further underlined by the National Strategic Reference Framework which points to community economic development as an important element of the Structural Funds strategy in Scotland. In the National Reform Programme, the need to target areas of particular deprivation is acknowledged with a commitment to an integrated policy approach to addressing the problems of the most disadvantaged areas. The NRP makes special reference to Closing the Opportunity Gap, the Scottish Executive strategy aiming to prevent individuals and families from falling into and to provide routes out of poverty. Taking forward the third of the outcomes in FEDS, the strategy sets two relevant targets to tackle poverty and disadvantage:

• to promote community regeneration of deprived neighbourhoods in urban areas, through improvements in employability, education, health, access to local services and quality of the local environment; and
• to improve service delivery in rural areas so that agreed improvements to accessibility and quality are achieved for key services in remote and disadvantaged communities.

In 2006, Closing the Opportunity Gap was supplemented by the Scottish Executive's People and Place: Regeneration Policy Statement, which states that regeneration is central to achieving the main goal of sustainable economic development. The Regeneration Policy Statement integrates public, private, voluntary and community sector activities to sustainable regeneration. It defines the regeneration challenge for Scotland:

Regeneration is a crucial part of growing the economy and improving the fabric of Scotland… Our aim is to turn disadvantaged neighbourhoods into places where people are proud to live. To turn places that have been left behind into places connected with the opportunities around them. To create areas of choice and areas of connection, rather than inward-looking places excluded from the wider successful Scotland around them. To build mixed and vibrant communities that sustain themselves.

The Regeneration Policy Statement recognises that this can only be achieved through an integrated policy approach that goes beyond investment in the physical infrastructure of these areas: the economic, social, physical and environmental aspects of regeneration requires an integrated approach which 'joins up' planning and delivery across these aspects, so that change is mutually reinforcing. At the same time, it must be an approach based on partnership, as no single organisation can deliver all of these outcomes.

Key instruments have been established to take forward these strategies. The Community Planning Partnerships ( CPPs) - one for each Local Authority - set out through Regeneration Outcome Agreements how the relevant partners at local level intend to combine their activities to achieve regeneration outcomes. The CPPs consist of partnerships of the key partners involved in local regeneration including the Local Authority, voluntary sector organisations, local Health Boards and other relevant bodies.

A commitment to strengthening communities also features strongly in A Smart Successful Highlands & Islands, setting out a commitment to creating strong and vibrant communities that have the capacity to retain population, encourage young people to return and attract in-migrants.

Economic infrastructure

The infrastructure needs of the region have been identified through a number of strategies. Overall, the rural nature of the area is addressed by the Executive's strategy for rural development, Rural Scotland: A New Approach sets out several key objectives for the development of rural areas: developing a strong and diverse rural economy; harnessing traditional strengths with an appetite for change in order to provide opportunity to young people; building a rural Scotland where everyone can enjoy a decent quality of life; developing a rural Scotland where people enjoy public services that are accessible, high-quality and with the greatest choice; and maintaining a rural Scotland where the natural and cultural heritage flourishes in all its diversity.

Similarly, development would take place within the context of the Scottish Sustainable Development Strategy, which establishes five main priorities for sustainable development: sustainable consumption and production; climate change and energy; natural resource protection and environmental enhancement; sustainable communities; and learning to live differently (as discussed in more detail in Chapter 5 below).

Economic infrastructure needs have been set for Scotland as a whole. The Infrastructure Investment Plan, Building a Better Scotland, provides a framework for spending up until 2008 in areas such as higher and further education, infrastructure in support of community economic development, healthcare and water provision. The new National Planning Framework will provide a framework for key infrastructure investments and economic development. The Programme has taken account of the areas where such spending is taking place and identified the key areas of additionality where Structural Funds can provide clear added value.

The Programme also complements the plans of local authorities from the area. The Highland Community Plan, which was drawn up by a partnership of key agencies and in wide consultation with public, private and voluntary sector organisations and local communities, puts the emphasis on developing sustainable communities. An important component is the development of prosperous communities and the plan highlights, amongst other things, the need for investment to widen and strengthen the economic and skills base, improvements to infrastructure and the environment, increased research activity, support for traditional industries, developing a quality tourist destination and giving local communities control over the use and management of natural resources.

Other examples of complementing aims are evident in the various economic development plans drawn up at the local level. For example, the Orkney Islands Council's Corporate Strategic Plan 2005-08 - seeks to encourage and harness individual and community enterprise, to ensure that development is sustainable in economic, social and environmental terms and to maintain and develop the existing industries and the diversification of the island's economies. Similarly, Shetland Island Council's Economic Policy Statement states that the Council's main aim through the provision of economic development services is " to maintain and enhance prosperity in Shetland by enabling businesses, communities and individuals to attain their full economic potential". This is reinforced within subsequent Operating Principles of 'Social Inclusion', with the aim of promoting an inclusive society, and 'Sustainable Development' whereby the Council will endeavour to find sustainable solutions for economic development. Similar concerns are evident in the Structure Plan of Moray Council where the aims are to promote economic growth and development, spreading the benefits of that growth across the community, while maintaining and improving the natural built-in environment. Special emphasis is placed on underpinning development by promoting sustainability and protecting and conserving the valued elements of the natural built-in environment, in part by the use of energy efficiency and the use of natural resources in a sustainable manner. Addressing key elements of these plans can be enhanced through selective and considered use of Structural Funds.

Specific infrastructure areas are covered by particular strategic documents. For further and higher education infrastructure, Smart Successful Highlands & Islands sets out the goal of ensuring UHI acquires university status and develop its teaching and research capacity and its role as a wider catalyst for economic growth. This approach also comes through in the mission statement of the UHI where, amongst others, it aims to develop innovative approaches to learning and teaching which will enable all students to acquire the personal and professional capabilities needed to empower them as life long learners and to contribute to the well being of their communities. UHI also aims to establish an information and communication technology infrastructure and to expand its research capability to advance knowledge, support student learning and contribute to social and economic development. Further work will be done to bring learning opportunities into remote areas through the development of community learning networks. Particularly significant here is the progress made towards 'Taught degree awarding powers' with a decision on full university title expected in 2007.

On the role of renewable energy, the Securing a Renewable Future document by the Scottish Executive sets out Scotland's approach to meeting its renewable energy commitments . For rural areas, the forthcoming National Transport Strategy will set out Scotland's plans through three strategic outcomes: improving journey times and connectivity; reducing emissions; and improving access and safety. Both strategies suggest a number of areas where complementary support from Structural Funds can have a more strategic impact. Similarly, with respect to ICT and communications infrastructure, A Smart Successful Highlands & Islands discusses the importance of anticipating future change in telecoms technologies and working towards improving the speed and capacity of the existing infrastructure in the area.

Lastly, the Scottish Executive tourism strategy - A New Strategy for Scottish Tourism - identifies the key role that the sector has in rural areas such as the Highlands & Islands, where the cultural and natural assets of the region require some further investment and support for full sustainable commercial use to be made.

3.2 Lessons from 2000-06 Programming

Structural Funds programming in Scotland has always built on the experience of 2000-06 programmes, maintaining the good practice while adapting to new circumstances. In developing the ERDF Programme for the Highlands & Islands region for 2007-13, the lessons of the previous use of European Regional Development Fund in Scotland were examined from a number of different perspectives. This section summarises the key studies drawing on those lessons:

• the mid-term evaluation updates of the Scottish Objective 2 programmes for 2000-06;
• the report of an internal Value Added Group on how to increase the value added of future Structural Funds programmes; and
• the Hall Aitken report on Structural Funds delivery options, 'Making Every Euro Count'.

Mid-term evaluation update

In 2005, the 2000-06 Highlands & Islands programme was assessed as part of the mid-term evaluation update of Structural Funds. The update set out a number of conclusions and recommendations that informed the development of the 2007-13 ERDF Programme for the region.

As part of the update, programme performance was assessed from a variety of perspectives: an initial analysis of programme data, undertaken by the Programme Management Executive; and two reviews of those analyses, one by the partners themselves through a special stakeholder event, and one by an analytical unit within the Scottish Executive, which considered net impacts, net costs and benchmarks with similar programmes/schemes.

The overall aim of the Programme was to secure the sustainable economic regeneration of the area. An initial analysis of the data for the Programme suggests that progress was good. The clear majority of targets has been exceeded for measures, or at least were well on their way to being met. Stakeholder views on programme performance reflected less the progress of the Programme with respect to its targets than a frustration with the system for measuring performance. Numerous comments were made about the inappropriateness of some indicators to particular measures, difficulties in aggregation across the Programme as a whole, the timespan for suitable results and impacts to become manifest under some measures, the lack of proper account of 'softer' impacts (notably with respect to employability support) and the value of more qualitative, case-study approaches to assessment. These views have been important in informing the development of the 2007-13 evaluation framework.

With regards to net impacts, the Programme was assessed in terms of net employment - not a comprehensive measure of what the Programme was trying to achieve, but a useful indicator that could be aggregated across the different priorities. However, it was difficult to draw strong conclusion on impacts: on a net cost-per-job basis, the figures were difficult to compare given the longer-term focus of many of the measures, particularly those with a focus on capital-intensive projects.

In the thematic areas examined by the update, the Programme showed strong progress. Environmental sustainability and equal opportunities were strongly encouraged by the Programme, with important case-study projects showing how the horizontal themes could be more widely embedded in domestic policy. Similarly, the Programme made important strides in supporting social inclusion with clear success in adding value to projects and supporting job entry for disadvantaged beneficiaries. However, this impact was largely concentrated in particular areas (the Highland area) as well as on particular beneficiary groups, reflecting the sparse and dispersed population and underlying project demand in this policy area.

The update emphasised that the Highlands & Islands Programme was conceived as a transitional programme. The Programme aimed to achieve a key strategic legacy that would not necessarily achieve the goals of full economic regeneration on its own, but provide a strong platform for economic development policy to build on in the period after 2006. The existence of that legacy was already apparent in the review of programme performance above, but much of the achievement would be felt in the Programme's combination of support for critical keystone projects, such as the University of the Highlands & Islands and broadband development. It should also be remembered that the Programme's funding was only a fraction of the total economic development resources available for the region. The same principles have been extended into the development of the 2007-13 Programme.

Value Added Group: 'Adding Value, Keeping Value'

As part of the preparations by the Scottish Executive for developing Structural Funds programmes for the 2007-13 period, a short-life internal working group was set up in 2005 to draw lessons on the 'value added' of the Structural Funds from the 2000-06 Scottish programmes. The specific objectives of the Group were the following:

• to identify the types of projects that have provided the highest added value in the 2000-06 programmes;
• to consider the characteristics of those projects which have made them particularly successful;
• to define added value in the context of Structural Funds programmes; and
• to assess how best to encourage development of such projects within the regulations governing future Structural Funds.

The Group was drawn from the European Structural Funds Division and the Programme Management Executives for the 2000-06 programmes. It concluded the following.

• In future, a greater premium should be placed on qualitative value added in project selection. This was not to suggest that value added should not have a strong quantitative dimension, but that qualitative value added should be a priority. In practice, this meant that Structural Funds could usefully support pilot, innovative projects - an approach reflected in the eligible activities set out in the priority descriptions below.
• Consideration should be given to providing a greater time limit on project funding in future. If the focus is on supporting qualitative projects, Structural Funds should have the role as a major lever for the early stages of a project's development. 'Repeat' projects or longer-term continuations should be discouraged unless there are strong operational reasons for doing so. As a result, project awards would be for a minimum of two years, though with annually-set targets and reviews.
• Partnership has been a critical factor in supporting value added, particularly when applied in particular ways. Partnership at a local/regional level in project development is important, often acting as 'brokers' for development activity (a role that has been supported through Structural Funds support). Where projects and activities have been developed through a networked, inter-agency approach, project quality appears to have been driven up. The recommended approach particularly underpins the delivery arrangements set out for Priority 2 of the new Programme.
• The continuing promotion of key shared policy goals should continue, particularly the horizontal themes. The Structural Funds have played a pivotal role in promoting equal opportunities and sustainable development as wider policy goals and should continue to do so. This is reflected on the continuing emphasis on the mainstreaming of these two horizontal themes, as set out in more detail in Chapter 5 below.

Value added has also been apparent where funding has been coordinated through a series of activities targeting a common goal. Whether the coordination is of different types of funds ( ERDF, ESF and other sources of EU funding) or different types of projects (through project clusters), their impact is strongest when geared towards a specific development goal. In Structural Funds, these goals have been most readily achieved when defined in terms of local geography (especially through community economic development) or niche sectors (particularly through targeted enterprise development activities). The focused approach is reflected in the targeted nature of the priorities described below.

Hall Aitken: 'Making Every Euro Count'

As part of the preparations for developing the 2007-13 programmes, the Scottish Executive commissioned a report of Hall Aitken Consultants in 2006 with several objectives:

• to identify a series of delivery options for single-stream funding of Structural Funds and other domestic policy resources, based on 2000-06 practice elsewhere in the EU;
• to draw out comparative lessons with a view to setting out options for Scottish delivery; and
• to set out options for Scotland.

On this basis, the report concluded that any approach should achieve as many of the following criteria as possible:

• minimise the administrative costs of operating projects;
• direct funds to where they will make the most difference in terms of economic need, opportunity and delivery capacity and quality;
• build on existing structures, partnerships and systems where possible and be developed with the support of stakeholders;
• shift the focus of effort from project selection to effective delivery and monitoring;
• integrate Structural Funds actions more closely with related domestic policy actions;
• retain sufficient flexibility to respond to changes in need and opportunity during the programme lifetime and ensure that projects address both issues;
• promote the horizontal themes; and
• spread learning and good practice.

The delivery mechanisms for the programmes - set out in detail in Chapter 6 - were developed with these conclusions in mind. They have also been designed to make use of the following range of elements, set out by Hall Aitken as mechanisms that could be used in delivering the programmes:

• small project challenge funds, including a pot for innovation projects;
• single-stream funding;
• area and local outcome agreements;
• competition between single-stream funding bodies;
• a more negotiated decision process;
• thematic partnerships;
• key strategic project competition; and
• specifying major projects.

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