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4 STRATEGY AND PRIORITIES

4.1 Programme Vision

The strategy for the ERDF Competitiveness Programme proceeds from the identification of key challenges within the socio-economic analysis (in Chapter 2) as well as the need for actions to fit with EU, UK and Scottish policy frameworks and the experience of previous programming (in Chapter 3). The socio-economic analysis described how the region has clear strengths and opportunities on which it can build - particularly with respect to its research and innovation, environmental and human capital resources - while recognising a range of significant weaknesses and challenges - deriving from low productivity, new firm formation rates, the commercial application of research and innovation and the specific challenges for economic development in urban areas of high deprivation and rural areas facing low economic growth. Eight challenges have been identified:

1 Increasing the regional benefits of a strong higher and further education sector.

2 Improving RTD and innovation across the region.

3 Increasing the low numbers of people becoming entrepreneurs.

4 Addressing the development bottlenecks for new and growing businesses.

5 Improving the indigenous enterprise development of the most disadvantaged urban communities.

6 Improving the ability of disadvantaged urban communities to access economic growth in the areas of opportunity.

7 Increasing the diversification of the rural economy into new activities while supporting sustainable competitiveness of traditional industries.

8 Improving key support services to underpin the sustainability of rural economic development.

The EU resources in the ERDF Programme are €375.958 million for 2007-13, resulting in a total programme value of €909.8 million. In light of current developments in the EU, the funding may be the last substantial funding of this scale for the region. Consequently, it is essential that the Programme aims to deliver lasting legacies to the region that will extend beyond the programming period, focusing on the key market failures in the competitiveness of the region and the sub-regional areas within it. The Programme can do this by making real contributions to tackle both the region-wide challenges of research and innovation and enterprise development as well as the localised challenges of urban and rural areas within the LUPS region.

The Programme will make its principal contributions and added value through:

• acting as a lever to encourage domestic resources to address the key development challenges outlined in the socio-economic analysis through its role as a match-funder;
• investing in the key research and innovation sources in the regional economy and encouraging their greater use by enterprises;
• promoting a more pro-active approach to research and innovation among all businesses;
• increasing the level of new firm formation;
• improving the conditions for indigenous economic growth in the most-deprived urban areas; and
• helping rural economies to diversify by developing their competitive advantages and enabling rural businesses to make full use of these advantages.

The overall vision of the ERDF Programme for the Lowlands & Uplands Scotland area is:

To encourage the growth of the region's economy within a sustainable development framework and thereby enable all parts of the region to contribute to achieving the Lisbon Agenda goals

There are three important parts to this strategic goal.

• First, the overall goal of the Programme is to address regional economic growth with a view to enhancing the region's ability to contribute to Lisbon goals. Some of these goals have already been met in Scotland as a whole, particularly its employment rate, but there remain substantial areas in which EU funding can make important contributions to the region's underlying competitiveness.
• Second, the Programme acts within a sustainable development context - that is to say, taking full account of the need to balance conservation of the region's environmental assets with both economic growth and the importance of distributing the benefits of that growth to all individuals and parts of the region.
• Lastly, the Programme recognises that these are goals that are not only met at regional level, but for the constituent areas of the region. Economic performance varies substantially across the region, often for different reasons and consequently the Programme should recognise the need for different sets of actions in different areas.

Given the limited resources, the strategy for the Programme will be more effective if acting in tandem with the overarching objectives of Scottish economic policy. As set out in the previous chapter, FEDS provides clear direction for the role and priorities of the Scottish Government: targeting those market failures in the economy where interventions will raise productivity and lead to a medium-to-long term economic growth whose benefits are enjoyed by all and within the context of sustainable development. As Section 3.1 stressed, Structural Funds are intended to extend and build on the work of key Scottish policies within the context of the Lisbon Growth and Jobs Agenda. As a result, the Programme is unable to support all activities that can contribute to this goal, so must concentrate on those areas where additionality and added value can be clearly demonstrated. It also acts within a wider sustainable development context as set out in the Scottish Sustainable Development Strategy, in which the Programme aims both to minimise any damaging environmental consequences of supported activities as well as support measures that will increase environmental sustainability, again where such measures are directly linked to the Lisbon Agenda.

The ERDF Programme also works with the ESF Programme for the Competitiveness Objective in Scotland. Chapter 6 sets out how the two programmes can complement each other effectively.

The following Chapter contains: an outline of the Programme Objectives; and detailed priority descriptions, setting out the rationale, eligible activities, targeting and indicators for each priority. The Chapter also includes a description of the use of technical assistance as a separate priority and the categorisation of assistance for the purpose of Lisbon 'earmarking'.

4.2 Programme Objectives

The strategic vision of the ERDF Programme operates through four sets of Objectives, addressing market failures in the following areas:

1. Research and innovation
2. Enterprise growth and entrepreneurship
3. Urban regeneration
4. Rural development

These Objectives have different spatial dimensions. The research and innovation and enterprise growth Objectives have a region-wide focus and concentrate on the key areas of economic competitiveness that are systemic to the whole economy. The latter two Objectives address the spatially-distinctive and localised needs of different parts of the region: 'urban regeneration' recognises the distinctive problems arising from severe urban deprivation, while the 'rural development' objective acknowledges the special needs of the region's most peripheral, rural areas.

Objective 1: Research and innovation

At the heart of the Lisbon strategy for improving the EU's growth and jobs performance is a need to increase growth and improve productivity by strengthening the sources of enterprise growth. Central among those sources is RTD and innovation, that is, the capacity for individual enterprises to renew the competitiveness of their products and services through continual technological, skills and business process renewal. The Community Strategic Guidelines give strong emphasis to the role of supporting RTD and innovation, particularly through the Competitiveness Objective. Chapter 3 demonstrates that this is also a high priority within UK and Scottish economic development.

RTD and innovation can be defined broadly. In economic development terms, policy has tended to focus both on what individual enterprises can do - in terms of their ability to generate, access and develop new ideas and skills - as well as on how regions as a whole can act as a self-sustaining innovation systems that will constantly refresh the economy's sources of competitiveness through, for example, increased knowledge transfer between the science base and industry.

The socio-economic analysis identified a range of issues relating to the RTD/innovation capacity of the region. The region lags behind both UK and EU averages for RTD spend by enterprises. Overall, the Objective recognises that while there are a number of elements underpinning the region's economic competitiveness, sustainable growth will only be possible if the region has a strong innovation system linked to a enterprise base with the skills, resources and capacity to make full use of RTD and innovation. Chapter 2 also draws attention to the strengths that the region has in some technological and industrial research areas - such as the life sciences and renewables - and the opportunities available to the region that Structural Funds support could make in reinforcing those strengths and linking them with the wider economy.

As a result, the Objective has been set as follows:

to improve the competitiveness of the Lowlands & Uplands Scotland enterprise base through increased innovation and a fuller use of its RTD base

Objective 2: Enterprise growth

The region's enterprise base is hampered by limited replenishment through new enterprises and the capacity of existing enterprises to develop into high-growth businesses. Both issues have similar bottlenecks lying at their heart, particularly with respect to the provision of business finance. The region lacks a sufficiently strong, self-sustaining market for business finance, both for start-ups and for enterprises wanting to expand their operations. This is particularly important within the emerging key sectors at the regional level, such as the life sciences and renewables, as well as sectors that have a strong importance to only parts of the region.

The Lisbon Strategy calls for "more emphasis on actions that stimulate greater productivity, employment growth and a more dynamic economy". The High Level Group that reported in November 2004 identified the need to increase the availability of risk capital on the grounds that the limited availability of capital is an obstacle to the establishment and development of businesses. Availability of risk capital to innovative SMEs is therefore central to achievement of the Lisbon aim of innovative growth-oriented businesses creating a more dynamic knowledge-based economy.

In the past, ERDF has been fundamental to expanding the venture capital market in Scotland. It has increased the amount of capital available for investment in SMEs, and has helped companies and investors appreciate this means of driving the expansion of innovative companies. Both in the 1994-99 and the 2000-06 sets of Programmes, ERDF has supported investment funds that have enabled the expansion of innovative small businesses which by their nature carry significant risks. High-risk equity provision in Scotland has undoubtedly developed faster and more effectively as a result of ERDF involvement in these funds. ERDF has been an effective lever for greater involvement by the private sector. It has built awareness of the need for investor-readiness schemes and encouraged the development of Business Angel syndicates and their interest in investing in innovative SMEs. European funding has steered this process positively, encouraging investment eight or ten years ago in the then less-favoured area of biotechnology and life sciences, and now in the emerging field of nanotechnology. As the socio-economic analysis underlined, there remains a need in the regional economy for these continuing interventions.

Enterprise growth is not simply a matter of making more resources available to enterprises. Finance needs to be complemented by targeted business support and advice, especially for entrepreneurs and new enterprises. This should not only include business advice, but other issues set out in the socio-economic analysis. In keeping with the sustainable development principles underlying the Programme, there should be support for specific activities designed to improve resource efficiency in enterprises and the commercial use of key environmental technologies. It also should include support for enterprises to make greater use of e-technologies and develop their e-commerce capabilities.

As a result, the Objective has been set as follows:

to improve enterprise formation and growth rates by enhancing the enterprise support environment, particularly with regards to access to finance, entrepreneurship, e-commerce and resource efficiency

Objective 3: Urban regeneration

Urban regeneration is an important contributor to achieving Lisbon goals. Regional competitiveness cannot be achieved simply by single-minded investment in the high-growth areas of a region, but in ensuring that all parts of the region can contribute to economic growth and minimising regional disparities. As seen in the socio-economic analysis, for some urban communities within the region, there are severe constraints on the capacity of these communities to take full advantage of their economic assets, leading to a debilitating systemic cycle of community decline and economic deprivation. As the economic problems faced by these areas are made up of different problems, there is a need for coordinated, targeted policies, driven locally within a national framework of commitment to addressing regeneration - a point reinforced in the strategies described in Chapter 3.

These problems are concentrated in particular urban areas, where the combination of economic and social deprivation can undermine the wider ability of the region to contribute to Lisbon Agenda goals. Consequently, this Objective will focus on supporting sustainable urban development with a view to improving the contribution of disadvantaged urban areas to wider regional growth. Despite sustained employment growth and historically high employment rates, a small number of Local Authority areas still have significant concentrations of deprivation. There needs to be a significant investment in creating sustainable urban regeneration in the poorest communities within these localities. This cannot be done by Structural Funds alone, but in parallel with domestic sources of funding.

In this context, the link between the growth potential of cities and surrounding deprived urban areas is important. Cities can act as major growth poles for their surrounding territories. At the same time, the scope for supporting such economic development within a strong sustainable development framework - in effect, a 'green' approach to urban regeneration - suggests that Structural Funds can have a 'model' effect in developing new ways of encouraging urban and economic development. Consequently, in addressing the most severe areas of urban deprivation, it is important to support activities that increase the links between these growth poles and areas of need that can benefit from the catalytic effect of better linkages to the opportunities such city-regions can provide.

As a result, the Objective has been set as follows:

to increase the contributions of the most disadvantaged urban communities to Lisbon goals by supporting their regeneration.

Objective 4: Rural development

The diversity of local economic circumstances in Lowlands & Uplands Scotland suggests that different parts of the region will be helping Scotland contribute to Lisbon goals in different ways. While there are issues that affect the region as a whole - such as the RTD and innovation challenges set out under Priority 1 - rural areas have distinctive economic issues that need specific action. The Community Strategic Guidelines recognise that there is a wide variation in the economic situation of the rural areas, and distinguishes between those with good links to urban centres and those more remote rural areas which have to contend with a highly dispersed and ageing population, poor technical and social infrastructures, inadequate services. The Guidelines emphasise one of the determining features of cohesion policy as its capacity to adapt to the particular needs and characteristics of specific geographical challenges and opportunities, and member states and regions are advised to " pay particular attention to those specific needs in order to prevent uneven regional development from hampering growth potential."

There has been some concern within rural areas of Europe that a strong RTD or high technology focus on future Competitiveness programmes will place rural areas on the periphery of the growth and jobs agenda. However, it is clear that the EU considers a strong territorial dimension to both Convergence and Competitiveness interventions as important key aspects and not simply considered as an optional extra. For Europe to achieve maximum competitiveness, each region must maximize its contribution. This priority is designed to achieve this within the context of rural areas in the LUPS region.

As a result, the Objective has been set as follows:

to maximise the contribution of rural areas to achieving Lisbon goals with a view to developing sustainable economic growth.

Relationship between Programme challenges and Objectives

The Objectives have been derived from the key Programme challenges set out in the socio-economic analysis, as Figure 3 displays. Each of these Objectives is addressed in the Programme by a single priority, as described in the following sections.

Figure 3: Relationship of Programme challenges and Programme Objectives

These Objectives operate at different spatial levels: the first two address issues of the regional economy as a whole, while the latter two recognise that parts of the region have distinctive problems that could affect the economic health of the overall region. Moreover, the Objectives do not work in isolation - each not only makes its contribution to the overall vision for the Programme but does so by complementing and reinforcing the other Objectives.

• Objective 1 addresses the overarching source, circulation and exploitation of the competitive ideas and technologies that will underpin any long-term improvement to the competitiveness of the regional economy.
• Objective 2 should enable the enterprise base to take full advantage of the ideas and technologies encouraged under Objective 1 (as shown by 1 in Figure 4 below). Support for business finance will make key resources available for developing new products, services and processes. Support for entrepreneurship will help to strengthen the enterprise base that will take advantage of these ideas and technologies. Support for energy and resource efficiency will ensure that enterprise development takes full account of the region's sustainable development goals.
• Objectives 3 and 4 ensure that the support in the first two Objectives are not concentrated in the growth areas of the regional economy, but that the benefits are distributed more widely (as shown by 2). The two Objectives will reduce regional disparities by addressing particular development bottlenecks. Objective 3 enhances the ability of urban areas where deprivation is specially concentrated to provide good growth conditions for the enterprises brought forward under Objectives 1 and 2, both in terms of enterprises indigenous to these areas and investment by enterprises from outside these areas. Although the first two Objectives are not exclusively targeted on cities, they will contribute to improving the growth potential of cities to develop strong research capacity and a business base to take advantage of research strengths and provide the areas of opportunity that can benefit the areas of need identified under Objective 3.

• Objective 4 targets the enterprise growth conditions of rural areas facing acute development challenges. It has two goals. First, it will target aspects of business development not covered by Priorities 1 and 2 but which are critical to improving the competitiveness of rural sectors and the ability of rural enterprises to diversify - particularly the marketing/exporting capacity of enterprises and their production processes. Second, like Objective 3, it will concentrate on the underlying conditions for the growth of rural enterprises, particularly key services and infrastructure in the communities that support businesses. Support for individual enterprises in the areas of research, innovation, entrepreneurship and access to finance is not envisaged, as these are covered by Objectives 1 and 2.

Figure 4: Relationship between the Programme vision and its Objectives

The following sections set out the descriptions for each of the individual priorities. Eligible activity is set out under each as well as geographical targeting for Priorities 3 and 4. In addition, a common eligibility criteria will be applied across the Programme with respect to project size. A minimum project threshold of an annual average of £200,000 in total eligible project costs will be put in place. The threshold has been introduced to:

• support the development of most strategic, legacy projects for the Programme with more significant impacts;
• encourage smaller, complementary projects to come together into more strategic partnerships;
• minimise the financial and audit risk of funding small projects; and
• promote linkages between small, pilot actions and activities to mainstream and disseminate their results.

The threshold has been set to take account of the nature of the eligible activities in the Programme and the financial and audit experience of the 2000-06 Programmes.

4.3 Priority 1: Research and Innovation

Rationale and aim

The priority given to RTD and innovation is clear in the Structural Funds, as the Community Strategic Guidelines identify research capacity and innovation as key drivers of regional competitiveness. Cohesion policy can make a number of important contributions to developing competitiveness by improving the main sources of RTD and innovation in the regional economy, the links between this research capacity and the enterprise base, and the ability of the enterprise community in Scotland to make maximum use of this capacity. These different elements should be self-reinforcing within a wider enterprise support framework.

First, a strong research base is a key source of sustainable economic growth. The socio-economic analysis identified a number of issues in the Lowlands & Uplands Scotland region that restrict the ability of the research base to support enterprise growth. The first is its overall size - relative to EU averages, Scottish private sector RTD investment rates have remained low, suggesting that the enterprise base needs to expand its contribution if long-term economic growth is to be improved. The second is the composition of the existing base with a heavy dependence on research conducted by higher education establishments, research centres and foreign-owned large companies with limited linkages to the wider, indigenous economy. Although there are a number of sectors where the region's research excellence offers good opportunities for developing wider competitiveness - including life sciences, digital and electronics technologies, and renewables - there is scope for increasing the contributions research can make to the overall economy. However, as Chapter 3 noted, the support through Structural Funds needs to complement the funding for research in the 7 ^th Framework Programme - consequently this priority needs to target the commercial application of research rather than 'blue-sky' activity.

Second, it is not simply a question of the size and activity of the research base, but the links between that research base to an enterprise community that will translate research into improving products, services and processes in enterprises. These links can take two forms: either direct contributions by the research base to enterprises through spin-out companies (particularly from the higher, further and research sector) or indirectly through cooperative research and development partnerships. In both cases, the socio-economic analysis noted that the region needs to improve.

Third, it is important that the industrial community has the capacity to take full advantage of its links with the research base by having the resources, knowledge and systems for developing sustainable innovation. The socio-economic analysis drew attention to the continuing constraints on innovation in individual Scottish enterprises, notably the cost and availability of key technical skills and personnel. This is particularly true of small and medium-sized companies, which can face significant barriers in accessing these resources.

Lastly, the willingness and demand among enterprises for research and innovation should be strengthened. In this context, research and innovation does not simply mean technological RTD, but the development of new products, services and processes with a view to improving the competitiveness of enterprises.

These issues are long-term challenges facing the Lowlands & Uplands Scotland economy whose resolution will extend beyond the Structural Funds programming period. The challenges are central to Scotland's principal strategies in support of economic and enterprise development, the Framework for Economic Development in Scotland and Smart Successful Scotland. It is important that Structural Funds complements the work of these strategies and the longer-term work to improve the sources of Scottish economic competitiveness by making additional sustainable, targeted contributions in these four areas. However, Structural Funds can also act as a catalyst to domestic policy, encouraging a greater focus on the sources of competitiveness that lie at the heart of the region's ability to contribute to achieving the Lisbon Agenda.

Consequently, this priority will address the range of challenges that prevent the region from taking full economic advantage of its potential research and innovation resources. The priority implements Objective 1 of the Programme:

to improve the competitiveness of the Lowlands & Uplands Scotland enterprise base through increased innovation and a fuller use of its RTD base

Structural Funds value added

As shown in Chapter 3, the importance of RTD and innovation in Scottish policy is strong and the resources supporting it - particularly through Scottish Enterprise and the higher/further education sector - substantially dwarf the Programme's funding. But the Programme has key areas where added value can be important in this area, acting as a catalyst for supporting significant projects underpinning RTD in the region's key sectors and by giving a strong focus to RTD and innovation issues, shaping policy priorities more widely.

Structural Funds policy will contribute by deepening the self-renewing value of the main sources of RTD and innovation in the economy, intensifying and broadening the links between this research capacity and the enterprise base and improving the ability of the enterprise community in Scotland to make maximum use of this research. The funding can have particular added value by investing in the emerging sectoral research strengths of the Scottish economy, improving the commercialisation of research in higher and further education and the enterprise base and enhancing the capacity and willingness of regional enterprises to make use of and develop innovation.

The Programme will also aim to encourage value added by encouraging more pilot, innovative approaches to tackling these enterprise development issues. In the 2000-06 period, the EU-funded Innovative Actions Initiative provided funding for cross-Scotland projects that funded pilot projects examining more systemic innovation issues. The Programme will include within its scope explicit support for projects that will address these issues on a cross-Scotland basis through co-ordinated bids with the ERDF Programme for the Convergence Objective in the Highlands & Islands area. The Strategic Delivery Body described in the Implementing Provisions chapter will also be encouraged to take forward such ideas.

Eligible activities

In the socio-economic analysis, it was recognised that there are already active steps to improve links between industry and the main sources of research in the region, commercialisation of university research, high-tech new starts and non-local collaborative research. As noted, the Programme can make value-added contributions to the following:

• support for individual enterprises, such as funding for commercialisation of RTD; and
• support for collaboration, such as links between enterprises and higher and further education (not just with respect to technological development but in contributing to wider product, service and process innovation) and collaborative projects that can have a wider impact on Scottish sectors and industries.

Over the programming period, €92.11 million of EU funding has been allocated to the priority, or 25% of the Programme. It is important that the limited EU resources are targeted on a selected set of activities in order to maximise impact.

Structural Funds were used substantially during previous programmes to enhance support provided by partner organisations. Actions now envisaged seek to build on the progress of recent years, address change and changing circumstances and direct the limited resources available at businesses in key sectors and increased value added - ie. those which have the greatest propensity to contribute to external and internal cohesion through GDP growth and have a strong RTD basis in the economy. As set out in the socio-economic analysis, these sectors currently include the following: aerospace; chemicals; digital media; electronics; energy; life sciences; and micro- and opto-electronics. Renewable energy will be given particular emphasis in the priority. Over the lifetime of the programme, new sectors may emerge, so the Programme will retain the flexibility of shifting resources to develop business growth and RTD/innovation capacity in these emerging sectors should they become apparent.

The Programme should concentrate funding on high-growth enterprise activities in this area and the key bottlenecks identified in the socio-economic analysis. Eligible activities will include the following.

Support for individual enterprises and research centres

• Support for small-scale research infrastructure in research centres of expertise
• Technology transfer programmes for individual enterprises and research centres
• Support to enterprises and individuals for converting research ideas into potential products, services and process improvements (although in the case of the food and drink industry, new product development will be supported through the Scottish Rural Development Programme, as set out in Chapter 6, but not this priority)
• Scoping studies and prototype development for individual enterprises
• Projects aiming to increase demand in individual enterprises for research and innovation and adapt business processes that encourage more internal innovation practices
• Investments in individual enterprise capacity to develop full product development and market research

Support for research collaboration

• Creation of collaborative research projects that address RTD bottleneck gaps, in particular in the potential growth sectors
• Pilot projects that test out new approaches to encouraging innovation with mainstreaming activity
• Projects that encourage enterprises with limited experience in working with research partners to develop collaboration
• Promotion of new sustainable RTD and supply networks, particularly for local SMEs, that transfer key research and innovation knowledge

The priority does not have spatial targeting, but aims to improve the competitiveness of the region as a whole. While there is likely to be support on activities surrounding higher and further education institutions and research centres, it is important that enterprises in all parts of the region are in a position to benefit from the support.

Some of the activity under this priority will be commissioned by the Managing Authority from Scottish Enterprise as a Strategic Delivery Body. These arrangements are described in more detail in the Implementing Provisions chapter below. As the economic development agency for the LUPS region and wholly funded by the Scottish Government, Scottish Enterprise has key responsibility for improving the research and innovation capacity of the region, including principal funder of several key research centres and initiatives (such as the Intermediate Technology Institutes) and deliverer of region-wide programmes to support commercialisation of new technologies, products and services.

There is the flexibility facility, which can allow up to 10% of the funding in this priority to be used for related ESF-type expenditure. Where necessary, it is envisaged that this will only be used to support limited training activities associated with the development of new research and learning facilities, research and technology development in key sectors (such as the training of key research staff). The flexibility could be applied in cases where the supported activity would not warrant a full-scale application to the ESF Programme as the support to be provided would be limited. It is anticipated that this flexibility will not be used extensively, but only to support limited project activity. The use of the facility will be exceptional and will only represent a small share of any single project's costs. Projects would need to provide clear justification for the need to include ESF-type expenditure.

Indicators and targets

As shown in the table below, the selected indicators reflect the priority's focus on two sub-groups of activities. For activities to support individual enterprises:

• for output indicator, the number of individual enterprises supported; and
• for result indicators, the number of new products and services resulting from support.

For activities to support the research networks and collaboration, the following output and result indicators have been set:

• for output indicators, the number of supported networks/collaboration; and
• for result indicators, the number of new products and services resulting from support and increase in turnover of supported enterprises.

For the priority as a whole, there are several indicators to be assessed:

• the number of renewable energy research projects supported (as an indicator of the Programme's cross-cutting environmental sustainability theme);
• number of gross jobs created;
• the number of net new jobs created; and
• and the change in the level of expenditure by supported businesses on research and innovation.

Targets have been set with reference to previous programme experience. The data for the majority of these indicators will be collected from individual participant data on a quarterly basis, as described in more detail in Chapter 9. However, there are a number of indicators which will be measured through a specially-commissioned data-gathering exercise. These include changes in research/innovation expenditure by enterprises and the number of net new jobs created, which will be assessed through a specifically-commissioned evaluation to be conducted in the latter half of the programming period - this will allow for a suitable period of time for the results of actions to become manifest.

Guidance on definitions of indicators will be provided by the Managing Authority to all potential applicants in advance of programming rounds.

Baselines to measure the priority's impact are set in Chapter 9, which also discusses in more detail how the data will be used for evaluation and reporting purposes. With respect to the individual indicators listed for this priority, the relevant baselines are as follows:

• number of enterprises in the region - 111,500 in 2002 ( NOMIS);
• GDP for the region - £74.298 million in 2003 (Scottish Economic Statistics); and
• employment for the region - 2.38 million economically-active 15-64 year olds in 2005 (Eurostat).

In addition, the Managing Authority will report on the size of enterprises receiving support in line with Article 66 of the General Regulation. This will include a breakdown by micro, small and medium-sized enterprises, which will be defined as part of guidance to be made available in advance of each programming round. A gender breakdown will also be reported on the 'number of gross jobs created'. Targets will not be set for these indicators.

4.4 Priority 2: Enterprise Growth

Rationale and aim

A thriving research and innovation system in a region can only add to regional competitiveness if it is linked to an active and replenishing supply of new enterprises - and consequently, entrepreneurs willing to set up new enterprises - able to sustain the enterprise community's capacity to develop innovative new products and services. As seen in the socio-economic analysis, Lowlands & Uplands Scotland has experienced persistently low new firm formation rates. The roots of the problem are varied, including the lack of sufficient access to resources for enterprise formation and growth and the overall supply of entrepreneurs in the economy. A co-ordinated set of initiatives is required to tackle the problem, involving improvements in the provision of risk capital in Scotland, a strong support environment for new and developing enterprises and measures to assist the cultural shift in the region towards greater entrepreneurialism.

To achieve this, the priority will address the Programme's second Objective:

to improve enterprise formation and growth rates by enhancing the enterprise support environment, particularly with regards to access to finance, entrepreneurship, e-commerce and resource efficiency

There are three areas where the Programme can make a significant difference: access to finance; support for entrepreneurs; and business processes.

Access to Finance

Development finance has been a key market failure for new and existing enterprises seeking to grow. In past programmes, ERDF-supported funds helped the development of new and ground-breaking businesses in Scotland. The 2000-06 programmes have shown the way to the emergence of sustainable funds, whose returns - both capital and revenue - can be retained within the fund for reinvestment in new companies. Some ERDF-supported venture capital funds have also added value by enhancing the provision of finance with the provision of advice and mentoring services, and sometimes the offer of a non-executive director to help steer the company through a period of rapid growth. The provision of risk capital has shown itself to be a sustainable financial instrument for supporting the creation and growth of the SME base in Scotland and thereby for building and maintaining the regional economy. With the associated business mentoring and non-executive director role of the investor, increased growth and higher business survival rates are delivered in a more sustainable way than with direct grant aid. Availability of risk capital as part of an effective investment market available for all stages of a company's growth is a way of meeting these needs and forms a key component of a sustainable Scottish economy.

Support should be available to target clearly-identified market failures and a clear economic rationale in each case. It will target development funding for enterprises seeking to expand, particularly for small firms growing into sustainable medium-sized enterprises. There is scope for providing a range of different enterprise finance instruments, addressing gaps at different stages in enterprise formation and development across the region.

Support for Start-Ups

For entrepreneurs and new firms, Programme resources could be most effective by supporting more pre-start events to stimulate action, provide the necessary skills, role models and informal networks; and by mobilising 'successful' entrepreneurs to provide more informal enterprise advice to complement the existing public sector system. The Programme can also usefully support promotional events in different parts of the region, targeted campaigns to address fears and lack of knowledge and initiatives to improve the networks between potential entrepreneurs and key sources of support, advice and finance. Special attention should be given to groups which may face particular barriers to developing new enterprises, such as women and minority ethnic entrepreneurs.

Enterprise Business Processes

Two other areas where the Programme can make significant contributions with limited funding are in addressing specific issues about the use of existing technologies to improve business processes.

First, e-business can continue to be improved throughout the region, taking advantage of the infrastructure investments in recent years in broadband. Such support can take the form of familiarising enterprises with the potential of the technologies, investing in their capacity to incorporate e-commerce into their businesses and addressing particular bottlenecks in their e-commerce potential.

Second, in keeping with the region's sustainable development aspirations and in line with the recommendations of the Strategic Environmental Assessment included in the Annex, the Programme should also support activities that contribute to an increased embedding of environmental sustainability within those activities directly contributing to the Lisbon Growth and Jobs Agenda. Encouraging greater resource and energy efficiency will improve the competitiveness of enterprises as well as meet the sustainable development aspiration of the Programme. Consequently, EU funding can provide added value through supporting activities that provide greater application of renewables technologies within business processes and initiatives that will improve the environmental sustainability of enterprises by tackling their resource efficiency.

Structural Funds value added

As with Priority 1, Scottish and Lisbon policy goals are strongly complementary - consequently, there is widespread support for enterprise growth and competitiveness in the region. Much of this takes the form of generic business development support. The Structural Funds should not support such basic provision for the region. The added value of the Funds lies in encouraging support for entrepreneurs and new enterprises at an early stage, as the existing business advice network has good coverage of other enterprises, as well as encouraging entrepreneurs into the advice network in the first place. Moreover, in tackling specific issues such as resource/energy efficiency and e-business, the Funds will be highlighting issues where the region continues to have lagging performance.

Above all, the Funds will have a major catalytic impact in the areas of access to finance. This will build on the experience of the Scottish Co-Investment Fund and other ERDF-supported schemes in past programmes and take full account of the market failures identified in the socio-economic analysis. The Funds will help to support an integrated, comprehensive approach to addressing finance gap issues for the region's enterprises.

Eligible activities

€122.186 million of EU funding has been allocated to the priority, or 33% of the Programme. Under this priority, three groups of eligible activities will be funded.

Access to finance

• Investor readiness programmes
• Support for risk capital funding for the region as a whole, where such schemes can demonstrate market gaps and build on the experience of past schemes
• Investment funding for early stage and start-up of new enterprises
• Targeted services for sign-posting enterprises to potential funding sources
• Initiatives that raise the capacity, skills and readiness of enterprises to assess their funding needs, manage new funding and general investor readiness

Entrepreneurship support

• Addressing gaps in pre- and post-start up provision of advice
• Promotional events for would-be entrepreneurs, particularly in more remote or deprived parts of the region
• Projects that promote start-ups from groups with relatively low rates of entrepreneurship, such as ethnic minorities and women
• Projects that encourage the greater conversion of would-be entrepreneurs to start-ups

Business processes

• Projects that encourage the take-up of e-business among enterprises
• Support for the development of e-commerce strategies by enterprises
• Development and implementation of environmental and carbon-use/footprinting audits by enterprises
• Introduction of more environmentally-sustainable production systems and business processes, including more efficient use of resources and energy
• Small-scale adaptation of businesses to renewable energy technologies

In addition, there is the flexibility facility, which can allow up to 10% of the funding in this priority to be used for related ESF-type expenditure. Where required, the facility will be limited and likely to be only used in supporting small-scale training activities associated with the entrepreneurship, e-commerce and business/resource efficiency. The flexibility could be applied in cases where the supported activity would not warrant a full-scale application to the ESF Programme as the support to be provided would be limited. It is anticipated that this flexibility will not be used extensively, but only to support limited project activity. The use of the facility will be exceptional and will only represent a small share of any single project's costs. Projects would need to provide clear justification for the need to include ESF-type expenditure.

Indicators and targets

As shown in the table below, the selected indicators reflect the priority's focus on two sub-groups of activities. For activities to support access to finance:

• for output indicator, the number of enterprises receiving any form of financial support; and
• for result indicator, the increase in turnover in those enterprises.

For activities to support entrepreneurship, the following output and result indicators have been set:

• for output indicator, the number of individuals and new firms receiving advice or business consultancy; and
• for the result indicator, the number of new enterprises that result.

For activities to support business processes, the following output and result indicators have been set:

• in support for development of e-commerce skills, the output indicator is the number of enterprises supported to develop their e-commerce capacity and the result indicators are the number of e-commerce strategies and plans introduced; and
• in support for resource and energy efficiency in businesses, the output indicator is the number of enterprises supported in energy and resource efficiency projects and the result indicator is the number of environmental audits and energy/resource efficiency business processes/systems introduced as a result.

For the priority as a whole, there are several indicators to be assessed:

• number of gross jobs created;
• the number of net new jobs created; and
• gross value added in supported enterprises.

Targets have been set with reference to previous programme experience. The data for the majority of these indicators will be collected from individual participant data on a quarterly basis, as described in more detail in Chapter 9. However, there are a number of indicators which will be measured through a specially-commissioned data-gathering exercise. These include changes in turnover and gross value added in supported enterprises and the number of net new jobs created. These will be assessed through a specifically-commissioned evaluation to be conducted in the latter half of the programming period - this will allow for a suitable period of time for the results of actions to become manifest.

In addition, the Managing Authority will be reporting on a number of other indicators that will not have targets set for them. These will include the following:

• number of new business starts by women
• number of new business starts by ethnic minorities

The Managing Authority will also report on the size of enterprises receiving financial support and support on start-up advice/consultancy and e-commerce and energy-saving and resource-efficiency activity in line with Article 66 of the General Regulation. This will include a breakdown by micro, small and medium-sized enterprises, which will be defined as part of guidance to be made available in advance of each programming round. Targets will not be set for these indicators either.

Guidance on definitions of indicators will be provided by the Managing Authority to all potential applicants in advance of programming rounds.

Baselines to measure the priority's impact are set in Chapter 9, which also discusses in more detail how the data will be used for evaluation and reporting purposes. With respect to the individual indicators listed for this priority, the relevant baselines are as follows:

• number of enterprises in the region - 111,500 in 2002 ( NOMIS);
• GDP for the region - £74.298 million in 2003 (Scottish Economic Statistics);
• number of new enterprises in Scotland each year - 11,850 in 2004 ( NOMIS); and
• employment for the region - 2.38 million economically-active 15-64 year olds in 2005 (Eurostat).

4.5 Priority 3: Urban Regeneration

Rationale and aim

The European Council of Lisbon in March 2000 recognised that the extent of poverty and social exclusion in certain areas was a major constraint on the EU achieving its competitiveness aims. Moreover, building a more inclusive EU is considered an essential element in achieving the Union's ten-year strategic goals of sustained economic growth, more and better jobs, and greater social cohesion. A wealthier Scotland is also the Scottish Government's main priority. However, in common with other areas of Europe, Lowlands & Uplands Scotland has a number of urban communities which have not enjoyed many of the benefits of economic growth. Efforts to bring about lasting regeneration in such communities are a high priority for Scottish Ministers. Failure to tackle these problems is not only contrary to a commitment to social justice but also represents a failure to make best use of all of the economic resources at our disposal in order to drive growth.

In addressing sustainable urban development, the Scottish Government's regeneration policies have been founded on the principle that it is only by promoting and encouraging economic growth that the regeneration challenges of the most deprived communities can be tackled. This view is consistent with the European Council's vision of " growth and employment making for social cohesion". It is, however, recognised that a key barrier to securing sustainable urban development in certain parts of the region is the high level of social and economic exclusion experienced by people living in the most deprived communities. The high levels of worklessness and the low level of economic activity are in themselves a major barrier to Scotland contributing fully to the realisation of the Lisbon growth and employment targets. In effect, social exclusion acts as a brake on Scottish ambitions to grow the economy in line with the Lisbon Agenda.

As described in Chapter 3, the Scottish Government Regeneration Policy Statement, People and Place, puts ' capturing the unrealised potential of people and places' at the heart of the Scottish Government's approach to regeneration as the most effective means of securing deep and lasting regeneration outcomes. By concentrating actions in this priority on sustainable development in the urban areas of greatest need the best use is being made of the limited funding available to make the greatest impacts on exclusion and poverty and help provide additional fuel for a drive to contribute to the Lisbon Agenda. Consequently, the priority will address Objective 3 in the Programme:

to increase the contributions of the most disadvantaged urban communities to Lisbon goals by supporting their regeneration

The Programme will work in tandem with Priority 1 of the region's ESF Programme, which tackles the parallel challenges of worklessness and social inclusion in deprived urban areas. Section 6.1 sets out how these two priorities will be co-ordinated.

As it is clear that regeneration initiatives that are imposed on disadvantaged areas are not only rarely successful but also reinforce the sense of exclusion within that community it will be a key criteria for successful sponsors to be able to demonstrate that ERDF projects in this Programme are delivered with the support and active involvement of the local community and an appropriate range of partners. As a result, the priority will place emphasis on supporting projects that integrate together a range of activities to support urban regeneration. At the same time, in keeping with the sustainable development aspirations of the Programme, funding will also be used to supporting 'green' approaches to urban development through greater use of renewable energy and resource efficiency technologies.

The priority's objective will be delivered through two inter-linked sets of activities, discussed in turn below:

• to links urban areas of need with areas of opportunity, by ensuring that people living in those communities can take advantage of the employment and training opportunities offered and complementing the social inclusion activity under the region's ESF programme; and
• to improve the potential of urban areas to develop, particularly by encouraging enterprise start-ups and sustain SME activity.

Linking Urban Areas of Need with Areas of Opportunity

It will be important to invest in the social and economic infrastructure required to allow people living in disadvantaged communities to take advantage of training and employment opportunities elsewhere. Priority 1 in the ESF Programme for the LUPS region will tackle exclusion of the 'hardest-to-reach' groups from the labour market. However experience suggests that ESF interventions are most effective when they form part of a long-term and integrated regeneration plan and the actions under this heading should complement the ESF actions.

EU funding can make key contributions in this area by supporting developments that encourage and empower individuals to gain access to such opportunities. This can include support for training and ICT facilities, the provision of safe and transport hubs and childcare for disadvantaged groups in parallel with ESF training support.

Improving the Potential Capacity of Urban Areas to Develop

In order to encourage the development of enterprise formation and development within most disadvantaged communities and sustain SMEs, additional specialised enterprise support will be funded. However, while Priority 2 will focus on support for individual enterprise, Priority 3 concentrates on improvements to the physical environment of the worst-off communities, though investments will only be limited to small-scale infrastructure in such cases, such as affordable workspace for community and private enterprises. It is distinguished from Priority 2 by focusing on the conditions and facilities supporting enterprise development in these areas rather than direct support to the enterprises themselves.

A key aspect of this will be supporting the conditions for social enterprises to develop as a means of combining support for employment growth and services to tackle social deprivation in the most disadvantaged areas. This is particularly true given that the aims and ethos of social enterprises is to intervene in these markets to create jobs and wealth. The goal should not only be to encourage such activity but to ensure that it is placed on a long-term sustainable footing.

Developing enterprises in urban communities should take place within a sustainable development frameworks. Consequently, support should be available to encourage communities to contribute to sustainable development goals through the application of renewable energy technologies for community energy needs, such as small-scale renewable energy production for local use, and the 'greening' of community regeneration construction projects.

Community Planning Partnerships

Individual projects will be eligible for support through the priority, but the emphasis will strongly be on projects that integrate several of the eligible activities. Projects will need to demonstrate that they are part of wider integrated strategies for supporting urban regeneration. In addition, funding will also be available to support projects that are part of integrated outcome agreements put forward by Community Planning Partnerships for the first two years of the Programme. This may include a package of smaller projects, linked together into a common aim of improving the sustainability of communities within the list of eligible areas described below. The objective of such funding will be to contribute directly to the Regeneration Outcome Agreements of the eligible CPPs which, as set out in Chapter 3, are the strategic frameworks for domestic spending on urban regeneration within each Local Authority areas. The outcome agreements will be expected to show how Structural Funds support would produce additional outcomes to the Regeneration Outcome Agreements and integrate social inclusion activity funded through Priority 1 of the ESF Programme.

The approach is described in more detail in section 6.1 with respect to bringing together ERDF and ESF funding to support integrated action plans.

Structural Funds value added

Chapter 3 noted a range of domestic strategies recognising the problems of social inclusion in parts of the region and the detrimental impact that this can have on local economic development. Resources for tackling these issues are provided across the region, but the Programme can have a particularly added-value effect by targeting its limited resources on particular areas. Specifically, the ERDF can be most effective in adding value to other initiatives through the following:

• addressing aspects of the physical environment that can make disadvantaged communities unattractive to external enterprises;
• enabling individuals to develop their own enterprises (including social enterprises) and economic activities with more customised and localised support than more general region-wide entrepreneurship initiatives;
• encouraging innovative interventions linking areas of economic opportunity with the regeneration needs of these communities;
• promoting a 'green' approach to urban regeneration by encouraging the mainstreaming of renewable energy/resource efficiency developments within wider urban regeneration initiatives; and
• working closely in tandem with related initiatives under the European Social Fund (an issue described in more detail in Section 6.1).

Moreover, the role foreseen for the Community Planning Partnerships described in Chapter 6 shows the value of the Funds in encouraging partnership working at local level and an integrated action-plan approach to tackling social exclusion issues.

Geographical targeting

Resources are finite and it is not possible to regenerate everywhere at the same level of engagement at the same time. The Community Strategic Guidelines and the level of funding available through this priority place restrictions on our ability to make impacts across the full spectrum of regeneration activity - physical, economic, social and cultural. In order to secure the deepest impact possible and to ensure that the ERDF funding available through this priority complements the substantial investment of domestic funding, effective targeting is essential if the value of interventions are to be maximised and a lasting legacy left after the end of the programming period.

The Scottish Regeneration Policy Statement has a specific aim to ' maximise the impact of reduced European funding streams by targeting resources on areas of greatest need'. ERDF funds allocated to regeneration-type actions can make a more significant impact in Scotland if they are concentrated on supporting activity in the most deprived parts of the region. Consequently, funding will be targeted on selected urban areas of the region rather than be made available to all communities, linked to local plans of regeneration.

By concentrating actions in this priority on particular urban areas, the best use is being made of the limited funding available to make the greatest impacts on exclusion and poverty and help provide additional fuel for a drive to contribute to both the Lisbon Agenda. Although the targeted areas are likely to change through the programming period, the principles for their selection should remain constant. Support will be limited to:

• the ten Local Authority areas accounting for the highest shares of population in the 15% most deprived data-zones, as measured by the Scottish Index of Multiple Deprivation; and
• in addition, the seven Local Authority areas showing the highest concentration of NEET ('not in education, employment and training') individuals.

In most cases, the two sets of areas will largely overlap, given the co-location of both sets of problems. As a result, at present, these areas will account for approximately 60% of the region's population, but it is anticipated that the list of eligible areas will change through the Programme, reflecting changes in the indicators. Moreover, applicants will be expected to target activity at the most deprived parts of the eligible Local Authority areas, rather than at the relatively more prosperous parts of the eligible area. The areas will be identified by the Managing Authority in advance of each project selection round using the methodology above.

Projects will be supported which address the challenge of these areas, although activity can be located elsewhere in the Local Authority area. Moreover, where projects covered beneficiary groups that overlap with similarly deprived bordering data-zones in other Local Authorities, up to 10% of the project award could be in the neighbouring data-zones. However, the 10% flexibility will not apply to funding for Community Planning Partnerships under the priority.

Eligible activities

€101.509 million of EU funding has been allocated to the priority, or 27% of the Programme, to support the following activities, integrated together into more co-ordinated projects.

Linking urban areas of need with areas of opportunity

• Support for locally-based job brokerage schemes that aim to match disadvantaged individuals with employment opportunities
• Support for refurbishment and enhancement of locally-based training/learning and e-skills centres
• Supporting safe transport hubs to link areas of need with those of opportunity
• Support for investment in increased local access to ICT facilities within communities with the intention of improving skills of local people seeking to re-enter the labour market and increasing access to web-based public services

Improving the potential capacity of urban areas to develop

• Support for refurbishment of existing business support and incubator facilities and workspace to make them suitable for new or established SMEs (especially those that employ 'green design' principles, including use of renewable energy, resource/energy efficiency and low/zero carbon use)
• Support for improvements to incubator and business support facilities for social enterprises
• Support for initiatives to encourage low carbon employment sites and premises, including conversion of existing incubator and other workspace facilities
• Support for small-scale conversion and adaptation to industrial sites and business centres/facilities that offer employment or training opportunities to people living in targeted areas (especially those that employ 'green design' principles)
• Support for small-scale energy production from renewable energy technologies in response to local energy needs, such as co-generation and distribution energy systems

Some of these activities may be taken forward through a revolving-loan facility under the JESSICA initiative, as described in more detail in Chapter 6, although there are no definite plans to do so at the time of the Operational Programme's drafting.

In addition, there is the flexibility facility, which can allow up to 10% of the funding in this priority to be used for related ESF-type expenditure. Where required, this is anticipated to be limited to assist projects with limited training activity required in providing support/advice to enterprises in these communities (eg. in e-commerce and e-skill centres). The flexibility could be applied in cases where the supported activity would not warrant a full-scale application to the ESF Programme as the support to be provided would be limited. It is anticipated that this flexibility will not be used extensively, but only to support limited project activity. The use of the facility will be exceptional and will only represent a small share of any single project's costs. Projects would need to provide clear justification for the need to include ESF-type expenditure.

Indicators and targets

As shown in the table below, the selected indicators reflect the priority's focus on two sub-groups of activities. For activities to support linking urban areas of opportunity with areas of need:

• for output indicators, the numbers of job brokerage initiatives, ICT/e-learning and local facilities supported (specifically childcare and other community centres) and local transport hub projects supported in the target areas; and
• for result indicators, increases in the numbers of individuals gaining employment as a result of the supported job brokerage initiatives and facilities (as measured at least six months after the support has been completed) and improvements in journey times resulting from the transport hub investments.

For activities to support developing the capacity of urban areas, the following output and result indicators have been set:

• for output indicators, the area of business space created or modified for use by local enterprises and the number of renewable energy and energy/resource efficiency projects supported; and
• for the result indicators, the number of enterprises supported (as well as the number of social enterprises), increases in the numbers of those gaining employment through the supported facilities and increases in the share of renewables in local energy usage.

For the priority as a whole, there are several indicators to be assessed:

• number of gross jobs created; and
• the number of net new jobs created.

Targets have been set with reference to previous programme experience. The data for the majority of these indicators will be collected from individual participant data on a quarterly basis, as described in more detail in Chapter 9. However, there are a number of indicators which will be measured through specially-commissioned data-gathering exercises. These include increase in employment resulting from support to job brokerage initiatives and facilities, changes in journey times and changes in the share of local energy usage accounted for by renewables and the number of net new jobs created. These will be assessed through specifically-commissioned evaluations to be conducted in the latter half of the programming period - this will allow for a suitable period of time for the results of actions to become manifest.

In addition, the Managing Authority will be reporting on a number of other indicators that will not have targets set for them. These will include the following:

• number of women gaining employment through supported job brokerage schemes, supported ICT/e-learning facilities and supported childcare/community facilities
• number of new business starts by ethnic minorities through supported job brokerage schemes, supported ICT/e-learning facilities and supported childcare/community facilities

The Managing Authority will also report on the size of enterprises receiving support in line with Article 66 of the General Regulation. This will include a breakdown by micro, small and medium-sized enterprises, which will be defined as part of guidance to be made available in advance of each programming round. Targets will not be set for these indicators.

Guidance on definitions of indicators will be provided by the Managing Authority to all potential applicants in advance of programming rounds.

Baselines for measuring achievement in the priority are set in Chapter 9, which also discusses in more detail how the data will be used for evaluation and reporting purposes.

4.6 Priority 4: Rural Development

Rationale and aim

The benefits of growth need to be available to people in all parts of Scotland. At present, as the socio-economic analysis underlined, peripheral rural areas do not share equally in the opportunities for growth. GDP and average wage levels in remote and rural parts of Scotland are strikingly lower than those in cities. There is a real danger that current trends such as the focus on metropolitan regions will work to reinforce these differences by permitting a dual pattern of development to emerge. Under such a pattern of development, innovation and growth would centre on city-based development poles, and people beyond the travel-to-work areas for the cities would not share in the prosperity thus created. The economic role of rural areas could diminish to the provision of residential and retirement services unless appropriate alternative models of development are supported to complement the city-growth approach. Priority 4 in this Programme is designed to meet that need.

At the same time, it is important that the Structural Funds complement other sources of EU funding for rural areas to maximise the potential for a coordinated, comprehensive approach to rural development. As Chapter 6 sets out, the strategic complementarity of the Structural Funds with the Scotland Rural Development Programme and the Scottish plan for the European Fisheries Fund has been an important design principle in the ERDF programme. A separate priority which can address related but distinct areas of rural development to the other two funds will help ensure such coordination is embedded in the structure of Structural Funds spending.

In Lowlands & Uplands Scotland, rural areas are not concentrated in any one part of the region. Although the Scottish Borders and Dumfries & Galloway constitute a large, contiguous rural area, there are other significant rural areas in North-East and parts of Central Scotland. Despite the scattered nature of rural areas across the Lowlands & Uplands Scotland region, the National Planning Framework for Scotland recognises that some rural areas of Scotland share key similarities. These include " low population densities, sparse settlement patterns and valuable natural heritage and cultural resources". The Framework suggests that the future for rural Scotland lies in economic diversification and environmental stewardship. It also recognises that " higher education has a key role to play in developing the knowledge economy in rural areas" and concludes that " across rural Scotland the aim should be to develop a diverse, modern economy with an international perspective based on environmental and cultural resources and adding value through long term planning, careful resource management and attention to good design."

Reflecting this, and the intention of developing a priority that can balance the need for rural areas to establish their internal sources of competitiveness as well as link to urban growth poles in the region, the priority implements Objective 4 of the Programme:

to maximise the contribution of rural areas to achieving Lisbon goals with a view to developing sustainable economic growth

To achieve this aim, and recognising the limited resources of the programme, the priority will contribute to two broad sets of activity. In this, the Programme will be complementing both national strategies, such as the Scottish Rural Development Programme as well as major local strategies. The key themes supported by the priority are:

• to assist the strengthening and renewal of rural industries; and
• to support the development of key shared services in the region to underpin economic and community sustainability.

Strengthening Rural Industries and Diversification

In addressing the role of rural areas in regional competitiveness, there can be a tendency in economic development policy to suggest that rural areas are merely passive recipients of urban-centred development. In this context, there are two parallel, but distinct, avenues for supporting the development of rural areas where the challenges of peripherality and a limited economic base are most acute. The first is to strengthen the competitiveness of traditional, largely primary-based industries, such as food and drink, forestry, textiles as well as tourism, particularly where those industries have strong cross-over into other activities (eg. 'food and drink' tourism). The Scottish Rural Development Programme will focus on the primary growing and processing at the source of these industries, but this priority will contribute to wider business and commercial development of key natural resources. With respect to the food and drink industry, new product development will be funded through SRDP, while the fuller commercial exploitation of food/drink products through marketing and production strategies will be supported in this priority. The SRDP will also concentrate on support for individual micro enterprises, while ERDF can support small and medium-sized enterprises and groups of micro, non-farm based enterprises. Similarly, the SRDP will support activities on a smaller scale than ERDF (eg. small, farm-based renewable energy projects), while ERDF Priority 4 can support medium-sized, community-based facilities. With respect to support for groups of micro enterprises, the focus will be on developing shared services/resources and addressing common problems for enterprises on a collective rather than an individual basis. Section 6.2 sets out the relationship between these funding streams in more detail.

A related strand of intervention will focus on diversification strategies. Eco-friendly energy generation and software development are among more recent developments in rural areas, and innovative sources of growth such as these should be supported by the Programme where they build on the strengths of the area without compromising the features that make it special. In supporting the development of emerging industries based on these new technologies, the priority will need to consider the importance of fostering local supply chains that would embed as many stages of the sector in the local economy as possible.

Support for more general RTD and innovation, new firm formation and access to capital will continue to be the responsibility of Priorities 1 and 2. Priority 4 will focus on other activities that will underpin the competitiveness of these sectors, particularly with regard to marketing and export development, new production strategies, business advice on market and product diversification and other business process to develop competitive niches in key local sectors such as tourism, forestry and food and drink. Such needs lie at the heart of the diversification of existing rural economic activity, where limited markets, sources of supply and production capabilities make the research/innovation and enterprise growth challenges identified in Priorities 1 and 2 particularly acute.

Supporting Development of Key Shared Services to Underpin Rural Sustainability

Deficiencies in shared services are one of the key factors behind the lagging development of many rural areas. In order for rural areas to maximise fully their contributions to the Lisbon Agenda, fundamental weaknesses in the sources of their competitiveness need to be addressed, particularly in their basic service provision. These services can cover a variety of areas - their specific nature will vary between localities and where they form a key bottleneck to economic development, the Programme will focus resources on them.

Across rural areas as a whole, these services can relate to the fragility of local communities as drivers of their local economies and can include the provision of ICT and training facilities, both of which can be important for sustaining a local enterprise base. Given the limits on infrastructure investment in the region, the focus will not be on supporting capital developments, apart from some small-scale actions with regard to industrial property, but in encouraging greater use of existing infrastructure, enabling enterprises and communities to identify their service needs and develop strategies for tackling these and piloting new approaches to addressing these issues (in keeping with the programme's focus on innovative actions). It will be distinguished from the LEADER support under the SRDP by the scale of activity being envisaged, particularly those associated with the two services highlighted below with respect to their importance to the sustainability of the rural economy: higher and further education; and accessibility.

• Higher and further education. Scottish small towns and rural areas have traditionally shown a high regard for educational values, and achieved high levels of educational success. Also traditionally, graduates from such areas have moved elsewhere on qualifying, often returning only later in life. A major economic challenge for peripheral areas is how to retain or replace the expertise so generated. In the Highlands & Islands, this challenge is being addressed with the development of the University of the Highlands & Islands, an innovative, 'distributed' university that is intended to act as a research and skills anchor for the region. There is scope for using support in Priority 4 to improve the higher and further educational resources of rural areas, though this cannot include infrastructure development. An important development in recent years has been the expansion of further education access to market towns and the establishment of a higher education presence in rural centres.

ERDF funding has a vital part to play in encouraging higher and further education bodies to engage with SMEs in rural areas and assist the development of innovative enterprises through initiatives to reach out to rural enterprises and communities even within the limitations with regards to infrastructure expenditure. ERDF can underpin such efforts by supporting studies that scope the e-learning and training needs of businesses and communities in rural areas and the scope for existing education institutions to address those needs as well as initiatives enabling rural enterprises to benefit from the educational and training services of remote higher and further education bodies.

• Accessibility. Access and public transport are critical issues for rural areas. Accessibility issues were identified in the socio-economic analysis as a major restraint on the ability of rural enterprises to develop markets as well as on the attractiveness of rural areas to enterprise investment from outside. The scope of the Programme for addressing the problems of rural transport is limited given resources and EU eligibility criteria. However, the Programme can make important contributions to developing community transport initiatives in areas where private and public sector transport provision is lacking (and market failure is particularly acute) as well as in promoting innovative, 'green' approaches to transport. This can include support for the logistics and studies involved in establishing community and 'green' transport schemes and projects that pilot the technology underlying new vehicles and fuels and public transport fleet conversion. However, ERDF will not be used to support the purchase or running of the vehicles themselves.

Structural Funds value added

Domestic policy in recent years has been often concentrated on the needs of areas within the region's Central Belt and more urban areas. While this has not been to the exclusion of rural areas, the Funds can enhance the profile of rural development issues and demonstrate the value of integrating different policy initiatives through the joint working with the Scottish Rural Development Programme outlined in Chapter 6. It can also bring significant value in supporting local economic strategies, such as the South of Scotland Competitiveness Strategy, enhancing a local partnership approach to economic development.

In recognising the distinctiveness of the problems facing the most rural areas scattered across the region, there is a strategic need to address the underlying problems of these local economies. Consequently, Structural Funds can bring clear added value by addressing:

• the challenges facing their traditional industries;
• the need to encourage wider economic diversification into new sources of sustainable economic activity; and
• the longer-term issues of reversing population decline by improving the research and skills and other types of infrastructure in these areas.

Geographical targeting

The funding should not be available across all areas that can potentially demonstrate rurality. It is important that the limited funding in this priority is not thinly spread but can make effective contributions to the most peripheral, disadvantaged rural parts of the region. Consequently, eligibility will be determined on the basis of 'remote rural' and 'accessible rural' areas, as defined in the Scottish Government's six-fold urban-rural classification: these are defined as settlements with less than 3,000 people and within 30 minutes driving of settlements of 10,000 or more. With limited resources, the Programme will need to concentrate on those Local Authority areas where rurality is particularly pronounced. Consequently, eligibility will be for those Local Authorities with more than 25% of their population in 'remote' or 'accessible' rural areas.

At present, these areas will account for approximately 24% of the region's population, although applicants will be expected to target activity at the most rural parts of the eligible Local Authority areas, rather than across the eligible area as a whole. The areas will be identified by the Managing Authority in advance of each project selection round using the methodology above.

Projects which address the challenge of these areas will be supported, although activity can be located elsewhere in the Local Authority area, as long as the impact in the target area can be demonstrated. Moreover, where projects cover activities in remote and accessible rural areas in adjacent Local Authorities that border the eligible areas, up to 10% of the project award could be spent in the neighbouring area.

Eligible activities

€51.13 million of EU funding has been allocated to the priority, or 14% of the Programme. It can be used in support of the following activities under each of the themes identified above.

Rural diversification

• Support for sector-wide market development initiatives to promote diversification in traditional industries in the region, particularly through identification of new market opportunities, including niche and exporting strategies, but not the e-commerce activities supported under Priority 2
• Support for small and medium-sized enterprises and for groups of micro, small and medium-sized enterprises in developing new sources of supply and production processes, but not the activities listed under Priorities 1 and 2 (such as development of new products and services, access to finance, resource efficiency and general advice/support for entrepreneurs), individual micro and farm-based enterprises and the development of new agricultural and forestry projects, which will be supported under the SRDP

Key shared services

• Support for refurbishment and enhancement of business centre and childcare facilities and training/learning centres
• Small-scale support for ICT investments enabling distance learning and higher and further education outreach in remote communities
• Small-scale business site development (especially those that employ 'green design' principles such as use of renewable energy, resource/energy efficiency and the encouragement of low/zero carbon use)
• Development of educational access strategies for rural areas, including scoping studies (but not support for infrastructure development)
• Support for initiatives that link enterprises with the training and educational services of higher/further education bodies
• Start-up support for the development and initial implementation of community transport and 'green' transport initiatives (but not the purchase and running of the vehicles)
• Piloting of emission-reducing and clean-energy technologies for vehicles and transport systems (although again, mobile assets themselves would not be eligible)

For the South of Scotland area (ie. Dumfries & Galloway and the Scottish Borders), the activities described here will be funded through a 'global grant' arrangement as defined in Articles 42 and 43 of the General Regulation. Under this arrangement, projects from South of Scotland partners will bid for funding from a dedicated global grant pot within Priority 4, but will not be eligible for funding under the remainder of Priority 4. Partners based in other eligible areas will bid through the competitive procedures for these remaining funds, but will be unable to bid into the global grant funding. Consequently, the two pots of funding will be geographically distinct. These arrangements are described in the Implementing Provisions chapter below.

In addition, there is the flexibility facility, which can allow up to 10% of the funding in this priority to be used for related ESF-type expenditure. This will be expected to be used in supporting small-scale training activities associated with the sector-wide initiatives above, the development of community facilities (eg. ICT/business centres) and emission-reducing transport initiatives. The flexibility could be applied in cases where the supported activity would not warrant a full-scale application to the ESF Programme as the support to be provided would be limited. It is anticipated that this flexibility will not be used extensively, but only to support limited project activity. The use of the facility will be exceptional and will only represent a small share of any single project's costs. Projects would need to provide clear justification for the need to include ESF-type expenditure.

Indicators and targets

As shown in the table below, the selected indicators reflect the priority's focus on two sub-groups of activities. For activities to support rural diversification:

• for output indicators, the number of enterprises supported;
• for result indicators, the numbers of new marketing initiatives and enterprises introducing significant improvements to production and supply processes; and
• for an impact indicator, improvements in the gross value added per employee in supported enterprises.

For activities to support key shared services for rural areas, the output indicators reflect the range of activities supported

• the number of community facilities supported, including e-learning and childcare facilities;
• the area of business space modified/created for enterprises;
• the number of educational access strategies and projects supported; and
• the number of local transport initiatives supported.

The results indicators will be:

• the number of enterprises benefiting from the supported community facilities;
• occupancy rates of the modified/created business space;
• the number of enterprises benefiting from the new educational access strategies; and
• improvements to journey times.

For the priority as a whole, there are several indicators to be assessed:

• number of gross jobs created;
• the number of net new jobs created;
• increase in turnover; and
• increase in gross value added.

In addition, the Managing Authority will report on the size of enterprises receiving support in line with Article 66 of the General Regulation. This will include a breakdown by small and medium-sized enterprises, which will be defined as part of guidance to be made available in advance of each programming round. A gender breakdown will also be reported on the 'number of gross jobs created'. Targets will not be set for these indicators.

Targets have been set with reference to previous programme experience. The data for the majority of these indicators will be collected from individual participant data on a quarterly basis, as described in more detail in Chapter 9. However, there are a number of indicators which will be measured through specially-commissioned data-gathering exercises because of the longer-term nature of the results/impacts (eg. GVA per employee), or their experimental nature (eg. number of enterprises benefiting from educational access strategies or time savings). These include improvements in GVA per employee in supported enterprises, changes in turnover and gross value added, the number of enterprises receiving longer-term benefits from the educational access strategy support and time savings as a result of the local transport initiatives and the number of net new jobs created. These will be assessed through specifically-commissioned evaluations to be conducted in the latter half of the programming period - this will allow for a suitable period of time for the results of actions to become manifest.

Guidance on indicator definitions will be provided to all potential applicants in advance of programming rounds. Baselines for measuring achievement in the priority are set in Chapter 9, which also discusses in more detail how the data will be used for evaluation and reporting purposes.

4.7 Priority 5: Technical Assistance

Technical assistance support will be provided to assist the management and administration of the programme. This will include activities in support of the various selection, appraisal, management and committee groups, the monitoring of financial and performance progress, Programme publicity and communication, and facilitating the exchange of best practice. Technical assistance will be used to support the work of the Intermediate Administration Bodies, which are described in Chapter 7.

Eligible activities

€9.023 million of EU funding has been allocated to the priority, or 2% of the Programme to support the following eligible activities:

• Servicing Programme groups and committees
• Communicating decisions and policy to partners
• Implementation of a common monitoring and evaluation framework and provision of regular monitoring reports
• Provision of advice to applicants
• Publicity and awareness-raising of the Programme among all beneficiaries and applicants in line with the activities set out in the information and publicity section in Chapter 7
• Annual reporting on the Programme
• Development of ICT systems to assist the application, monitoring and financial control of the Programme
• Evaluation studies in line with the strategy set out in Chapter 9

4.7 Categories of Assistance

As set out in Article 9 of the General Regulation, Programmes under the Competitiveness Objective must meet an target of 75% for expenditure on activities contributing directly to the objectives of the Integrated Guidelines for Growth and Jobs (2005-08). The relevant categories of assistance are listed in Annex IV of the General Regulation.

While the 75% target will be met, the ERDF Programme for Lowlands & Uplands Scotland has set itself an ambition of achieving 78% of expenditure. A table with a breakdown by category of the programmed use of the Funds is attached in the Annex, though this will be indicative only and does not contain any targets for specific categories of expenditure.

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