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EU/S3/09/R1

1st Report, 2009 (Session 3)

The impact of the financial crisis on EU support for economic development

Contents

Remit and membership

Report
Executive summary

Background
Findings

Committee report

Introduction
Remit
Report structure
Impact of the financial crisis on the ground
Is the financial crisis affecting the ability of structural funds to continue to contribute to local economic development?
What could be changed to allow programmes to adapt to the new economic environment and contribute to recovery?
Recommendations for further short term action
Long term issues
Conclusion

ANNEXE A: EXTRACTS FROM THE MINUTES OF THE EUROPEAN AND EXTERNAL RELATIONS COMMITTEE

ANNEXE B: ORAL AND ASSOCIATED WRITTEN EVIDENCE

ANNEXE C: OTHER WRITTEN EVIDENCE

Remit and membership

Remit:
The remit of the European and External Relations Committee is to consider and report on-

(a) proposals for European Communities legislation;
(b) the implementation of European Communities legislation;
(c) any European Communities or European Union issue;
(d) the development and implementation of the Scottish Administration's links with countries and territories outside Scotland, the European Communities (and their institutions) and other international organisations; and
(e) co-ordination of the international activities of the Scottish Administration.

(Standing Orders of the Scottish Parliament, Rule 6.8)

Membership:
Ted Brocklebank
Patricia Ferguson
Charlie Gordon
Jamie Hepburn
Jim Hume
Michael Matheson (Deputy Convener)
Irene Oldfather (Convener)
Sandra White

Clerks to the Committee:
Lynn Tullis
Simon Watkins

Assistant Clerks:
Lewis McNaughton
Lucy Scharbert

Committee Assistant:
Kathleen Wallace

The impact of the financial crisis on EU support for economic development

The Committee reports to the Parliament as follows—

Executive summary

Background

1. The global financial crisis has already had a major impact on Scotland and most commentators expect this impact to increase. The European Union (EU) has adopted a number of initiatives to tackle the crisis, in particular, the European Economic Recovery Plan (“the Recovery Plan”).

2. Scotland also has a long and successful record of using structural and other EU funds to boost regional economic development, and these funds could be particularly valuable in the current economic situation. However, EU programmes have always relied on match funding from the private and public sector to support their activities. The global financial crisis, and the lack of availability of credit, raises the question of whether match funding will continue to be forthcoming and whether EU-supported programmes will suffer as a result.

3. The European and External Relations Committee therefore resolved to examine whether the financial crisis was having an impact on EU programmes in Scotland, specifically:

  • What the impact is of the financial crisis on EU programmes;
  • Whether the financial crisis is affecting the ability of structural funds programmes to contribute to economic development;
  • What changes could be made to enable the programmes to adapt to the new economic environment and contribute to recovery.

4. The Committee conducted several evidence sessions with key stakeholders including Highlands and Islands Enterprise (HIE), Scottish Enterprise (SE), Highlands and Islands Partnership Programme Ltd (HIPP), ESEP Ltd, Scottish Trades Union Congress (STUC) and the Scottish Chambers of Commerce (SCC). In addition, the Committee received written evidence from the Convention of Scottish Local Authorities (COSLA), the Scottish Council for Voluntary Organisations (SCVO) and the Scottish Local Authorities Economic Development Group (SLAED). Finally, the Committee took evidence from the Cabinet Secretary for Finance and Sustainable Growth at its meeting on 28 April 2009.

Findings

  • The financial crisis is having an impact on the finance available to SMEs and other European Union programme participants

5. A clear message emerged from witnesses on the impact of the financial crisis on the ground. Witnesses pointed to significant job reductions, specifically in the construction, retail and commercial property sectors.1 Highlands and Islands Enterprise (HIE) reported that the continuing squeeze on the availability of working capital was having an effect on the performance of many small businesses and that banks were being more careful about the level of risk in their lending.2 Scottish Enterprise (SE) confirmed that cash flow was a key issue and that in some cases banks were trying to renegotiate terms of existing loans and credit arrangements.3

6. Problems in accessing finance were confirmed by the Scottish Chambers of Commerce (SCC) which stated:

“In view of the fact that [we] were of the view that a “funding gap” existed for SME’s prior to the credit crunch we believe this position has deteriorated considerably following its recent arrival last year. We have many examples of well run SME’s not being able to secure funding for development and growth from banks even with the offer of good quality lending security”4

  • There is some emerging evidence of difficulties with match funding affecting EU programmes

7. SE reported that there was some anecdotal evidence that the fall-out from the financial crisis had had an impact on the ability of the structural fund programmes to invest in local economic development in Scotland.5 Likewise, HIPP Ltd indicated that there was anecdotal evidence that some smaller organisations pursuing training programmes were having difficulties in relation to match funding.6 HIPP advised that, while it had encouraged organisations to submit three year programmes, there were concerns about the ability of those organisations to secure a further two years of match funding.7 HIE reported that the Highlands and Islands 2007-13 programme was under-performing as a whole and indicated that this was in relation to both expenditure and approvals of budget.8

  • A number of measures have already been taken which the Committee welcomes

8. The Committee welcomes the initiatives set out in the Recovery Plan which seek to simply procedures, to provide greater flexibility and to create further funding opportunities. The Committee further welcomes the response from the Scottish Government and its decision to frontload £95 million from EU structural funds to boost the Scottish economy.

9. However, the Committee believes that there are further measures which should be pursued by the Scottish Government, the UK Government and the EU:

  • Postponement of the closure of 2000-2006 programmes
  • The extension of N+2 to N+3
  • Increase in intervention rates
  • A greater focus on infrastructure projects
  • Use of the mid-term review to address any difficulties in securing match funding
  • The introduction of a Proact type programme in Scotland (i.e. training support for businesses)

10. In addition, the Committee considers that the Scottish Government has a key role to play in providing clear guidance to partners, stakeholders, and businesses on the implications of the Recovery Plan and amending regulations and, in particular, guidance on eligibility for, and access to, EU funding.

COMMITTEE REPORT

Introduction

1. With total financial resources of €347 billion for the 2007-2013 period, European cohesion policy provides crucial investment and financial support for EU member states and regions.9 Scotland has a long and successful record of using structural funds to boost regional economic development10 and, despite a reduction in funding under the 2007-2013 programme, the €820 million11 allocated to Scotland still represents vital support.

Remit

2. Prompted by concerns about the impact that the global financial crisis might be having on EU support for economic regional development in Scotland, the European and External Relations Committee agreed to seek evidence from stakeholders on the impact of the financial crisis on the ground; whether it was affecting the ability of structural funds to contribute to economic development and; what could be changed to enable programmes to adapt and contribute to economic recovery.

3. In particular, the Committee recognised a clear need to act timeously to raise key concerns from stakeholders, to examine the adequacy of the response to the crisis at both EU and Scottish Government level and to identify any further action that could be taken by the EU, the UK Government and the Scottish Government in the short term to ensure that optimum use was made of EU structural funds to contribute to economic recovery in Scotland.

4. In order to be able to report promptly on the issues highlighted by stakeholders, and to raise these with the Scottish Government, the Committee elected to conduct a short, focused inquiry. This report, therefore, concentrates specifically on EU funding derived from structural funds rather than on funding from other sources, such as the Common Agricultural Policy. Likewise, the Committee has not sought to examine all aspects of the European Economic Recovery Plan, though the importance of other key measures such as those which offer support to the newly unemployed and to small businesses is recognised. Finally, the report proposes short term solutions rather than long term measures, while recognising that many of the issues raised may be relevant to the negotiations for the next funding round for 2014-2020.

Report structure

5. At its meetings on 3 March and 17 March 2009 the Committee conducted evidence sessions with key stakeholders, including Highlands and Islands Enterprise (HIE), Scottish Enterprise (SE), Highlands and Islands Partnership Programme Ltd (HIPP), ESEP Ltd, Scottish Trades Union Congress (STUC) and the Scottish Chambers of Commerce (SCC). In addition, the Committee received written evidence from the Convention of Scottish Local Authorities (COSLA), the Scottish Council for Voluntary Organisations (SCVO) and the Scottish Local Authorities Economic Development Group (SLAED). Finally, the Committee took evidence from the Cabinet Secretary for Finance and Sustainable Growth at its meeting on 28 April 2009. The Committee is grateful to all those who have contributed to this inquiry.

6. This report takes its structure from the three key questions raised with witnesses, namely:

  • What is the impact of the financial crisis on the ground?
  • Is the financial crisis affecting the ability of structural funds to contribute to economic development?
  • What changes could be made to enable the programmes to adapt to the new economic environment and contribute to recovery?

7. In addressing the third issue, the Committee considered the action taken to date by the EU and the Scottish Government both in terms of the Recovery Plan and in relation to other EU initiatives, such as JESSICA (Joint European Support for Sustainable Investment in City Areas) and JEREMIE (Joint European Resources for Micro to Medium Enterprises). The Committee has made a series of recommendations for further action which it considers should be taken in the short term at EU level and which should also be actively pursued by the UK and Scottish Governments to facilitate use of EU structural funds in supporting economic development.

8. Finally, the Committee noted complementary measures in the Recovery Plan (such as European Investment Bank (EIB) support for SMEs and a reduction in the de minimis threshold in relation to State Aid) and, where appropriate, made further recommendations for additional action.

Impact of the financial crisis on the ground

9. A clear message emerged from witnesses regarding the impact of the financial crisis on the ground. Witnesses pointed to significant job losses, particularly in the construction, retail and commercial property sectors.12 Highlands and Islands Enterprise (HIE) reported that the continuing squeeze on the availability of working capital was having an effect on the performance of many small businesses and that banks were being more careful about the level of risk in their lending.13 Scottish Enterprise (SE) confirmed that cash flow was a key issue and that, in some instances, banks were trying to renegotiate terms of existing loans and credit arrangements.14 In addition, SE had identified difficulties with operating costs, turnover and the deferment of investment decisions.15 Problems in accessing finance were confirmed by the Scottish Chambers of Commerce (SCC) which stated:

“In view of the fact that [we] were of the view that a “funding gap” existed for SME’s prior to the credit crunch we believe this position has deteriorated considerably following its recent arrival last year. We have many examples of well run SME’s not being able to secure funding for development and growth from banks even with the offer of good quality lending security, a situation we believe is not going to change in the short term.”16

10. Several witnesses indicated that the situation was not wholly negative and pointed to the benefits which resulted from the depreciation in the value of Sterling, such as export and tourism opportunities.17 Others expressed less optimism. As the SCC commented: “international exchange rates work both ways for businesses in Scotland. In terms of export markets, the falling pound would, on the face of it, make Scottish goods cheaper to export abroad…..however, we must question whether there is demand for those goods.”18 This view was echoed by the Scottish Trades Union Congress (STUC) which stated that “any short term benefit from the devaluation of the pound has been lost with the collapse in demand.”19

Is the financial crisis affecting the ability of structural funds to continue to contribute to local economic development?

11. The Committee was keen to establish the extent to which the financial crisis was affecting the ability of structural funds to contribute to economic development. In general, witnesses described positively the methods by which their organisations were attempting to extract optimum benefit from structural funds by using, for example, existing flexibility or by front loading programmes. Nevertheless, there was recognition of the difficulties that potentially lay ahead.

12. SE indicated that it had a number of EU funded projects which complemented its own recovery plan. These included the Scottish Co-investment Fund, the Investment Readiness Scheme, Intermediate Technology Initiatives, Proof of Concept, Innovation Support and the Scottish Venture Fund. HIE reported that it had some of flexibility within the current programmes:

“We have been able to bring forward capital projects by using European funds, and we have others in the pipeline for which we can use European funding.”20

13. Both ESEP Ltd and SE referred to the potential benefits of the “Exceptional Project Procedure” for the 2007-2013 programmes, which provided that strategic projects could, in special circumstances, be brought forward outside of the annual funding call.21 Nonetheless, ESEP Ltd warned that it had to be careful that: “flexible responses are audit proof”22 and pointed to occasions in the past when “creative” decisions had been approved by the Commission and subsequently overturned by the auditors.23

14. ESEP Ltd indicated that the Lowlands and Uplands Scotland programme had probably gained more than £100 million in structural funds as a result of the exchange rate changes. It reported that its monitoring committee had pursued a policy of high commitment and front loading of programmes which meant that programmes could now benefit from the advantageous exchange rate.24 Nevertheless, ESEP Ltd acknowledged that in order to benefit from the exchange rate “the trick is to capitalise on that situation by spending through the programme and declaring it to the European Commission.”25 Likewise, HIE confirmed that the real challenge was achieving actual spend.26

15. Highlands and Islands (Scotland) Structural Funds Partnership Ltd (HIPP Ltd) indicated that, this year, it had encouraged applicants to submit three year proposals. While that approach had been effective at raising the commitment, there were still concerns. HIPP reported that a number of the three year recommendations were dependent on a further two years of match funding which had not yet been secured (an issue which is explored further below).27

16. SE reported that:

“There is some anecdotal evidence in Scotland that the fall out of the economic downturn has had an impact on the ability of the Structural Fund Programmes to spend on local economic development. At this stage, there is insufficient data available to back this up, although some EU projects which are providing direct support to businesses suggest that there is slower uptake than was anticipated at this stage in their implementation.”28

17. SE indicated that it was currently gathering more information on the situation.

Access to match funding
18. The issue of match funding was further explored by the Committee to establish the extent to which the financial crisis was affecting the ability of projects to access such finance and whether there were concerns that either a) private sector contributions would simply no longer be available; or b) public sector funding would be redirected to more critical areas. Witnesses suggested that, while largely anecdotal at this stage, there was some emerging evidence of difficulties with match funding. ESEP Ltd stated that:

“It is possible that, this year, project applicants will come forward who expected the co-finance to be available only to find it being redirected to other, more critical areas.”29 Although it indicated that ESEP Ltd did not have immediate indications of this.30

19. SE advised that the full effect of the financial crisis on match-funding for EU projects was still not clear,31 while HIPP Ltd indicated that there was anecdotal evidence that some smaller organisations pursuing training programmes were having difficulties in relation to match funding.32

20. The message from HIE was more pessimistic. It reported that the Highlands and Islands 2007-13 programme was underperforming as a whole in terms of both expenditure and approvals of budget mainly in relation to the European Regional Development Fund (ERDF). It indicated that this was due to a combination of reasons. In particular, “as all EU expenditure has to be match funded by public bodies there has been a particular issue for this programme that its start up period coincides with a new economic strategy, modified budgets and new funding arrangements for local authorities through the single outcomes agreements.” HIE reported that some of the EU decisions and rules might well be exacerbating the problem. In this programming period the proportion of infrastructure investment in the Programme had to be reduced “at a time when the demands for investment are no less, which suggests that there will be less match funding available for other activities”.33

What could be changed to allow programmes to adapt to the new economic environment and contribute to recovery?

Response at EU level
21. Key aims of the Committee’s inquiry were to establish the steps being taken to facilitate access to EU funding; to assess the adequacy of the response at EU, UK and Scottish Government level; and to make recommendations for further action, where appropriate. Witnesses stressed that, in the current economic climate, there was a need for flexibility and simplification in the implementation of the current structural funds programmes in order to maximise benefit from the allocated funding and to achieve spend. The Committee noted that there appears to be recognition of this need in the Recovery Plan which was agreed by member states at the December Council in 2008.

22. The Recovery Plan proposes a series of initiatives to address the global financial crisis and is based on two key pillars:

i) a set of incentives to boost demand and save jobs in the short term and; ii) a set of measures and reforms to ensure that the EU economy will be able to fully recover.

23. While the first pillar focuses on action to be taken at member state level, the second pillar is largely being co-ordinated by the European Commission.

24. The Recovery Plan proposes a number of measures in connection with structural funds. These include: advances of pre-payments, allowing state aid advances amounting up to 100% of the aid being paid to beneficiaries, allowing certain social housing projects to be eligible for energy efficiency renovation, allowing in-kind contributions such as land for match funding, allowing flat rate reimbursements for certain overheads, and releasing €6.3 billion in advance payments across the EU-15 member states.

25. Finally, the Commission indicated that it would consider extending the spending eligibility period for the previous structural fund programmes for 2000-2006. Under the regulations (known as N+2), member states have up to two years to spend the money allocated to each year.

Adequacy of the EU response
26. There appeared to be broad support for the Recovery Plan among witnesses and, in particular, a recognition that there was a need for a Europe-wide response. The STUC stated that: “We argue strongly that there needs to be action to increase global demand and the EU clearly has an important role in driving that agenda.”34 The SCC emphasised that: “The most important role that the EU can play is to ensure that we deal with the international crisis on an international basis.”35 Nonetheless, while supporting the overarching framework of the Recovery Plan, the STUC considered that the Commission’s “rigid adherence to “structural reform”” was at odds with the framework’s principles and aims.36

27. In relation to specific measures relating to structural funds, ESEP Ltd felt that the Commission was showing a willingness and flexibility in dealing with the financial crisis, particularly in relation to structural funds, but was not necessarily simplifying procedures. It also felt that the Commission’s response was “slightly overcautious”.37

28. COSLA welcomed the change “to more flexible criteria in the EU structural funds regulations”.38 The STUC supported the proposals to simplify criteria for the European Social Fund (ESF) in order “to reinforce active labour market policies, concentrate support for the most vulnerable and match skills to anticipated job vacancies”.39

29. SE considered that the proposals making use of housing and land as equity for match funding in EU-15 countries permissible for the first time were positive.40 ESEP Ltd indicated that it had been difficult in the past to obtain the additional public and private sector capital and reported that the Commission had now agreed that while it had a preference for cash investment, asset values such as land could be used.41 Likewise, HIPP confirmed that previously land would have had to be transferred to a third party for it to be eligible.42

JESSICA and JEREMIE
30. Witnesses pointed out that regulatory flexibility presented in the Recovery Plan provided scope to benefit from two key EU programmes: JESSICA (Joint European Support for Sustainable Investment in City Areas) and JEREMIE (Joint European Resources for Micro to Medium Enterprises).

31. In particular, SE advised that the Recovery Plan proposals that made use of housing and land as equity for match funding in EU-15 countries permissible and the amendments to make energy efficiency in housing an eligible activity made the uptake of JESSICA in Scotland much more feasible.43 ESEP Ltd pointed out that JESSICA could invest in large-scale infrastructure in urban regeneration areas in a way that was not possible under priority 3 as currently drawn and also could bring in key investment experience from the European Investment Bank (EIB).44 ESEP Ltd indicated that the notional figures for a JESSICA fund “would be an initial £25 million from the ERDF, which would be matched plus”.45

32. Nonetheless, SLAED was concerned about the diversion of funds from other areas and cautioned that it would “be desirable to have a mechanism for considering the consequences of JESSICA for ineligible areas, employability projects and other, non-JESSICA activity”.46

33. The Committee also queried the extent to which JESSICA funding could be used for all urban regeneration given that it apparently addressed only “cities”. ESEP Ltd reported that some of the thirteen local authority areas that are targeted under priority 3 were not city areas. However, it indicated that the Scottish Government was arguing for the need to take a more flexible approach. ESEP Ltd reported that proposals would be allowed to come forward from 13 target local authority areas.47

34. A number of witnesses referred to the potential benefits that JEREMIE could provide. SE explained that the Recovery Plan “allows for increased technical assistance (and potential finance) available for the JEREMIE initiative. The increase in technical assistance is to encourage JEREMIE initiatives to get up and running, as it covers the cost of preparation.”48 SE advised that JEREMIE supports the growth of the early stage risk capital market through a mechanism that can lever potentially substantial private sector involvement (through the European Investment Bank).49 SCC recognised that “Such funding certainly has some potential to address some of the funding gaps, and it could work on a shorter term basis than the existing funding arrangements.”50

35. The STUC also referred to the JEREMIE initiative and indicated that:

“the STUC has argued for a long time that one of the major market failures that we face in Scotland is a lack of patient, committed capital for growing companies. Our large financial sector has singularly failed in that area. Scottish Enterprise and Highlands and Islands Enterprise have done a lot to try to fill this gap….but we would welcome anything that can happen with regard to European Investment Bank moneys to provide more resources to address that market failure.”51

Use of structural funds versus other EU measures
36. While supporting these initiatives, witnesses were keen to point to the limits of structural fund programmes to address the short term difficulties arising from the global financial crisis. In particular, SCC queried whether EU financial support and funding mechanisms were the best instruments for dealing with the current crisis.52 This view was supported by SE which stated:

“It is important to recognise that the Structural Fund Programmes are designed to address medium to longer-term reform, tackling structural weaknesses in our economy and do not necessarily lend themselves to the short term interventions needed for economic recovery.”53

37. Likewise, HIE stated:

“A challenge is posed when we look to deploy European funds on a short term basis—they are structural funds and the name describes what they do.54

38. SLAED argued that the step to use structural funds to address the effects of the global economic crisis distanced such funding even further from its original purpose which was to reduce economic and social disparities.55

39. In its written evidence, HIE emphasised that it would be “prudent and practical to reserve EU funding for a relatively small number of the most strategic activities where there is less at risk of confusion between audit standards and such projects can be better adapted to the higher administrative overhead of EU funding.” 56 SE indicated that a focus should be maintained on “the medium to longer term challenges in the use of Structural Funds, so that the Scottish economy is in a position to maximise its growth potential when the economic climate returns to more favourable conditions.”57

Additional short term measures
40. As a result, witnesses commented briefly on alternative mechanisms contained in the Recovery Plan potentially more suited to aiding short term recovery.

41. COSLA pointed to the EU’s existing financial instruments geared to respond to “sudden shocks”, such as the European Globalisation Adjustment Fund (EGAF) and the European Solidarity Fund.58 In an effort to make the EGAF more effective, the Commission announced a series of proposals to improve the performance of the fund, including lowering the eligibility threshold for EGAF applications from 1000 to 500 redundant workers, increasing the EU intervention rate from 50% to 75% and extending to 24 months (currently 12 months) the duration of EGAF support.

42. The Committee also noted that member states have accepted a proposal from the European Commission to increase investments by the European Investment Bank (EIB) by €30 billion during 2009-2010. The Plan Recovery would see EIB lending increased by 30% in both 2009 and 2010. In particular, lending to SMEs would rise by 50% to €15 billion over two years.

43. The Committee further noted that the Recovery Plan provides for a temporary exemption of two years beyond the de minimis threshold for State aid in respect of an amount of up to €500,000. Finally, the Committee noted that the Recovery Plan permits the use of accelerated procedures in the public procurement directives in connection with “major public projects.”

44. The Committee welcomes the Recovery Plan and the initiatives to simplify procedures and provide greater flexibility in connection with structural funds.

Response at Scottish Government level
45. The Committee also wished to establish the steps being taken by the Scottish Government in respect of EU funding and its use to support economic recovery. In his evidence to the Committee, the Cabinet Secretary acknowledged “the helpfulness of the European Commission’s response in its economic recovery plan.”59 The Cabinet Secretary advised that the Government had been successful in obtaining agreement from the European Commission to amend the European social fund programmes to include assistance for workers who were at risk of being made redundant.60 He reported that two further ESF projects were under consideration, including one which would extend the “training for work” offer for those who had recently been made unemployed.

46. On 18 April 2009 the Scottish Government announced that it would use £95 million of European structural funding to provide a boost to the Scottish economy. The Government reported that this funding would be directed to Scotland’s economic recovery through programmes to develop the workforce, safeguard and create jobs and regenerate communities. In making the announcement, the Scottish Government made explicit that the structural fund support had been front loaded. The Scottish Government reported that £70.2 million from the European Regional Development Fund (ERDF) would be allocated to 129 projects and that £24.7 million would be allocated from the ESF.

47. In his evidence to the Committee, the Cabinet Secretary acknowledged that a balance needed to be struck between using European funding for short term solutions and retaining sufficient funding for long term economic development. He argued that EU funding could do both. The Cabinet Secretary reported that “many European structural and social fund programmes allow us to position ourselves for short, medium and long term scenarios”61 and pointed to the agreement to reconfigure the programme to allow for support to individuals who were unemployed or facing redundancy.62 The Cabinet Secretary admitted that, at this point, the Scottish Government had to manage two factors: a) ensure that programmes were sustainable throughout the six year period and b) make a proper assessment of currency risk.63

48. In respect of the JESSICA initiative, SE had advised that the Scottish Government had set up a steering group to oversee feasibility in Scotland. The group included representatives from Scottish Government, Scottish Enterprise and COSLA and had already commissioned consultants to explore JESSICA’s options and feasibility in Scotland.64 In his evidence to the Committee, the Cabinet Secretary reported that the Scottish Government had accepted an internal application to set up a fund under the JESSICA programme and that the Government was considering “how [JESSICA] can add value to a range of interventions in Scotland.”65

49. In respect of JEREMIE, SE reported that it had “been exploring with the Scottish Government the possibility of setting up a Scottish JEREMIE initiative by using the Scottish Co-Investment Fund II as a building block for this type of activity, given the ERDF project’s complimentary activity”.66 The Cabinet Secretary indicated that the Scottish Government was “actively determining whether we can secure successful applications under the JEREMIE programme, which could open up opportunities for investment in the Scottish economy.”67

50. The Committee welcomes the steps taken by the Scottish Government to date in utilising EU funding to support economic recovery while emphasising that sufficient funding should be retained for long term economic development.

Recommendations for further short term action

51. The Committee welcomes the action taken at both EU and Scottish level in relation to structural funds and commends the Scottish Government on its recent announcement to boost the Scottish economy with £95 million from EU structural funds. Nevertheless, the Committee considers that there are further steps that could be taken in the short term at EU level which it considers should be actively pursued by the Scottish Government in consultation with the UK Government.

Flexibility, simplification and audit
52. The key message from witnesses was that, in order to be able to use structural funds to maximum effect, there was still a need for greater flexibility and simplification in the implementation of structural funds. As SE stated: “Simplification” is still a complicated word as far as Brussels is concerned”.68 Likewise, SCVO claimed that: “The overall application and claims process is still onerous.”69 COSLA indicated that it had consistently argued for further simplification of the funds.70

53. Witnesses also pointed to the need for flexibility to adapt to the changing economic environment. COSLA indicated that this would enable member states, such as the UK, to benefit from the substantial additional funding as a result of the exchange rate.71 COSLA also reported that practitioners were seeking a less bureaucratic approach to programme implementation, whereby more flexibility was available for adjusting timescales and targets to take into account the currently changing economic climate.72 SCVO also sought greater flexibility within the programme to allow fast movement of funding between priorities and allow easier project changes in response to local market conditions.73

54. Witnesses were conscious, however, that solutions needed to “stand up to the test of the audit trail that deals with European programmes.”74 As a result, SCVO sought a more “relaxed, minimalist and supportive perspective” pointing to the possible deterrent factor in audits,75 a view shared by the STUC.76

55. In his evidence to the Committee, the Cabinet Secretary reported that “the nature and flexibility of programmes are welcome. It would be helpful if programmes went further, but I accept that there are limits on the resources that can be deployed and on the scale of intervention that can be made.”77

56. The Committee is aware that there may be reluctance on the part of the Commission to introduce further structural short term measures that could create difficulties for managing authorities and practitioners to adapt to new rules. Nonetheless, the Committee considers that witnesses made a number of sensible proposals which should be pursued by the Scottish Government at both EU and UK level. In particular, witnesses pointed to a number of measures that could enable projects to benefit from the additional funding available as a result of the exchange rate and address potential difficulties in obtaining match funding.

Postponement of closure of programme 2000-2006
57. The Committee notes that the Scottish Government has applied to take advantage of the Commission’s offer to extend the period by which money allocated under the 2000-2006 programmes has to be spent and claimed. ESEP Ltd considered this initiative helpful which would enable further scope for funding committed to remain in the Scottish economy rather than be returned to the Commission.78 COSLA supported the idea of the Scottish and UK Governments jointly negotiating with the Commission for an extension beyond June of the closing of the 2000-2006 programme so as to fully maximise the allocated resources.79 The Committee sought further information on the progress of this initiative at local level from the Cabinet Secretary.

58. The Cabinet Secretary advised that: “There are certain constraints on our ability to [extend the period during which programme expenditure could be incurred and resolved], particularly in relation to the internal financial arrangements of the United Kingdom, which provide some challenges.”80 He was hopeful that these issues could be resolved.

59. The Committee is concerned that there is apparently a delay in the implementation of this measure in Scotland, despite the UK receiving formal approval from the Commission. The Committee urges the Scottish Government to work actively with the UK Government in order that projects in Scotland might benefit from this initiative.

The extension of N+2 to N+3
60. Under the financial discipline N+2, funding that has been committed to a project must be spent within two years of being committed. Any unspent monies must be returned to the European Commission. While the EU-15 countries are obliged to adhere to N+2, the new member states enjoy N+3. ESEP Ltd reported that both the UK and Scottish Governments had approached the Commission and sought extension of N+2 to N+3.81

61. A number of witnesses pointed to the benefits of a move to N+3. ESEP Ltd indicated that N+2 had always been a challenge in Scotland because the application for structural funds “was an open competition and challenge fund approach.”82 As a result, at any one time, the monitoring committee was not always aware of the level of interest and number of projects that were emerging. COSLA indicated that practitioners were supportive of an extension of the N+3 rule to all member states.83

62. The STUC called for an easing of N+2 targets84 and the SCVO indicated that a move to N+3 could benefit Third Sector organisations which had received awards but struggled to obtain match funding.85

63. Recommendation: The Committee recommends that the European Commission should actively consider an extension of N+2 to N+3 for the UK as enjoyed by the new member states.

64. Recommendation: The Committee recommends that the Scottish Government should work with the UK Government to lobby the Commission for a move to N+3 for the UK.

Greater focus on infrastructure projects
65. Witnesses emphasised the need for EU funding to provide greater support for infrastructure projects. ESEP Ltd referred to the Commission’s approach which in the most recent programming periods had constantly put pressure on the UK “to move from capital infrastructure spend to revenue type-activity”86 and pointed out that “some of our college estate is not fit for purpose and needs major refurbishment.”87

66. The Committee welcomes the steps that have been taken by the Commission to facilitate access to the JESSICA initiative which could provide investment for large-scale infrastructure. However, the Committee considers that there should, in general, be a greater focus by the Commission on support for infrastructure projects and therefore increased flexibility in the funding mechanisms to facilitate this. The Committee recognises the additional benefits that such support could provide in opening up employment opportunities in the ailing construction industry.

67. Recommendation: The Committee recommends that the European Commission should provide greater flexibility in funding mechanisms to enable support for infrastructure projects.

68. Recommendation: The Committee recommends that the Scottish Government should work with the UK Government to lobby the European Commission to provide greater flexibility in funding mechanisms to enable support for infrastructure projects.

Higher intervention rates
69. Under the current rules, a project will not normally receive more than 50% of its eligible costs from Structural Funds; the remainder has to be covered by match funding. Witnesses suggested increased intervention rates would greatly assist in the current climate. For example, HIE suggested that the problem of match funding and the need to get money moving quickly could be addressed by intervention rates.88 HIPP Ltd indicated that it had raised the issue of raising grant rates in a paper to the monitoring committee so that the Commission was aware of the issue.89 In its written evidence, the SCVO confirmed that there should be scope for higher intervention levels – potentially up to 75% for some applications.90 Increasing intervention rates was also supported by the STUC.91

70. Recommendation: The Committee recommends that the EU give serious consideration to increasing intervention rates to improve access to match funding.

71. Recommendation: The Committee recommends that the Scottish Government, in consultation with the UK Government, seek an increase in intervention rates to facilitate access to match funding for projects in Scotland.

Increased flexibility in match funding
72. Witnesses suggested that there should be greater flexibility in match funding. For example, SCVO called for improvements to the eligibility of in-kind match allowances and allowing easy changes in sources of declared (at project application) match funding.92 STUC supported such a move pointing out that “in the current economic climate organisations may find that money is redirected elsewhere and this would threaten the viability of the project.”93

73. Recommendation: The Committee recommends that the EU give active consideration to further measures to ensure optimum flexibility in match funding; in particular, by permitting the change to sources of match funding mid-programme.

74. Recommendation: The Committee recommends that the Scottish Government raise with both the UK Government and the EU the possibility of increasing flexibility in match funding, in particular, by permitting the change of sources of match funding mid-programme.

Use of mid-term review
75. HIE suggested that preparations for revisions to the Programme Document should be at the mid-term review in 2010 and the Committee agrees with this suggestion.94

76. Recommendation: The Committee recommends that the Scottish Government use the mid-term review to take action to address any concerns about the availability of match funding.

Development of clear guidance
77. The SCC indicated that “it was important that Government at all levels in the UK and Scotland works to ensure that businesses are aware of the funding opportunities that already exist and can take advantage of new opportunities that arise.”95 COSLA was of the view, for example, that it would be helpful to have clear guidance from the Scottish Government on the implications of the simplification measures and, in particular, those in relation to revenue generating projects.96

78. In response to questioning from the Committee, the Cabinet Secretary referred to the “normal channels” by which information on funding options were made available and indicated that further guidance for SMEs would be provided if the Scottish Government considered that it needed to be conveyed.97

79. The Committee considers that the Scottish Government has a clear role to play in raising awareness about the funding opportunities available under the revised Globalisation Adjustment Fund, support for SMEs from the EIB and the reduction in the de minimis threshold for state aid and in providing detailed guidance to stakeholders and partners on the implications of the Recovery Plan and implementation measures.

80. In addition, the Committee considers that the Scottish Government should raise awareness about the funding opportunities provided under the JESSICA and JEREMIE initiatives to ensure that eligible applicants come forward.

81. The Committee notes the guidance that the Scottish Government has issued on the Commission’s statement about extending the use of accelerated procedures in public procurement. The Committee is concerned that such cautious guidance has been issued in relation to a potentially positive development and considers that any such guidance should present both the opportunities and the risks of the Commission’s initiative.

82. Witnesses also saw a clear role for the Scottish Government in connection with the implementation of the programme. In particular, COSLA considered that “a strong strategic dialogue within the Scottish Government and between the Government and local partners is needed to ensure consistent, complementary and joined up activity on the ground.”98 SLAED also called for a “greater degree of partnership working”.99

83. Recommendation: The Committee recommends that the Scottish Government raise awareness among stakeholders, businesses and partners such as local authorities, COSLA and Enterprise Agencies about the funding opportunities available under the Recovery Plan and under the JESSICA and JEREMIE initiatives.

84. Recommendation: The Committee recommends that the Scottish Government provide detailed guidance on the implications of the recovery plan and implementation measures for stakeholders, businesses and partners in Scotland such as local authorities, COSLA and Enterprise Agencies. In particular, the Committee recommends that the Scottish Government provide clear and balanced guidance on the funding opportunities presented by the European Solidarity Fund, the EIB support for SMEs, the amendments to eligibility for the Globalisation Adjustment Fund and the extension to the Public Procurement rules.

Redundancies and skills
85. Finally, the STUC considered that the primary responsibility of the Scottish Government in responding to the recession is “to help those who are most badly affected. We want a comprehensive package of support to be put in place for the newly unemployed and those who are at risk of redundancy.”100 In terms of redundancy response/skills, the STUC considered that EU funds had a key role to play in assisting people upskill, reskill and, through wage subsidy and training programmes, retain employment which would otherwise have been lost.101 STUC pointed to the Welsh Assembly Government’s Proact programme which provides training support to “inherently viable” companies.

86. While the Committee is aware that Scotland does not have access to Objective 1 funding, the Committee considers that the Scottish Government should investigate the feasibility of a PROACT type programme in Scotland.

87. Recommendation: The Committee recommends that the Scottish Government actively consider the terms of the Welsh Assembly Government’s Proact programme and investigate the options for introducing a similar programme to provide support for Scottish businesses.

Long term issues

88. Witnesses raised a number of long term issues in relation to EU structural funding at EU, UK and Scottish Government levels which would be of key importance in the negotiations for the next funding round 2014-2020. While it is beyond the scope of this report to make specific recommendations on these matters, the Committee sees value in highlighting these issues here and recognises the need for further detailed examination. In particular, COSLA referred to the need for:

  • The application of subsidiarity and a more flexible approach;
  • Further simplification: in particular, removal of overlaps between EU funds;
  • More robust deployment of the partnership principle, both at local and national level;
  • Consistency between the Cohesion Policy and other EU policies102

89. The Committee further notes plans for the creation of a Scottish Investment Bank which would utilise European funds. The Cabinet Secretary reported that the aim of this vehicle was to deliver long term benefits to the Scottish economy.103

90. Finally, the Committee notes the point made by the SCVO that the Third Sector felt that in this round of funding it had lost out more than other sectors.104 In his evidence to the Committee, the Cabinet Secretary replied that “We are engaged in dialogue to ensure that the position of the third sector is improved. The Government sees the third sector as having a great deal to contribute to the employability agenda, so that we will seek additional ways of ensuring that we maximise that input.”105 The Committee welcomes this commitment.

Conclusion

91. A clear message emerged from witnesses on the impact of the financial crisis on the ground. In addition to rising redundancies and the corresponding fear of skills’ loss, witnesses pointed to difficulties in accessing finance and the reluctance of banks to make much needed investment. In terms of EU structural funds, there was some emerging anecdotal evidence of difficulties with match funding. Witnesses called for both flexibility and simplification in the implementation of the current programme to enable optimum use of EU funding at the point when it is most needed, to enable projects to benefit from the exchange rate and to facilitate access to match funding. Nevertheless, witnesses stressed the need to strike a balance between the use of EU structural funding for short term solutions and the need to retain sufficient funding for strategic long term economic development.

92. The Committee therefore welcomes the initiatives set out in the Recovery Plan which seek to simply procedures, to provide greater flexibility and to create further funding opportunities. The Committee further welcomes the response from the Scottish Government and its decision to frontload £95 million from EU structural funds to boost the Scottish economy.

93. Nevertheless, witnesses identified a number of further steps that should be taken by the EU in the immediate future to facilitate access to funding and which the Committee considers should be actively pursued by both the UK and Scottish Governments. In particular, stakeholders called for the postponement of the closure of the 2000-2006 programme, the extension of N+2 to N+3 to the EU-15 as enjoyed by the new member states, greater support for infrastructure projects, an increase in intervention rates and greater flexibility in match funding. In particular, the Committee considers that the Scottish Government should use the mid-term review of the 2007-2013 programme in 2010 to address any evidence from organisations of difficulties in accessing match funding.

94. In addition, the Committee considers that the Scottish Government has a key role to play in providing clear guidance to partners, stakeholders, and businesses on the implications of the Recovery Plan and amending regulations and, in particular, guidance on eligibility for, and access to, EU funding.

Annexe A: EXTRACTS FROM THE MINUTES OF THE EUROPEAN AND EXTERNAL RELATIONS COMMITTEE

4th Meeting, 2009 (Session 3), Tuesday 3 March 2009

European Union response to financial crisis: The Committee took evidence from—
Gordon McLaren, Chief Executive, ESEP Ltd.

European Union response to financial crisis: The Committee considered the key themes arising from the evidence session.

5th Meeting, 2009 (Session 3), Tuesday 17 March 2009

European Union response to financial crisis: The Committee took evidence from—

Lorna Gregson-MacLeod, Assistant Chief Executive, Highlands and Islands (Scotland) Structural Funds Partnership Ltd;
Donald MacInnes, Chief Executive of Scotland Europa, Scottish Enterprise;
Alex Paterson, Director of Regional Competitiveness, Highlands and Islands Enterprise;
Garry Clark, Head of Policy and Public Affairs, Scottish Chambers of Commerce;
Stephen Boyd, Assistant Secretary, Policy and Campaigns Department, STUC.

European Union response to financial crisis: The Committee considered the key themes arising from the evidence session and agreed to invite the Cabinet Secretary for Finance and Sustainable Growth to give evidence to the Committee and to produce a report on the Committee's findings.

7th Meeting, 2009 (Session 3), Tuesday 28 April 2009

Decision on taking business in private: The Committee agreed to take consideration of its draft report on the European Union's response to the financial crisis at its next meeting in private.

European Union response to financial crisis: The Committee took evidence from—

John Swinney MSP, Cabinet Secretary for Finance and Sustainable Growth, John Rigg, Head of European Structural Funds Division, and Jim Millard, European Structural Funds Division (Team Leader for Highlands and Islands Transitional and Cross Border Team), Scottish Government.

European Union response to financial crisis: The Committee considered the key themes arising from the evidence session

8th Meeting, 2009 (Session 3), Tuesday 19 May 2009

European Union response to financial crisis (in private): The Committee considered its draft report.

9th Meeting, 2009 (Session 3), Tuesday 2 June 2009

EU's response to the financial crisis inquiry (in private): The Committee agreed its draft report subject to specified changes being made.

ANNEXE B: ORAL AND ASSOCIATED WRITTEN EVIDENCE

European and External Relations Committee Official Report, 3 March 2009

SUBMISSION FROM SCOTTISH ENTERPRISE

Summary

Scottish Enterprise’s action plan for economic recovery outlines a number of areas where additional resources will be deployed to help meet the aspirations detailed in the Scottish Government Economic Strategy. There are a number of projects where structural funds have been sought and which will help with economic recovery. However, it is important to recognise that the Structural Fund Programmes are designed to address medium to longer-term reform, tackling structural weaknesses in our economy and do not necessarily lend themselves to the short term interventions needed for economic recovery.

While preparation work is underway for Structural Fund initiatives which could have a role in short-term economic recovery, these initiatives also have an important role to play in looking to the future of structural funds in Scotland, beyond the current programming period (2007-2013). It is important that a focus is maintained on the medium to longer-term challenges in the use of Structural Funds, so that the Scottish economy is in a position to maximise its growth potential when the economic climate returns to more favourable conditions.

What the impact of the credit crunch has been on the ground?

Scottish Enterprise (SE) has a key role to play in helping Scottish businesses respond to both the short term shocks and over the longer term, the more fundamental challenge is to work with partners and stakeholders to help raise Scotland’s sustainable growth rate. The focus in relation to the current economic downturn requires relatively short-term measures, while positioning businesses for longer term success.

Through discussions with our client managed businesses, based on our ongoing Business Reviews, some common issues have emerged which could be attributed to the credit crunch. However, it should be noted that the following issues vary by company and in the current economic market are susceptible to rapid changes in trends:

  • Finance - cash flow is a major issue. In some instances banks are seeking to renegotiate terms of existing loans and credit lines, placing increased controls on new loans and taking longer to agree packages.
  • Operating costs some raw material prices are starting to reduce as demand falls, although companies locked into long-term energy deals are seeing energy costs rising by up to 50%.
  • Turnover - forecasts of future sales vary. The majority of firms, whom are part of our portfolio, still expect turnover to either grow or remain static over the next 6 months. However, we are aware that market conditions could deteriorate and expect a number of companies may report a decline in turnover.
  • Investment/growth plans businesses are deferring investment decisions due to the credit squeeze and/or nervousness over the length of downturn. Businesses are also diverting funds from investment to ensure liquidity.
  • Opportunities – some companies are identifying opportunities in the downturn, for example the fall in the value of sterling may help to make Scottish goods and services more competitive in some export markets.

The Scottish Government in its Recovery programme has made reference to the fact that it wishes to accelerate the award of Scotland's European Structural Funds projects and bring forward projects that will stimulate the economy, increasing business advice and strengthen its responsiveness to businesses and individuals facing redundancy.

Scottish Enterprise has recognised the need to vary the services it offers to customers and stakeholders and has produced an action plan which sets out clearly where additional resources will be deployed to help meet the aspirations detailed in the Government Economic Strategy. Scottish Enterprise’s action plan for economic recovery is structured around a number of specific areas including:

  • Direct and specialised support to businesses
  • Finance for businesses
  • Accelerating major infrastructure projects
  • Developing skills to help Scottish Enterprise staff and businesses manage during a downturn
  • Marketing campaign to raise awareness of support available to businesses
  • Gathering and sharing intelligence and information

The following provides examples of the sorts of additional activity being undertaken in addition to the usual services that we provide to customers and include:

Business reviews: We have undertaken dedicated business reviews with our account managed companies to help them identify and exploit new opportunities. There is likely to be increased demand for Scottish Enterprise’s services as a result of this support. In particular, Scottish Enterprise is providing additional support to assist companies to innovate and undertake R&D, to exploit opportunities most effectively as the economy recovers.

Access to Finance: We have seen an increase in demand for the risk capital support Scottish Enterprise enables businesses to access. Additional resources have been allocated to meet this and there may well be further demands going forward.

Scottish Manufacturing Advisory Service (SMAS): There has been increased demand for services that help businesses increase their efficiency. The Scottish Manufacturing Service is designed to help manufacturing firms eliminate waste from their processes, increase the quality of products and produce goods in a more cost effective manner, ultimately helping them to become more competitive. We plan to double the number of projects that SMAS can support in response to increased demand from companies.

Infrastructure Projects: The Scottish Government has provided additional funding this year which is allowing us to bring forward investment in key infrastructure projects including the SECC Arena for the Commonwealth Games, Fife Energy Park and the Edinburgh Bioquarter.

Support to Exporters: Scottish Development International has increased the level of service available to firms wishing to export by increasing the eligibility for support to a further 2,000 to 3,000 businesses. It has also instituted flexibility in payments allowing them to “sell now, pay later” for participation at major trade shows where SDI has taken exhibition space.

New European powers: Scottish Enterprise is exploring how to utilise new European powers that range from the support to high growth young innovative enterprises through to possible relaxation of state aid regulations. There may be demands for additional resources to deliver these new powers.

Wider support to Firms: Scottish Enterprise is undertaking a major marketing and communications campaign entitled “Now’s the Time to Ask” which invites all companies to contact us on areas where they would require assistance to help them to grow. Every question submitted will be answered with practical information on how to tackle the issue including business guides, information and advice from Scottish Enterprise and Scottish Development International, or partner organisations including Business Gateway.

Whether the impact of the credit crunch is affecting the ability of structural funds programmes to contribute to local economic development?

It is important to recognise that the Structural Fund Programmes are designed to address medium to longer-term reform, tackling structural weaknesses in our economy. While Structural Fund Programmes can make a contribution to Scotland’s overall response to the current financial crisis, it is important that a focus is maintained on the medium to longer-term challenges so that the Scottish economy is in a position to maximise its growth potential when the economic climate returns to more favourable conditions.

Structural Funds do not lend themselves well to the short term interventions needed for economic recovery, such as responding promptly to mass redundancies. This is because in general it takes a number of months to develop and approve a project before it can begin to get implemented. The requirement for high percentages of match-funding; retrospective claiming of project expenditure; and the annual calls for funding (for example in the Scottish Programmes) ultimately means structural funds are unsuitable for quick fixes.

That stated the Managing Authority for the Lowland and Uplands Scotland Programmes has a certain level of flexibility available, as approved by the Programme Monitoring Committee in March 2008, specifically for dealing with time criticality. Strategic projects can be brought forward outside of the annual funding call, through the “Exceptional Project Procedure” for the 2007-13 Programmes, in special circumstances. Applicants in that situation need to explain the time criticality, its strategic nature and that the project will achieve an above-average level of outputs and results in relation to the relevant priority targets or address targets that are under-achieved within the priority.

Taking into account the above situation about the traditional use of structural funds, Scottish Enterprise currently has a number of live EU funded projects which complement our recovery plan. Key projects include:

  • Scottish Co-investment Fund II – invests up to £1m in high growth companies on a pari passu and fully commercial basis alongside private sector investor partners in deals of up to £2m. This is a follow up to the fund set up in 2003 in the previous Programmes by supporting early stage equity gap for ambitious young growth companies by: increasing the money supply available to investors and companies seeking risk capital support; and introducing new investors from outwith Scotland. ERDF has been secured to part finance the £67m re-capitalisation of the Scottish Co-investment Fund running from 2008 to 2015. The Fund is evergreen in that any returns will be repaid to the SCF bank account for future re-investment. After recapitalisation, Scottish Enterprise believes that the fund is now sufficiently large as to be long term economically sustainable.
  • Investment Readiness Scheme - The main objective of this scheme is to improve SMEs' ability to secure investment finance,in order to further grow their businesses in the areas of new products, markets or increasing employment. It addresses their investability; aims to educate entrepreneurs and SMEs about the financing options; and will help with developing skills of entrepreneurs in presentation required to present those proposals effectively to investors.
  • Intermediate Technology Initiatives – ITI Scotland was set up in 2003 to drive Scotland’s ambitious plans to identify, develop and commercialise valuable technology-based intellectual assets. This follow-on project has now transferred to Scottish Enterprise and builds upon that established work. ITI undertakes market focused collaborative RTD projects, developing key technologies in Energy, Life Sciences and Techmedia sectors. The project links enterprise and academic research whilst encouraging enterprises with limited experience in working with research partners to collaborate and enable the transfer of key research and innovation knowledge into Scottish SMEs.
  • Proof of Concept – The Proof of Concept Programme supports the pre-commercialisation of leading-edge technologies emerging from Scotland's universities, research institutes and NHS Boards. It helps researchers to export their ideas and inventions from the lab to the global marketplace. Projects can typically be defined as occurring after advances made during curiosity-driven or strategic research.
  • Innovation Support – This project activity aims to raise awareness of the need for and benefits of innovation to business. This is combined with an increase in the resources made available to provide grant aid for the development of new products processes and services. By focussing on innovation it is hoped that companies will come out the other end of the recession stronger and better equipped to take advantage of market opportunities. Those who do not innovate are expected to be the least likely to survive.

In addition Scottish Enterprise has a number of pipeline projects which compliment activity needed for economic recovery, such as the “Scottish Venture Fund” and “Business Efficiency”, currently submitted to EU Programmes which are being assessed and awaiting approval.

  • Scottish Venture Fund – could invest up to £2m in high growth companies on a fully commercial basis alongside private sector investors in deals of up to £10m. Scottish Enterprise is in the process of recapitalising this fund at £50m and has applied for £20m ERDF – this will be considered at the 18 March PMC.
  • Business Efficiency Programme - will improve enterprise growth rates, the use of e-commerce by firms and the levels of resource efficiency achieved by them. It will tackle Scotland’s low level of productivity and support the development of a more efficient and competitive supply chain, helping Scottish business to compete in the global marketplace.

There is some anecdotal evidence in Scotland that the fall out of the economic downturn has had an impact on the ability of the Structural Fund Programmes to spend on local economic development. At this stage, there is insufficient data available to back this up, although some EU projects which are providing direct support to businesses, suggest that there is slower uptake than was anticipated at this stage in their implementation. We are gathering more information on this at present. Also, the full impact of the credit crunch on match-funding for EU projects is still not clear.

Our assessment is that we expect EU projects in the coming months to focus on organisations core activity.

What could be changed to allow programmes to adapt to the new economic environment and contribute to recovery?

As members of the Committee will be aware from previous meetings, the Commission outlined its proposals for a European Economic Recovery Plan (see 1, at end of submission) at the end of November last year. The plan has a number of interesting proposals for amendments to Cohesion Policy regulations which could have a significant impact on current absorption potential if utilised by Managing Authorities.

Scottish Enterprise is investigating with the Scottish Government, as the Managing Authority for the Structural Fund Programmes in Scotland, two initiatives which have the potential to make a considerable impact, both in dealing with economic recovery and providing longer-term support for economic growth. These two initiatives, JEREMIE (see 2, at end of submission) and JESSICA (see 3, at end of submission), are a move away from the traditional one-off grant based finance model to innovative mechanisms that make the funds evergreen and provide legacy funding beyond the length of the current EU programming period (2007-2013). This will require a return on the investment which will be recycled for future activity within a holding fund.

The European Economic Recovery Plan allows for increased technical assistance (and potentially finance) available for the JEREMIE Initiative. The increase in technical assistance is to encourage these initiatives to get up and running, as it can cover costs of preparation.

From a strategic perspective, JEREMIE supports the growth of the early stage risk capital market and its emergent strong pipeline of venture-backed firms, through a mechanism that can lever potentially substantial private sector involvement (through the European Investment Bank).

Operationally, we have been exploring with the Scottish Government the possibility of setting up a Scottish JEREMIE initiative by using the Scottish Co-investment Fund II as a building block for this type of activity, given the ERDF project’s complimentary activity. Also, pending approval, the Scottish Venture Fund might also be utilised in this way. We are exploring which other ERDF-supported products a JEREMIE initiative could include. The larger the pool of ERDF identified for this initiative, means the larger the monies matched by the European Investment Bank will be, thus contributing to the size of the overall holding fund.

Having seen an increase in demand for equity finance from businesses over recent months we hope that these initiatives will substantially increase access to risk capital for Scotland’s high growth companies. This increase in demand for this type of finance is only partly attributable to the economic downturn. This trend is also in line with demand forecasts we set prior to awareness of the economic downturn. We anticipate that increases in demand for this type of finance are more likely to reflect market growth and as the market gets bigger, it will need more support. That said, the shortage of debt could be forcing companies to seek equity, notwithstanding that in many cases, it is more than likely to be the wrong type of finance (for things like working capital, factoring and asset finance etc).

Another positive side effect of the regulatory flexibility presented by the European Economic Recovery Plan is in relation to these financial instruments. There are proposals that make the use of housing and land as equity for match funding in EU-15 countries permissible for the first time (previously it was just the newer Member States that could do this). There are also amendments to make energy efficiency in housing an eligible activity; previously excluded for fear that these types of initiatives could absorb whole Programmes. These amendments now make the uptake of JESSICA in Scotland much more feasible, as not being able to use land or housing as equity was a major barrier for public sector involvement as per the prior rules. The Scottish Government have just set up a steering group to oversee its feasibility in Scotland led by regeneration policy. The group has representatives from Scottish Government, Scottish Enterprise, and COSLA. It has already commissioned consultants to explore JESSICA’s options and feasibility in Scotland. We hope the utilisation of JESSICA might have an impact on kick starting large scale investments in strategic urban regeneration projects.

Conclusion

Scottish Enterprise’s response for economic recovery will utilise structural funds where the scope of activity compliments the aim of the EU Programmes. We anticipate that some organisations will focus their usage of EU funding on core activity in future months. As structural change occurs in the economy, it goes without saying that there will be an increased demand for Structural Fund type activity. Despite the built-in inflexibilities of the Structural Funds for short-term interventions, there are a number of positive developments and options.

Firstly, strategic projects can be brought forward outside of the annual funding call, through the “Exceptional Project Procedure”.

Secondly, through the amendments afforded through the European Economic Recovery Plan, Scottish Enterprise along with other stakeholders are exploring the options open to Scotland in setting up a JESSICA holding fund in order to help kick-start strategic urban regeneration projects.

Lastly, Scottish Enterprise has been working with the Scottish Government to explore the possibility of setting up a JEREMIE holding fund to promote increased access to finance for the development of micro, small and medium-sized enterprises. Scottish Enterprise has identified that there has been a growing demand from business for access to equity, and hope that these initiatives will substantially increase access to risk capital.

Endnotes:
1. The main objective of the European Economic Recovery Plan is to accelerate payments to Member States and to facilitate access to the Structural Funds. This translates into two types of measures: In the short term this means measures that seek to “save jobs” while the second measure of “smart investments” hopes to yield higher growth and sustainable prosperity in the longer term. The desire is that this will help speed up project implementation on the ground and inject confidence and dynamism into the European economy.

2. JEREMIE (Joint European Resources for Micro to Medium Enterprises) is an initiative of the European Commission together with the European Investment Bank (EIB) and the European Investment Fund (EIF) in order to promote increased access to finance for the development of micro, small and medium-sized enterprises in the regions of the EU. The JEREMIE initiative offers new opportunities to invest and re-invest Structural Funds using a range of financial instruments, instead of grants. This means that funds are used to maximum advantage, gaining additional value, or leverage, and also that funds can be used over a longer period for the benefit of SMEs.

3. JESSICA’s (Joint European Support for Sustainable Investment in City Areas) main feature is that it provides an alternative to the traditional ERDF grant funding for individual projects and instead offers a combination of loans and financial guarantees to part fund integrated urban development plans. It offers the possibility to take advantage of outside expertise in the form of European Investment Bank and the Council of Europe Development Bank and to have greater access to loan capital for the purpose of promoting urban development.

Scottish Enterprise
March 2009

SUBMISSION FROM HIGHLANDS AND ISLANDS ENTERPRISE

Introduction

Highlands & Islands Enterprise (HIE) is the Scottish Government’s economic and community development agency for a diverse region, with a growing population, which covers more than half of Scotland. HIE aims to build sustainable economic growth in all parts of the Highlands & Islands and delivers its services through area teams located from Lerwick to Lochgilphead.

HIE has a key role to play in helping to achieve the overall purpose of the Government Economic Strategy, that is to create a more successful country, with opportunities for all of Scotland to flourish through increasing sustainable economic growth.

HIE’s focus is on:

  • Supporting high growth businesses and sectors
  • Creating the infrastructure and conditions to improve regional competitiveness
  • Strengthening communities, especially in the fragile parts of the region

We lead and work with partners to deliver transformational projects which can have a significant economic impact beyond local markets and assist local organisations to create stronger, more dynamic and sustainable communities.

HIE welcomes the opportunity to submit evidence and looks forward to joining the Committee on 17 March 2009 to discuss the impact of the credit crunch and the impact of EU funds in ameliorating the situation.

Impact of the credit crunch on the ground

The global recession is deepening and expectations of its severity and duration are increasingly pessimistic. In Scotland this has resulted in falling manufacturing output together with increased unemployment as businesses have closed or restructured, and many report decreases in turnover. It is a complex and fast moving environment impacted on a frequent basis by decisions taken by the UK or Scottish Governments or other organisations such as the Bank of England.

Our recent experience suggests the following situation in the Highlands & Islands:

  • A continuing squeeze on the availability of working capital is having an impact on the performance of many small businesses and may result in the loss of some otherwise profitable businesses.
  • Banks are being more careful about the level of risk in their lending. In a number of cases they have acknowledged the worsening trading prospects of their clients by reducing their lending levels and charging higher risk premiums. In other cases they have increased their lending in favour of less risky business. Private investors appear to be reacting similarly and the result is more expensive borrowing and a shortage of funding, particularly for more risky projects.
  • Evidence of significant job reductions, particularly in construction and retail sectors. Unemployment levels in the H&I are below the Scottish average but have shown significant increases between December 08 and January 09. The claimant count was 2.7% in January and the more comprehensive ILO measure was circa 4.2%.
  • The situation is not wholly negative. While there is clearly a slowdown in business activity with associated job reductions and smaller order books, together with a squeeze on availability of bank funding there are positives for the H&I economy. Depreciation of sterling opens up export opportunities and makes the H&I a more attractive tourism destination. Also, there is a current high level of significant public and private initiatives in progress.
  • Given the high level of public sector activity in the region, there could well be a bigger negative impact later when recovery is underway if the public sector then faces budgetary constraints to counterbalance the initial increases in expenditure on the crisis.

HIE’s initial response to the crisis has been a 7-point plan including business information and advice delivered online and through a telephone helpline, through business clinics, and in one-to-one sessions; a Business Masterclass Programme; targeted Interest Relief Grants; and an acceleration of capital spend.

Ability of structural funds programmes to contribute to local economic development

EU Structural Funds have had a positive impact on Highlands & Islands in supporting a range of strategic developments and promoting economic development across the region. This has included supporting developments such as the Centre for Health Science, European Marine Energy Centre (EMEC) and the Horizon Centre in Forres.

EU funding in the Highlands & Islands has a number of strands, of which Structural funding is the most explicitly targeted at the region but is not the largest component. CAP funding alone exceeds the Structural funds. In addition there are significant contributions from Rural Development Funding and a variety of thematically targeted funds such as Research and Technological Development via Framework funding and trans-national programme funding (INTERREG).

The Structural Funds programmes are:

  • The H&I ERDF programme 2007-2013 is €122m.
  • The H&I ESF programme 2007-2013 is €52m.

These equate to significantly less than 5% of the public spending according to the H&I Convergence Programme Document. Given the very large uncertainties about the impact of the credit crunch on both enterprise and government spending and the fact that a significant proportion of the programme has still to be committed to projects it is difficult to be precise about the potential impact of structural funds in addressing the situation.

HIE has been allocated c£14m of ERDF from the programme for enterprise development until 2011 via a Strategic Delivery Body (SDB) agreement. There are currently no indications that lead us to think we will not be able to carry out projects and expenditure to deliver the programmed outputs.

Other EU measures have already provided useful means to tackle the Credit Crunch. The new Temporary Framework for State Aid in response to the current financial difficulties has been utilised by Scottish Government to provide powers for HIE and other agencies and Departments to provide additional financial support of up to £500,000 to SMEs and large firms over the next two years. These powers will enhance HIE’s ability to respond by assisting Enterprises at higher levels and this fits well with the existing activities planned within HIE’s ERDF funding agreement (for example assisting firms to expand to become “firms of scale” in the context of the H&I).

We are aware however aware that the programme as a whole is under-performing in terms of both expenditure and approvals of budget (mainly concerning ERDF) and this is almost certainly due to a combination of reasons. Past experience indicates that all programmes experience slow spending in the initial years because of the complexities of closing down activities from the previous programme and starting projects under new strategies and rules. Also, as all EU expenditure has to be matched by public bodies there has been a particular issue for this programme that its start up period coincides with a new economic strategy, modified budgets and new funding arrangements for local authorities through the single outcomes agreements. However, it is likely that this situation has been impacted by worries and caution over future match funding availability as a result of the credit crisis.

Furthermore, some of the EU decisions and rules may well be exacerbating the problem. For example, in this programming period the proportion of infrastructure investment had to be reduced, at a time when the demands for investment are no less, which suggests that there will be less match funding available for other activities. Also, the legacy value of infrastructure investment and its suitability for EU audit purposes make it more suitable for EU funding and if this is withdrawn then funding bodies find it more difficult to find projects that meet all of these EU requirements.

Another factor for the H&I programme is the high level of front loading in the expected expenditure profile required. This is particularly difficult to achieve in the current circumstances referred to above, which may well lead to penalty being imposed in terms of an overall budget reduction (the so called N+2 mechanism). Paradoxically this might result in even less EU funds becoming available in future years when the real impacts of this recession on both private investment and public funding become more pronounced.

What could be changed to allow the programmes to adapt to the new economic environment and contribute to recovery?

Existing recent Government measures at the macro economic level, such as placing more funds into the economy via the banks should begin to impact soon. The recent enlargement of the Enterprise Finance Guarantee scheme should also help encourage banks to make more funding available to commercial enterprises.

HIE feels there is probably enough flexibility within the H&I Convergence programme to deal with the business development issues that we have the lead responsibility for via the Strategic Delivery Body (SDB) arrangements. However, there may be merit in using ERDF funds and HIE/SG funds to lever loan funds from the EIB via the EU JEREMIE programme to fund loans and equity for growth by smaller firms if the recent indications of reduced bank lending continue to be felt.

  • Some possible additional actions under the Convergence Programme could include:
  • Higher rates of EU grant, enabling projects to proceed sooner and with lower levels of public match funding.
  • Preparation for revisions to the Programming Document (programme strategy) at the mid-term review in 2010.

Introduce an initiative to select one or two pieces of infrastructure investment to generate extra early expenditure with long term benefits for competitiveness, with earmarked ERDF at very high EU grant rates.

Some immediate procedural changes have already been agreed, such as permitting more rapid approvals and changes in this direction are to be welcomed.

HIE’s view is that EU funding is not suitable for use in short term revenue funding of business as an emergency response to the financial difficulties, given its complexity and the small level of funding available. It would be prudent and practical to reserve EU funding for a relatively small number of the most strategic activities where they are less at risk of confusion between audit standards and such projects can be better adapted to the higher administrative overhead of EU funding. Furthermore, such strategic investments will support the growth and development of the Highlands & Islands as we emerge from the current recession.

The Highlands & Islands has benefited greatly from EU Structural Funds and they can continue to provide significant support to activity in the Highlands & Islands. EU funding has the potential to contribute to strategic developments which provide significant and lasting benefits to the region. It has the potential to contribute to economic recovery and create the conditions from which the Highlands & Islands economy can fully capitalise on opportunities as we emerge from recession.

Highlands & Islands Enterprise
10 March 2009

SUBMISSION FROM SCOTTISH CHAMBERS OF COMMERCE

General Background

We are aware that the European Union Structural Funds, through the European Regional Development Grant Fund (ERDF) has already made a significant contribution and impact in Scotland in supporting a number of important business loan and equity funds that aim to bridge the funding gap that can exist with Small Medium Sized Enterprises (SME’s) who are trying to raise important funding for business start up, growth and even survival.

Funds supported to date include:

  • West of Scotland Loan Fund Limited (local authority led)
  • Scottish Seed Capital Fund Limited (Scottish Enterprise )
  • Scottish Co-Investment Fund Limited (Scottish Enterprise/Private Sector led)
  • Various business development funds

These funds have made a significant economic impact over the years in terms of new and additional job creation, supporting business formation and improving business survival rates. We also believe independent evaluations of these funds have found they have been very effective in terms of additionality and value for money.

Current Credit Crunch

In view of the fact that Scottish Chambers of Commerce were of the view that a “funding gap” existed for SME’s prior to the credit crunch we believe this position has deteriorated considerably following its recent arrival last year. We have many examples of well run SME’s not being able to secure funding for development and growth from banks even with the offer of good quality lending security, a situation we believe is not going to change in the short to medium term.

As a result of the above, we believe there is an increasing need for the EU Structural Funds to provide even more resources to help organisations both in the public and private sector to develop innovative loan/equity funds to address a very serious business development gap which we believe will be with us for some time and act as a barrier to growth.

As noted above, the European Regional Development Fund has been very successful to date in providing much needed support to fill the “funding gap”; the need for further intervention we believe is even greater.

Scottish Chambers of Commerce
10 March 2009

SUBMISSION FROM SCOTTISH TRADES UNION CONGRESS

Introduction

The STUC welcomes the opportunity to provide evidence on the impact of the credit crunch and whether EU funding is 1) sensitive to the changed circumstances and 2) making a difference on the ground.

The impact of the credit crunch

The impact of the financial crisis and subsequent recession is reflected in all current data and survey evidence and therefore the Committee is unlikely to benefit from the STUC repeating statistics already in the public domain. Suffice to say that the labour market intelligence being fed back to the STUC from trade union workplace representatives confirms the bleak picture painted by the data and our current view is that, in terms of unemployment, the full impact of the recession is unlikely to be reflected in the statistics for another 6 months or so.

The recession is of a different nature to those experienced in recent decades in that no sector – including the public sector – is likely to escape unscathed. This is predictable in a credit crunch induced recession and it is worrying that recent research confirms that recessions precipitated by financial crisis have tended to be longer and deeper than those with different origins.

In Scotland to date, job losses have largely been confined to

  • house-building and commercial property sectors – and those services which rely on churn in these markets such as communications; and,
  • Retail

Contrary to popular perception, the full impact of the banking crisis has yet to be reflected in job losses in the banking or wider financial sector in Scotland although, regrettably, we do anticipate substantial job losses later this year. Manufacturing is suffering from collapsing global demand and problems with export credit finance and has been unable to accrue advantages from the fall in the value of sterling.

Many companies are now working with unions to consider short-time working, reduced hours, pay freezes or cuts as responses to current economic pressures. Although rational from the individual company perspective, the loss of demand resulting from widespread adoption of these measures could potentially have catastrophic consequences for the wider economy.

This is why the STUC is:

1. Seeking additional stimulus measures at UK, EU and global level – current indications that the G20 is unlikely to agree co-ordinated action is a major concern. The complacency of EU finance ministers in this respect is a particular worry;
2. Supportive of measures to get credit flowing again – although we would have started from a very different place, quantitative easing is a practical necessity given the failure of traditional monetary policy in current circumstances;
3. Campaigning for additional measures – such as short term wage subsidies – to help retain jobs and help workers upskill/reskill; and,
4. Working to ensure that the new economic development infrastructure in Scotland is fit for purpose in meeting the substantial challenges of recession and rising unemployment.

The STUC believes that European funds can have a substantial role to play in supporting the second and third objectives listed above.

The European Commission’s response

The European Recovery Plan published by the Commission on 26 November 2008, had ‘two key pillars’ and one ‘underlying principle’. The two key pillars were:

  • a major (200bn euros or 1.5% of EU GDP) injection of purchasing power into the economy, to ‘boost demand and stimulate confidence’; and,
  • ‘smart’ investment to boost long-term competitiveness with ‘smart’ investment translating as investment in clean technologies, energy efficiency and infrastructure.

The underlying principle is ‘solidarity and social justice’.

The strategic aims are to:

  • Swiftly stimulate demand and boost consumer confidence;
  • Lessen the human cost of the downturn and its impact on the most vulnerable;
  • Help the European economy to prepare for the future; and,
  • Speed up the shift towards a low carbon economy.

The STUC enthusiastically supports this overarching framework and believes that the importance of the social model has been reaffirmed by events of the past year. However, we are less supportive on the document as a whole and unclear about what the proposals mean for Scotland.

The Commission’s rigid adherence to ‘structural reform’ is at odds with the policy framework established by the principles and aims listed above. Ideologically driven labour and product market deregulation is not just incompatible with a Social Europe agenda, it played a fundamental role in bringing about the credit crunch in the first place.

Nevertheless, the STUC can support the Commission’s proposals to simplify criteria for the European Social Fund (ESF) in order to reinforce:

  • Active labour market policies;
  • Concentrate support for the most vulnerable; and,
  • Match skills to anticipated job vacancies.

Similarly, the STUC can support changes to the Globalisation Adjustment Fund to allow rapid and effective interventions, measures to assist SME’s access finance and measures to increase investment in R&D, renewable energy and energy efficiency projects.

The potential contribution of structural funds

In tackling the impact of the credit crunch, the STUC believes that EU funds have a vital contribution to make in three main areas:

Redundancy Response/Skills

The STUC believes that the main contribution of Government and agencies in Scotland is in addressing the impact of recession by providing comprehensive and effective assistance to the newly unemployed and those at risk of redundancy.

The STUC has welcomed the Scottish Government’s recent enhancements to the Partnership Action for Continuing Employment (PACE) initiative but believes challenges remain in ensuring that the new economic development policy and institutional infrastructure is fit for purpose in meeting the challenges of recession.

EU funds clearly have a key role to play in assisting people upskill, reskill and, through wage subsidy and training programmes, retain employment which would otherwise have been lost. For instance, the STUC is impressed by the Welsh Assembly Government’s Proact programme which provides training support to ‘inherently viable’ companies. The support package includes a wage subsidy element.

The STUC is aware that Wales has access to Objective 1 funding and that Scotland does not. However, we look forward to working with Government and other partners to examine what might be possible in Scotland.

Access to finance:

The following is an extract from a paper provided to the Economy, Energy and Tourism Committee in January 2009 by Scottish Enterprise:

”We have seen an increase in demand for the risk capital support SE enables businesses to access. Additional resources have been allocated to meet this and there may well be further demands going forward. To enable a further response to future demand, the Scottish Government and SE are jointly scoping out a proposal, that will be subject to Ministerial approval, to increase the level of equity finance available to firms in Scotland through access to EU funds using the JEREMIE model (Joint European Resources for Micro to Medium Enterprises) including a loan from the European Investment Bank. We have also submitted an application for a further £20m in support from ERDF for equity finance with a final decision expected in March 2009”.

The STUC strongly supports this initiative which should help to address a long-standing market failure; one that has been fundamentally detrimental to the Scottish economy.

Transition to a low carbon economy

The STUC supports the European Commission’s aspiration for higher investment in low carbon technologies and energy efficiency programmes. We are aware that a number of exciting programmes, particularly in biomass, are already receiving EU funding in Scotland. We look forward to discussing with Government and partners how EU funds can be used to enhance investment in Scotland.

Potential changes to the structural funds programmes

The STUC doesn’t claim any particular expertise on the delivery of EU programmes in Scotland. However, given the pressing economic challenges at this moment in time we could encourage the Commission and Scottish Government to consider the following:

  • Increasing intervention rates;
  • Easing N+2 targets;
  • Adjusting level of audit – the STUC appreciates the sensitivities involved but we are also aware that the level of audit as a deterrent to applications;
  • Relaxing interpretation of state aid guidelines;
  • Allowing for greater flexibility at a project level by allowing projects to adapt to changing circumstances. An approved application is never set in stone but it can be difficult to make any wholesale changes as the project progresses.
  • Relaxing the rules on match funding. Once confirmed at application stage no changes can be made to match funding. In the current economic climate organisations may find that money is redirected elsewhere and this would threaten the viability of the project.

As noted at the start of this submission, this programme is being implemented at a time of major change within the Scottish public sector; particularly within those organisations with a locus on economic development. The STUC would encourage the Committee to examine the impact of this change on the effective delivery of the programmes. Particular issues might include the role of Skills Development Scotland and the impact of recent budget cuts at Highlands and Islands Enterprise.

STUC
March 2009

European and External Relations Committee Official Report, 17 March 2009

European and External Relations Committee Official Report, 28 April 2009

LETTER FROM CABINET SECRETARY FOR FINANCE AND SUSTAINABLE GROWTH TO THE CONVENER

Thank you for your letter of 30 April. I was very pleased to be invited to appear before the Committee and hope that Committee members found the session to be informative and positive.

I would also like to take this opportunity to update the Committee on the separate issue of the transposition of the EU Services Directive (Directive 2006/123).

Programme Evaluations
Firstly, as requested, I shall be pleased to enclose copies of the recent evaluations of the Scottish 2007-13 European Structural Funds programmes. Fraser Associates were commissioned to provide a socio-economic spot-check on the Lowlands and Uplands Scotland programmes and Blake Stevenson similarly for the Highlands & Islands programmes. The first of these is enclosed here; I shall arrange for the latter to be sent in the next few days. These evaluations are being used to inform our approach on the best use of the remaining funds in the current economic climate.

Simplification Measures
On the issue of Council Regulation 284/2009 and simplification measures, I very much welcome the European Commission's commitment to simplifying the implementing arrangements during this period of Structural Funds programmes. Essentially, there are three distinct elements to the simplification agenda: the changes brought about by Regulation 284/2009; changes to Commission guidance; and an indication of changes in the Commission's approach to any necessary adjustments to Operational Programmes.

Regulation 284/2009
Provisions which allow easier engagement of the EIB and/or ElF in programmes and the acceptance of contributions in kind towards some financial engineering measures are both welcome. The additional 2.5% advance, taking the total advance up to 7.5% of programme value, is also welcome as it assists cash flow and contributes to our annual expenditure (n+2) targets. While the advance itself is welcome, I should point out that the Scottish Government will pay all valid claims for grant within 30 days of receipt regardless of whether we are in surplus or deficit with our Structural Funds 'account'. In other words, we absorb any cash flow (and exchange risk) consequences to ensure that projects receive funds due for work carried out at the earliest opportunity.

Commission Guidance
Part of the Commission's simplification agenda is being pursued through changes in its guidance on programme implementation. The changes are technical in nature and we are currently considering which options are worth taking up. We need to balance carefully any reductions in reporting/accounting requirements with the necessary due diligence which we and potentially subsequent Commission audits might expect. My officials intend advising projects of any changes in writing in the next month. I would be happy to provide a copy of this advice to the Committee.

Commission Approach
The Commission has indicated to us on a number of occasions that they will be more flexible in their appraisal of proposed changes to the scope and content of Operational Programmes. As I suggested to you when we met, we are currently considering the extent to which our Programmes might be adjusted to take account of the quite different economic environment in which we are now working. It was for this purpose that we commissioned the independent reports noted above.

The indications are that the Programmes are reasonably fit for purpose. However, Programme Monitoring Committees scheduled for later this month (for LUPS) and for early June (H&I) will consider in more detail whether we should pursue programme changes with the Commission. Possible changes might take account of any counter recessionary measures, re-align programme scope with partner organisation priorities and/or accelerate the uptake of funds and spend and help achieve n+2 expenditure targets. I do not wish to pre-judge the PMC consideration, but I am hopeful that, in the spirit of a more simplified and responsive approach, the Commission will be able to adopt fairly swiftly any necessary changes to the Programmes.

When we met, you also asked whether there were any areas that were not on the Commission's simplification agenda. One area which features regularly is the audit burden. I should make it clear that I have no issue with ensuring probity in projects and that we take our audit responsibilities seriously. However, audit scrutiny should be in proportion to the levels of funding - both overall and in relation to the proportion that Structural Funds form of project or programme total value. The majority of Structural Funds beneficiaries are publicly funded and subject to audit at the national level. Greater recognition and acceptance of national audit arrangements and greater co-ordination across the respective Commission services and the ECA would bring a more structured and efficient audit regime without detracting from the degree of assurance that the Commission legitimately seeks.

EU Services Directive 2006/123
I believe that transposition of the general provisions of the Directive would best be undertaken by means of a single set of Regulations with UK-wide scope. The Directive is one where there is limited discretion as to what is implemented. As the Directive covers services in both reserved and devolved areas, implementation by two parallel sets of regulations would introduce unnecessary complexity for end-users.

The Scottish Government has therefore asked the UK Government to transpose the general provisions of the Directive in relation to devolved matters in Scotland in exercise of the power in section 57(1) of the Scotland Act 1998 and in line with the principles expressed in the Memorandum of Understanding. I am content that this approach is the most appropriate way to progress this matter with regard to Scotland and my officials will continue to work closely with the Department for Business, Enterprise and Regulatory Reform to ensure Scotland's interests are maintained and that the transposition of the Directive is successful.

We are currently screening Scottish devolved legislation to ensure it complies with the Directive. If it is found that amendments are required we will consider the appropriate legislative process for that. I will keep the Committee informed of progress on this issue.

John Swinney MSP
Cabinet Secretary for Finance and Sustainable Growth
15 May 2009

Annexe C: OTHER WRITTEN EVIDENCE

SUBMISSION FROM CONVENTION OF SCOTTISH LOCAL AUTHORITIES

The Convention of Scottish Local Authorities (COSLA) is the representative voice of all Scottish Local Authorities both nationally and internationally and it has long being advocating strong, consistent Structural Funds in which local communities are given the means to prosper and where the partnership principle, whereby Local Authorities are fully involved in the design and implementation of the programmes, is fully applied.

Overview:

COSLA interest on EU Cohesion is at both a political and policy design level as well as on a short term and long term perspective:

  • COSLA has been actively influencing the content of the current Scottish Operational Programmes 2007-2013 and has appointed two political representatives at the LUPS Programme Monitoring Committee as well as engaging at officer level with both Scottish Government European Structural Funds Division, Scotland’s four European Consortia and individual Council experts and practitioners.
  • At the long term policy development level COSLA has been very active in the ongoing discussion on the Future of EU Cohesion policy. We have consistently, and so far quite successfully, argued at the current EU level discussions that areas such as Scotland should continue receiving EU Structural Funds post 2013 in those particularly deprived or spatially affected local areas where EU added value funding can be maximized. We believe that local programming and local partnerships are the best instruments for that.
  • Drawing on existing COSLA positions and ongoing discussions with our Member Councils we are also working on and trying to influence the current high level discussions on how to further simplify the management of the EU Structural Funds of which the recent review of the current Regulations and the temporary application of more flexible State Aid rules are first steps which we fully support.
  • In particular, Question 2 provides additional specific suggestions that we have gathered from Council practitioners that could be applied in Scotland during this programming period and Question 3 highlights more long term simplification challenges that are already been discussed in Brussels and that we have been made aware via our contacts with the European institutions and a extensive policy dialogue with our opposite numbers from other Member States.

Therefore COSLA welcomes the opportunity given by the Scottish Parliament EU and External Affairs Committee to contribute to its enquiry over the EU Response to the financial crisis and in particular how this relates to the Scottish Structural Funds programmes and the Scottish Councils themselves.

Detailed response to the Scottish Parliament Questionnaire:

What the impact of the financial crisis has been on the ground?

COSLA has recently undertaken a survey of its members and their work in this area. All councils are either tweaking their current services or creating new ones, to deal with the downturn. There has been significant reassessment of the use of local budgets, a considerable emphasis on economic matters in the Single Outcome Agreements (SOAs) and an undoubted use of the financial flexibilities within the Concordat between the Scottish Government and the Convention of Scottish Local Authorities.

Councils are clearly anticipating the effects of the down turn and the significant role that they have to play. They are keen to shield communities, businesses and individuals from the worst effects and the social stress it will cause. The majority of interventions fall into one or other of the following categories:

  • Supporting businesses and stimulating the economy
  • Managing the effect of the downturn on communities
  • Managing the effect of the downturn on council services and
  • Improving employability and preparing for economic recovery

Many of our members are concerned about us revisiting the high unemployment levels of the mid 1980’s, and the long term effects this would have. From elsewhere we know that the growing numbers of newly unemployed come from specific larger councils particularly across the Central Belt. Demand for some services is already increasing. The additional stress that this is placing on already stretched Council budgets is widely felt. Many councils are working pragmatically to enhance the scope and resilience of their services. However from where we are it is difficult to predict how the downturn will develop.

At a political level, the bi-monthly meetings between COSLA, John Swinney and Fiona Hyslop provide us an opportunity to have an overview of our joint work on the downturn. At an officer level COSLA is engaged with high level group lead by the Scottish Government’s Chief Economist on economic recovery as well as a similar arrangement focussed on employability.

Whether this is affecting the ability of structural funds programmes to contribute to local economic development?

Given the relatively short time since the current financial crisis made itself felt on the ground it is early to provide a definitive assessment on how this is impacting on the delivery of Structural Funds at a local level. As discussed elsewhere, EU Structural Funds are geared to medium to long term economic and social development and its immediate use for sudden economic shocks is valuable but necessarily limited.

However, it can be anticipated that the difficulties faced by Councils in responding to the crisis might have an effect on their ability to benefit from Structural Funds can be reduced, given the greater pressure on financial resources and administrative capacity which are needed to support the Structural Funds funding rounds.

Therefore it is important for the Managing Authority and the PMC to make full use of the new Structural Funds rules. These cover faster advance payments, allowing in kind contributions as match funding, accepting payment claims earlier, allowing flat rate reimbursements for certain overheads, allowing state aid advances amounting up to 100% of the aid being paid to beneficiaries, allowing certain social housing projects to be eligible for energy efficiency renovation, and finally releasing an estimated €6.5bn in advance payments across the “old” EU Member States once the SF Regulations and the Financial Regulation are reviewed by early June.

What could be changed to allow programmes to adapt to the new economic environment and contribute to recovery?

The starting point to address this question is whether we are considering changes during the current period (2007-2013) or for a new generation of EU Structural Funds.

As mentioned in the introduction, COSLA welcomes the change to more flexible criteria in the EU Structural Funds Regulations that are likely to be in place before the summer recess. We understand that the Commission might be considering additional changes over the coming months to be put in place within the period. However, the long term economic development perspective of EU Structural Funds would limit the potential to proceed with radical changes during the present financial period without creating difficulties for managing authorities and practitioners to adapt to new rules. This is especially since EU Structural Funds rules apply to all EU regions or at the very least by groups of “old” and “new” Member States. We understand that the Commission would not be prepared to enter into any radical rule changes that would result in an avalanche of renegotiation of OPs or NSRF as the Commission does not have sufficient administrative capacity to manage this.

On this point is is worth remembering that the European Union already has financial instruments that are geared to responding to sudden shocks: the €500bn Globalisation Adjustment Fund for precisely answering to economic situations such as the present one and the €1bn European Solidarity Fund (managed by DG REGIO) for industrial and technological disasters. Its small size was a political choice during the Financial Perspective negotiatiosn back in 2006 so it could be open to question whether the EU budget review could revisit this issue.

In terms of specific improvements during the current period, we have received views from our member council practitioners stating that a less bureaucratic approach to programme implementation is needed, whereby more flexibility is available in terms of adjusting timescales and targets to take in account of the currently changing economic environment;

Similarly, and in line with the new SF Regulations, decision making needs to be streamlined to ensure an accelerated issuing of formal grant offers and of confirmation of awards. As part of the same approach, the compliance and payment processes need to be greatly simplified to ensure that the approved projects can be quickly delivered on the ground. Scottish Government guidance on the application in Scotland of recent EU simplification measures on revenue generating projects wouls be welcome.

A strong strategic dialogue within the Scottish Government and between the Government and local partners is also needed to ensure consistent, complementary and joined up activity on the ground between local projects within the Scottish Structural Funds Operational Programmes and domestic programmes such as Job Centre Plus and Skills Development Scotland, Flexible New Deal and other relevant initiatives coming from other Scottish and UK agencies.

Consistent with this, practitioners argue for a more strategic approach from the Managing Authority that could ensure a predictability in the contributions from the EU and councils. Local services need to be geared to combat the crisis and partly financed by Structural Funds, maximise what is available to them and do not suffer from short to medium term funding gaps caused by currency fluctuation or competing demands from diminised local finances due to the crisis. Local practicioners argue that particular value can be maximized from the potential of Community Planning Partnerships to provide innovative response for both systemic and short term demands for employability and skills support.

Local Structural Funds practitioners also suggest that measures such as retrospective awards already attempted in the 2000-2006 period could also be used in the current one as to speed up the application processes.

Finally, practitioners support the idea of Scottish and UK Governments jointly negotiating with the European Commission for an extension beyond June of the closing of the 2000-2006 programme so as to fully maximize the allocated resources, using existing provisions in the Regulations. On more strategic approach, they support the idea of broadening broaden the proposals to further simplify and speed up Structural Funds payments (which we understand are likely to be tabled by the European Commission over the next few months) with the extension to all EU 27 Member States of the N+3 rule currently applicable to the “new” 12 EU Member States.

This, along with actions proposed at the las period, would add to the much desired flexibility needed to adapt to the changing economic environment and would be of particular value in ensuring the beneficial use of the substantial additional funding that has become available in those Member States, as in the UK, where the Euro has significantly strengthened against the local currencies since the allocations were originally set two years ago.

Having said that, COSLA does actively support and encourage ambitious simplification and reforms of the EU Structural Funds post 2013 – as witnessed by our engagement on the ongoing discussions on simplification already taking place in Brussels at political and senior official level on simplification.

Indeed, the following points are already part of well established and politically agreed COSLA positions:

  • Subsidiarity and more flexible approach: We clearly support the full use of the subsidiarity and partnership principles within Cohesion Policy as a way of streamlining payments and reducing administrative burden to local practitioners. The new wording of the proposed Lisbon Treaty Article 317 TFEU article could facilitate a further devolution to the sub-Member State level. However, we would caution against full Commission disengagement from the operation of the OPs as this would weaken a level playing field across the EU.
  • Simplification: COSLA has consistently argued for a further simplification of the funds, namely via a Single Operational Programme – Single Fund – Single eligibility rules basis. While acknowledging the technical or practical difficulties this might entail we believe that this is a sensible solution to reduce the burden on smaller local funding practitioners. Indeed, in the current recession and in a context of stable or even a decreasing availability of EU funds, it is imperative that overlaps between EU funds are removed. Whatever the final decision on the architecture of the programmes is, COSLA believes that the bottom line is that the local beneficiaries should not lose out. Ideally funding officers should have a “one-stop-shop” point of access to all EU Structural Funds and, eventually, the Rural Development Funds as well.
  • Partnership: COSLA has consistently argued for a robust deployment of the partnership principle both at local level and as regards to the national level. We have also argued for binding rules with clearly verifiable implementation criteria. Similarly, we see the Single Outcome Agreements, whose rules COSLA negotiated with the Scottish Government, as an EU-wide best practice example of national-local relationship that could be applied in other EU nations and regions as well as with the EU institutions.
  • Consistency between Cohesion Policy and other EU policies: While we recognise the role that EU Cohesion Policy plays in helping the local economic and social development we believe that there is a great potential for ensuring consistency, synergies and a removal of overlap among EU Policies with a territorial dimension. This is particularly the case between Cohesion Policy and Rural Development, but also as regards to the EU Transport, EU environmental policy and last but not least EU Internal Market Policy. Improvements of the latter would be particularly welcome as, while not providing additional funding, more localised EU rules could allow that Councils make the best possible use of its reduced financial resources. In this respect the temporary easing of State Aid rules is welcomed but there is more room for improvement if the Commission fully applied the principle in the draft Lisbon Treaty Protocol of Services of General Interest outlining “the essential role and the wide discretion of national, regional and local authorities in providing, commissioning and organising services of general economic interest as closely as possible to the needs of the users”.
  • Use of funding vehicles that combine EU grant and loans: COSLA is aware of proposals to establish JEREMIE and JESSICA EIB schemes in Scotland. We are interested in supporting the initial work underway on the business case for the JESSICA, but await further information on any proposals that might emerge concerning a Scottish JEREMIE. In both cases we would want to ensure that local accountability of any local financial resources or in kind contributions that are transferred to such funding vehicle is guaranteed.

In addition to the above principles we are now discussing with our member Councils the merits of the below further simplification ideas that we are aware are already being discussed at EU official and political level:

  • to apply a flat-rate system for technical assistance for both ERDF and ESF
  • to define a higher rate of tolerable error for audit purposes
  • to apply a system of flat rates, overheads and standard costs to reduce administrative burden
  • to use less restrictive evaluation criteria for innovative projects (to avoid current risk averse culture)
  • to reduce the maximum of years the documents have to be electronically stored from 10 to 3 years.
  • to provide more consistent guidance applicable to all SF and Rural Development programmes in respect of record keeping requirements and applicable for the whole life of the programmes
  • to agree more efficient mechanisms for storage and retention of documents e.g. electronically only or scanned.
  • to create EU-wide database of best (as well as bad) practices
  • for DG REGIO to create special Units to receive complaints from practitioners (not just Managing Authorities) on problems in applying the SF Regulations as well as one to advise on best practices
  • DG REGIO and the Council Cohesion Working Group to regularly meet with Regional and Local stakeholders
  • Merging the National NSRF+Lisbon Reform Programmes (potentially with links to other national programmes such as energy efficiency, transport, climate change strategies, etc)
  • Shortening the Financial Perspectives period from 7 to 5 years and link it with the European legislative term, as just proposed by the European Parliament
  • As discussed, above Single OPs for ESF and ERDF, potentially for EAFRD too (of course this would apply if Single Fund-Single OP principle emerges as basis for the future of SF) – Alternatively, both funds could remain but with pretty much the same eligibility and management rules.
  • Two-tier OPs, including one fixed part covering the fundamentals that can only be reviewed using the current process of authorisation whereas the remaining sections could be just subject of a simplified procedure (via Commission authorisation letter)
    Whether it makes sense that ERDF funding applications have to foresee future income.
  • To allow auditing and control to be exercised nationally with only European Commission certifying the total MS envelope – there are Treaty issues here but there are emerging arguments for it to be explored. The sensitive issue of differentiated control depending on which MS could also be raised on this context.
  • More flexibility rules to move financial allocations between ERDF and ESF and well as even between OPs.

While the responses so far have been largely positive as regards to the above suggestions we will would refrain at this stage to present MSPs a definitive view on the above points as this is a moving picture at this stage.

On the other hand we would be happy to enter into discussions with the Scottish Government so that we can ensure that Scottish local government views are fully included in the Scottish Government exchanges with HMG on the UK negotiating position on the simplification discussions.

COSLA Brussels Office
April 2009

SUBMISSION FROM SCOTTISH COUNCIL FOR VOLUNTARY ORGANISATIONS

About SCVO

The Scottish Council for Voluntary Organisations is the national body representing the interests of the voluntary sector in Scotland. It does so through its policy committee which is elected from its membership of around 1300 Scottish voluntary organisations. SCVO’s mission is to advance the values and shared interests of the voluntary sector to provide them with information and assistance; to improve their effectiveness and efficiency and to represent their views to Government and other public bodies. Further details about SCVO can be found at www.scvo.org.uk.

Introduction

The Scottish Council for Voluntary Organisations welcomes the opportunity to provide comment on the current use of EU funding in the context of global financial crisis, the ability of EU funds to contribute to local economic development and any changes that would allow programmes to adapt to contribute to recovery.

In the interests of defining which sectors in Scottish society hold the greatest potential influence in these key considerations it is important to assess where the EU funding has been allocated thus far in the current programme.

The figures below have been provided directly by the Highlands & Islands Programme (HIPP), drawn from the Lowlands & Uplands Programme (LUPS) documentation, combined and rounded for ease of comparison, and presented by broad sector and region.

European Structural Funds Awards 2007-2013 Programme
(All application rounds 2007-9 plus SDB & CPP allocations)

LUPS & South of Scotland Third Sector Colleges and Univ. Government and LA’s Community
Planning
Partnerships
(CPP)
Other Totals
ESF 24,297,000 19,956,000 20,846,000 40,620,000 6,913,000 112,632,000
ERDF 4,600,000 36,341,000 101,300,000 14,143,000 9,368,000 165,752,000
             
HIPP            
ESF 4,357,000 6,029,000 3,312,000 405,000 657,000 14,760,000
ERDF 4,317,000 12,413,000 22,712,000 1,927,000 797,000 42,166,000
             
Totals 37,571,000 74,739,000 148,170,000 57,095,000 17,735,000 335,310,000

The picture revealed is very clear in that, of the £335m already committed, £205m (62%) is under direct LA and Government control. Higher and Further Education is 22%, the Third Sector at 11% and a range of others at 5%.

Clearly therefore the largest share of responsibility in ensuring maximum economic benefit is achieved from the use of Structural Funds in meaningful localised and national project interventions is with the LA and Government applicants. Equally those fund holders also hold the majority of responsibilities in ensuring the programmes are fit for purpose and truly focused on beneficiary and community need during these exceptional times.

From a Third Sector perspective the ESF priorities have yielded committed awards of £28m (22% of all Scottish ESF). This is a very significant reduction when compared with the previous EU programme where Third Sector organisations implemented 40% of all ESF.

It should also be noted a significant proportion of that £28m was utilised in the 2007 Shadow Round to protect vulnerable organisations from investment shortfalls due to the late opening of the current programme. Indeed a downward trend is emerging in that the combined Shadow Round/Round 1 awards provided £21m of investment in the Third Sector.

By comparison the Third Sector ESF direct awards from Round 2 has dropped to £7m.

At this time it is unclear what, if any, proportion of the CPP strategic awards will filter downwards to local Third Sector organisations. Clearly those organisations will be ambitious to work with the CPPs in delivering services agreed by the local plan and eligible under the ESF expenditure criteria. However it is reasonable to suggest, given the variable nature of real community involvement across all the CPPs to date, it is unlikely consistent access to these strategic awards will be experienced by local Third Sector organisations.

Impact on the Ground for Third Sector organisations appears to be significant in that as levels of EU funding drops the ability to attract match funding equally diminishes. As greater amounts of Government and LA funding is being utilised to match greater ESF awards in the Public Sector, further reductions in local funding will be experienced by local third sector organisations involved in economic and social inclusion programmes.

This, combined with the range of new limitations in expenditure eligibility and the off -putting nature of audits, has reduced both the added value and the appetite within the Third Sector for ESF programmes. The risk is further disengagement of many organisations traditionally involved in assisting harder to reach and help people access training towards employability.

It is arguable therefore the role of the third sector in contributing to local economic development has been substantially reduced.

The CPP ESF programmes will require complex local multi-partnerships to be fully established in order meaningful delivery can be achieved. The experience of many larger Third Sector organisations that created such partnerships locally, nationally and internationally in the last EU programme is they are difficult to plan, manage and audit. This similar challenge for CPPs may lead to delays in implementation and expenditure.

Given the substantial funding allocated to the Higher and Further Education sector it is important to recognise much of this delivery will exclude traditionally hard to reach, hard to help and hard to manage people. Particularly given the confidence building and pre-vocational needs of this group of citizens, (most of whom have been long-term unemployed) they are unlikely to be the target group of Educational Institutions.

The range of EU initiatives such as The European Investment Bank, the JESSICA and JEREMIE Schemes, the Scottish Co-Investment Fund, Venture Fund and Seed Capital funds are unlikely to connect in any significant way with the majority of Third Sector organisations given the intended nature and mechanisms surrounding those structures.

What could be changed?

1. Increase the time available to fully spend awards from 2 to 3 years. (N+3). This could benefit Third Sector organisations who have received awards but struggle to obtain the match funding. However this may create a risk in locking down funds if the large awards to Government don’t work quickly enough.

2. Reduce wherever possible the deterrent factor in audits. Clearly levels of compliance are required however a more relaxed, minimalist and supportive perspective (as appears to be exercised in many other EU member states) would be hugely beneficial. At times during the audit experience in Scotland it appears ambition exists to disallow funding and create situations where money would be returned to Brussels.

3. Simplify Procedures. The overall application and claims process is still onerous. The promised efficiencies have yet to materialise and many organisations often fund the project for several months prior to successfully receiving EU funds.

4. Promote greater flexibility within the programme. Allow fast movement of money between priorities and allow easier project changes in response to local market conditions (and within a more relaxed audit regime). Remove the £200k project threshold in the LUPS zone.

5. Increase the flexibility in match funding. Improve the eligibility of in-kind match allowances, allow easy changes in sources of declared (at project application) match funding and better recognise the real core costs of organisations in delivering projects.

6. Increase intervention rates. Recognise the different types of organisations seeking to use EU funds for local economic improvements. Create scope for higher levels of ESF intervention – potentially up to 75% for some applicants. In many instances local organisations able to assist people furthest from the job market are well placed to generate social capital by adding value through volunteering hours. This tends not to be true in larger organisations or LAs. Paradoxically these smaller organisations also have less access to match funds and clearly struggle to achieve the current thresholds required. Positive discrimination in this regard could energise greater grass roots activity.

7. Reintroduce cash advances. The previous programme permitted some front loading of claims against planned expenditure. Less important perhaps for ‘cash rich’ applicants such as education and government but of major importance to many other applicants.

8. Ensure vulnerable individuals, groups and communities are properly served. One of the underlying principles of the EU is solidarity and social justice. A real risk exists in this tightening market ‘troublesome’ people could lose priority. Reinforce priority funding for job brokerage schemes, wage subsidies and work training access. Ensure tighter linkages to the changing DWP funding schemes.

9. Widen the ‘Urban Area’ categorisation. Restricting this aspect of funds eligibility discriminates against former industrial areas out with city zones. Many older industrial areas within provincial settings are challenged by identical historical legacies and are still struggling to recover from the last recession.

10. Widen access to the CAP funding. Introduce greater flexibility and availability of funding on a ‘beyond the farm gate’ principle. Vulnerable rural communities need a wide range of training and employment opportunities if population and economic stability is to be achieved.

This SCVO report hopes to have reinforced the unique offering to the employability and social/economic inclusion challenges the Third Sector offers. Its positioning in society locally and pan-regionally, in conjunction with its connectivity and integration with large sections of the communities it serves, has created a network of trust not always enjoyed by the more formal institutions in society.

The model of Structural Funds distribution currently being deployed in Scotland was designed prior to the current recession and, as the financial table demonstrates, has hugely increased the percentage of funds allocated to local, central and other government agencies. Given that it is inevitable during any recession those society members currently part of the long-term unemployed will struggle even harder to compete for available jobs, specific focus must be given to alleviate that phenomena. Additionally many of the wider training for work programmes implemented by the Department of Work and Pensions create incentives for providers i.e. time on programme (40% of fees), securing employment (40% of fees) and sustaining Employment (20% of fees), and these financial structures can deter training providers to work with harder to reach and help citizens.

The logical counter balance to this reality is to ensure the social capital, community ownership and volunteering participation generated by Third Sector organisations in Scotland is deployed within a range of focused initiatives supported by easier to access and manage structural funds. The current experience of ESF deployment indicates the opposite is occurring as a result of the combined elements described in this paper.

In conclusion it is plain the level of involvement by Third Sector organisations with Structural Funds has reduced dramatically during the past 2 years. Consequently the level of historical expertise in delivery of economic development, training and employability projects is likely to begin diminishing as the intellectual capital transfers into other activities. SCVO suggests that implementation of the changes suggested above may redress that situation, and permit refocus by the Third Sector on utilising ESF towards providing economic inclusion services for those in our society most difficult to reach and help.

References
Third Sector Summit Interim Research Briefing (November 2007) – Provides latest intelligence on the size of the Third Sector in Scotland, and interim findings from a survey on needs and challenges of SCVO's member organisations.
http://www.scvo.org.uk/scvo/Information/ViewInformation.aspx?Info=1550&TCID=27&PageName=Facts

Scottish Voluntary Sector Statistics (May 2007) – Full statistical briefing on the Scottish Voluntary Sector as released at the Gathering, May 2007.
http://www.scvo.org.uk/scvo/Information/ViewInformation.aspx?al=t&page=&all=
&from=DSR&Info=1464&TCID=27&PageName=Facts

Scottish Council for Voluntary Organisations
17 April 2009

SUBMISSION FROM SCOTTISH LOCAL AUTHORITIES ECONOMIC DEVELOPMENT GROUP

Introduction

This submission will not seek to duplicate points made by other contributors, particularly as SLAED members have already had an opportunity to contribute, through their local authorities, to the submission made by CoSLA.

Background

European Structural Funds are designed for specific purposes. The purpose of European Regional Development Fund is the reduction of economic disparities between regions. Similarly, the purpose of European Social Fund is to support those individuals most disadvantaged in the labour market. The current European Structural Funds programmes, however, have been required to address wholly different issues.

The EU, as a whole, decided that a very high proportion of Structural Funds during the 2007-2013 period, were to be “earmarked” towards achieving the “Lisbon Agenda” objectives of economic growth and competitiveness, at the expense of reducing economic and social disparities. In addition, it can be seen that, in Scotland at least, the funds have been further constrained by being applied to the support of the “Gothenburg Agenda” on sustainability.

These constraints have already led to a skewing of funds away from their purpose and from real existing need, contributing to the present situation where the LUPS programme, in particular, demonstrates a mismatch between availability of, and demand for, funds in several of the Programmes’ priorities.

This situation looks likely to be exacerbated by the imposition of yet more demands on the funds. In this case the EU and, apparently, all member states are now looking to Structural Funds to make a major contribution to addressing the effects of the global economic crisis.

Instead of achieving their purpose, i.e., reducing economic and social disparities, Structural Funds are now being asked

  • to achieve economic growth and competitiveness,
  • to create a sustainable economy,
  • to compensate for the failure of financial markets to provide investment and
  • to support the newly unemployed to get quickly back into work.

Even before the economic crisis, the mismatch in the priorities of the LUPS programme, in particular, was evidence of a lack of mutual understanding between the Scottish Government and partners which might have been avoided by a higher level of early participation in the drafting of the Programmes.

There is too little left in some priorities for easily anticipated future demand and, alarmingly, given the overall reduction in available funds, several programme priorities have large sums unspent. Specific proposals are made below which will enable partners to make a real contribution to the realignment of programme eligibility so that the programmes are fit, both for the purpose of the Scottish Government, and usable by partners.

Scottish Government actions

SLAED supports the response made, in supporting co-ordinated local delivery of support for those remotest from the labour market and our most deprived communities through Community Planning Partnerships. Despite a long and complex approvals and claims process leading to late starts and delayed claims, these projects are now delivering effectively and have achieved much increased cooperation, reduced inefficient duplication and have increased participation from the third sector. Employability services are successfully established in all of the eligible areas.

SLAED emphasises to the Committee, as Councils and CPPs have done to Government, the need for strategic planning now, in advance of the third application round, relating to what needs to be in place after March 2010. Not only are the ESF and ERDF contributions under threat due to the existing and anticipated competing demands, (such as JESSICA) but Fairer Scotland Fund, which is the main source of match funding for these activities, is due to end then. It is essential that we can start to plan now. SLAED welcomes the Government’s invitation to participate in the JESSICA working group, along with Councils and CoSLA. It would be desirable to have a mechanism for considering the consequences of JESSICA for ineligible areas, employability projects and other, non-JESSICA activity.

SLAED notes the observations relating to the level of third sector awards from the programme at around 11%. Local authorities account for only 10% of value of awards made in round two of the LUPS programme, despite Councils accounting for, typically, around 50% of previous structural Funds programme activity.
Directly and through the Business Gateway contracts, Local Authorities are now responsible for the provision of support to the overwhelming majority of Scotland’s businesses. It is essential that government works with Councils to ensure that the resources necessary to deliver that support are not wholly diverted to meet other competing demands.

SLAED acknowledges the right of the Scottish Government to adapt its policy priorities in the light of changing economic circumstances. We would advocate a much greater degree of partnership working, however. There is a risk that the opportunity will be missed for the Government to take with it, partners from local government, the third sector and others, if decisions on refocusing of funds are taken without wider practitioner participation. It is suggested that, for the LUPS programmes, a Programme Review Group analogous to that relating to the Highlands and Islands programmes should be established.

While this applies most immediately in relation to Structural Funds programmes and their design and realignment, there are many other European funding streams which Scotland is failing to take full advantage of. A genuine “team Scotland” approach would see Government bringing together partners from all sectors to maximise our participation in programmes which have could have a direct and powerful effect in the economy, such as the Lifelong Learning Programme and the Competitiveness and Innovation Framework Programme. This would include, as well as local government, the third sector, further and higher education and Scotland Europa and the enterprise networks.

Scottish Government in partnership with UK and EU

With reference to the discussion on N+2/N+3, SLAED proposes the investigation of the possibility of applying a “major project or aid scheme” to the 2000-2006 Scottish Structural Funds programmes, in the terms of Structural Funds Regulation article 94. This provides the possibility of a “period of interruption” to the N+2 rule. When combined with the “reserve list” approach, referred to in previous submissions to the Committee, this effective suspension of the N+2 rule to the old programmes solves the potential problem of availability of match funding, avoids match funding simply being diverted from the current programme to the previous programme and enables quick spend. This approach is still subject to constraints which are in the control of the UK Government. The potential benefit to Scotland, the UK and other non-Euro Member States is significant, however.

SLAED members have already contributed indirectly to this enquiry and thank the Committee for the opportunity to provide further evidence.

SLAED spokesperson on European and External Funding
March 2009


Footnotes:

1 HIE, STUC. Written submissions to the Scottish Parliament European and External Relations Committee.

2 HIE. Written submission to the Scottish Parliament European and External Relations Committee.

3 SE. Written submission to the Scottish Parliament European and External Relations Committee.

4 SCC. Written submission to the Scottish Parliament European and External Relations Committee.

5 SE. Written submission to the Scottish Parliament European and External Relations Committee.

6 Scottish Parliament European and External Relations Committee, Official Report, 17 March 2009, col 1055.

7 Scottish Parliament European and External Relations Committee, Official Report, 17 March 2009, col 1055.

8 HIE. Written submission to the Scottish Parliament European and External Relations Committee.

9 DG Regional Policy. A short summary of cohesion policy's response to the economic crisis http://ec.europa.eu/regional_policy/funds/recovery/doc/responsecrisis_en.pdf

10 Scottish Government response to “Growing regions, growing Europe: European Commission consultation on the future of Cohesion Policy”

11 At current exchange rate.

12 HIE, STUC. Written submissions to the Scottish Parliament European and External Relations Committee.

13 HIE. Written submission to the Scottish Parliament European and External Relations Committee.

14 SE. Written submission to the Scottish Parliament European and External Relations Committee.

15 SE. Written submission to the Scottish Parliament European and External Relations Committee.

16 SCC. Written submission to the Scottish Parliament European and External Relations Committee.

17 HIE, SE. Written submissions to the Scottish Parliament European and External Relations Committee.

18 Scottish Parliament European and External Relations Committee, Official Report, 17 March 2009, col 1059.

19 Scottish Parliament European and External Relations Committee, Official Report, 17 March 2009, col 1060.

20 Scottish Parliament European and External Relations Committee, Official Report, 17 March 2009, col 1060.

21 Scottish Parliament European and External Relations Committee, Official Report, 3 March 2009, col 1026
SE. Written submission to the Scottish Parliament European and External Relations Committee

22 Scottish Parliament European and External Relations Committee, Official Report, 3 March 2009, col 1027.

23 Scottish Parliament European and External Relations Committee, Official Report, 3 March 2009, col 1027.

24 Scottish Parliament European and External Relations Committee, Official Report, 3 March 2009, col 1025.

25 Scottish Parliament European and External Relations Committee, Official Report, 3 March 2009, col 1025.

26 Scottish Parliament European and External Relations Committee, Official Report, 17 March 2009, col 1060.

27 Scottish Parliament European and External Relations Committee, Official Report, 17 March 2009, col 1055.

28 SE. Written submission to the Scottish Parliament European and External Relations Committee.

29 Scottish Parliament European and External Relations Committee, Official Report, 3 March 2009, col 1033.

30 Scottish Parliament European and External Relations Committee, Official Report, 3 March 2009, col 1034.

31 SE. Written submission to the Scottish Parliament European and External Relations Committee.

32 Scottish Parliament European and External Relations Committee, Official Report, 17 March 2009, col 1055.

33 HIE. Written submission to the Scottish Parliament European and External Relations Committee.

34 Scottish Parliament European and External Relations Committee, Official Report, 17 March 2009, col 1052.

35 Scottish Parliament European and External Relations Committee, Official Report, 17 March 2009, col 1053.

36 STUC. Written submission to the Scottish Parliament European and External Relations Committee.

37 Scottish Parliament European and External Relations Committee, Official Report, 3 March 2009, col 1026.

38 COSLA. Written submission to the Scottish Parliament European and External Relations Committee.

39 STUC. Written submission to the Scottish Parliament European and External Relations Committee.

40 SE. Written submission to the Scottish Parliament European and External Relations Committee.

41 Scottish Parliament European and External Relations Committee, Official Report, 3 March 2009, col 1039.

42 Scottish Parliament European and External Relations Committee, Official Report, 17 March 2009, col 1058.

43 SE. Written submission to the Scottish Parliament European and External Relations Committee.

44 Scottish Parliament European and External Relations Committee, Official Report, 3 March 2009, col 1028.

45 Scottish Parliament European and External Relations Committee, Official Report, 3 March 2009, col 1028.

46 SLAED. Written submission to the Scottish Parliament European and External Relations Committee.

47 Scottish Parliament European and External Relations Committee, Official Report, 3 March 2009, col 1042.

48 SE. Written submission to the Scottish Parliament European and External Relations Committee.

49 SE. Written submission to the Scottish Parliament European and External Relations Committee.

50 Scottish Parliament European and External Relations Committee, Official Report, 17 March 2009, col 1056.

51 Scottish Parliament European and External Relations Committee, Official Report, 17 March 2009, col 1057.

52 Scottish Parliament European and External Relations Committee, Official Report, 17 March 2009, col 1053.

53 SE. Written submission to the Scottish Parliament European and External Relations Committee.

54 Scottish Parliament European and External Relations Committee, Official Report, 17 March 2009, col 1053.

55 SLAED. Written submission to the Scottish Parliament European and External Relations Committee.

56 HIE. Written submission to the Scottish Parliament European and External Relations Committee.

57 SE. Written submission to the Scottish Parliament European and External Relations Committee.

58 COSLA. Written submission to the Scottish Parliament European and External Relations Committee.

59 Scottish Parliament European and External Relations Committee, Official Report, 28 April 2009, col 1118.

60 Scottish Parliament European and External Relations Committee, Official Report, 28 April 2009, col 1118.

61 Scottish Parliament European and External Relations Committee, Official Report, 28 April 2009, col 1123.

62 Scottish Parliament European and External Relations Committee, Official Report, 28 April 2009, col 1124.

63 Scottish Parliament European and External Relations Committee, Official Report, 28 April 2009, col 1133.

64 COSLA. Written submission to the Scottish Parliament European and External Relations Committee.

65 Scottish Parliament European and External Relations Committee, Official Report, 28 April 2009, col 1121.

66 SE. Written submission to the Scottish Parliament European and External Relations Committee.

67 Scottish Parliament European and External Relations Committee, Official Report, 28 April 2009, col 1122.

68 Scottish Parliament European and External Relations Committee, Official Report, 17 March 2009, col 1054.

69 SCVO. Written submission to the Scottish Parliament European and External Relations Committee.

70 COSLA. Written submission to the Scottish Parliament European and External Relations Committee.

71 COSLA. Written submission to the Scottish Parliament European and External Relations Committee.

72 COSLA. Written submission to the Scottish Parliament European and External Relations Committee.

73 SCVO. Written submission to the Scottish Parliament European and External Relations Committee.

74 HIE, Scottish Parliament European and External Relations Committee, Official Report, 17 March 2009, col 1055.

75 SCVO. Written submission to the Scottish Parliament European and External Relations Committee.

76 STUC. Written submission to the Scottish Parliament European and External Relations Committee.

77 Scottish Parliament European and External Relations Committee, Official Report, 28 April 2009, col 1120.

78 Scottish Parliament European and External Relations Committee, Official Report, 3 March 2009, col 1029.

79 COSLA. Written submission to the Scottish Parliament European and External Relations Committee.

80 Scottish Parliament European and External Relations Committee, Official Report, 28 April 2009, col 1124.

81 Scottish Parliament European and External Relations Committee, Official Report, 3 March 2009, col 1029.

82 Scottish Parliament European and External Relations Committee, Official Report, 3 March 2009, col 1029.

83 COSLA. Written submission to the Scottish Parliament European and External Relations Committee.

84 STUC. Written submission to the Scottish Parliament European and External Relations Committee.

85 SCVO. Written submission to the Scottish Parliament European and External Relations Committee.

86 Scottish Parliament European and External Relations Committee, Official Report, 3 March 2009, col 1030.

87 Scottish Parliament European and External Relations Committee, Official Report, 3 March 2009, col 1031.

88 Scottish Parliament European and External Relations Committee, Official Report, 17 March 2009, col 1060.

89 Scottish Parliament European and External Relations Committee, Official Report, 17 March 2009, col 1061.

90 SCVO. Written submission to the Scottish Parliament European and External Relations Committee.

91 STUC. Written submission to the Scottish Parliament European and External Relations Committee.

92 SCVO. Written submission to the Scottish Parliament European and External Relations Committee.

93 STUC. Written submission to the Scottish Parliament European and External Relations Committee.

94 HIE. Written submission to the Scottish Parliament European and External Relations Committee.

95 Scottish Parliament European and External Relations Committee, Official Report, 17 March 2009, col 1056.

96 COSLA. Written submission to the Scottish Parliament European and External Relations Committee.

97 Scottish Parliament European and External Relations Committee, Official Report, 28 April 2009, col 1121.

98 COSLA. Written submission to the Scottish Parliament European and External Relations Committee.

99 SLAED. Written submission to the Scottish Parliament European and External Relations Committee.

100 Scottish Parliament European and External Relations Committee, Official Report, 17 March 2009, col 1065.

101 STUC. Written submission to the Scottish Parliament European and External Relations Committee.

102 COSLA. Written submission to the Scottish Parliament European and External Relations Committee.

103 Scottish Parliament European and External Relations Committee, Official Report, 28 April 2009, col 1128.

104 SCVO. Written submission to the Scottish Parliament European and External Relations Committee.
Scottish Parliament European and External Relations Committee, Official Report, 28 April 2009, col 1132.

105 Scottish Parliament European and External Relations Committee, Official Report, 28 April 2009, col 1132.