Select Committee on Welsh Affairs Minutes of Evidence

Examination of Witnesses (Questions 40-56)



Mr Caton

  40. From what you have just said I understood, perhaps you will correct me if I am wrong, that you are relying on existing public sector organisations for the public sector for match funding elements of your programme. Is that right?
  (Mrs Yates) That is very much so. As you said, we are not the only kid on the block.

  41. What is the current proportion of public to private sector match funding in each of your regions?
  (Mr Flamson) We work on a basis of 40 per cent European, 40 per cent public and 20 per cent private. This is a real challenge, the pound for pound match, between the European and public match, particularly in some of the areas I explained before.

  42. You are managing to meet that, are you?
  (Mr Flamson) Yes, overall we are not in any critical state with meeting that sort of financial table. We have difficulties, real business challenges, in particular priorities and measures that you have to manage, but I think they will differ actually in different programmes. That is the essence of a programme that has match funding as its trigger. If it were just a large discretionary fund, called the European fund, that you would dispense as if it were a regional selective assistance fund or a community chest just based on a good business case that would be one thing, but it is not. I think sometimes that is not fully understood by the applicant community.
  (Mrs Yates) I certainly endorse that. I described managing European programmes as a multi-dimensional game of chess, it is not only getting the finances right, the right combination, the right time and the right pockets of programme but you also have to look at what you are delivering. Whilst in the second year of our delivery the financial aspects of our programme were looking healthy I have some concerns about whether we are delivering some of the targets, business sales, for example, looking at floor space. There are those aspects that one has to pay heed to, it is not just, have you got the right combination of funds, is the cocktail right, it is what is being delivered as well and can you evidence it.

  43. I take the point. What is your proportion of private sector match funding?
  (Mrs Yates) We have 750 million European and the equivalent for public sector and up to 1.8 million counting private investment, it is slightly smaller in South Yorkshire.
  (Mr Bayly) Ours is significantly smaller, I do not have the exact figures with me.

Adam Price

  44. Those are the figures across the programme area. Is there a variation in terms of the requirement of match funding for an applicant with different measures, across measures, and indeed within measures. Can you give me a flavour of that and the rationale?
  (Mr Flamson) I guess what happens as well, without giving you the tables is you get different intervention rates, first of all, what is the level of grant against the eligible expenditure that an applicant can conceivably get, they will vary depending on the type of projects, whether it is an ESF project, whether it is an ERDF project and then within an ERDF whether it is a business project or whether it is a property development, so you do get different grant rates. I understand, correct me if I am wrong, the point you were looking at, that you might well have a financial table that could reconcile at the end in terms of your public and European funding, and so forth, but that itself is based on certain assumptions, in our case priorities, chunks of the programme. We have four main priorities and a fifth which is really a support priority. When I was alluding before to Priority 1, which is the business development, there is a sort of challenge to get the public sector match into that area. We may actually have a surfeit of public sector match in another area round infrastructure or what have you. It is important through the midterm evaluation that we will conduct with the Regional Development Agency and government and the European Commission to take a fresh look at that. We have to make sure that our financial tables or budgets actually reflect the real world.
  (Mrs Yates) I think I would add to that we see the intervention rates as being the ceilings and what you would want to do in a project in an ideal world is give a minimum amount from European funding and drawing the maximum amount from elsewhere. There will be variation depending on which it is that you want to support and what the project actually needs. Why give more European grant to something that does not need it because there is sufficient coming from a Regional Development Agency or private sector development.

  45. Clearly one of the other advantages, apart from the pot of money that Objective 1 status confers, is the derogation in terms of state aid rules and the relaxation of state aid rules covering investment aid and operating aid. This has been a key area of interest in Wales and I know there have been discussions with the other Objective 1 regions involving officials and with the Treasury, I understand these discussions are on-going. Perhaps if you would like to elaborate on any of the discussions that you have had in relation to opportunities afforded by operating investment aid within your own regions?
  (Mr White) If I can just mention, our view from a central point of view is that, as I am sure you are aware, under the current programme the Commission have been applying the state aid rules a lot stricter than they did under the previous programme because there were some possibly illegal schemes approved and we would support a stricter enforcement of those rules. In terms of expertise centrally I am afraid that really lies very much with the Department of Trade and Industry. I am aware that the Committee is speaking to them next week so if you forgive me I will leave that until you speak to the DTI next week. In terms of individual programmes, I do not know if my colleagues wish to mention any.
  (Mr Flamson) I have a colleague here who could give you a much fuller explanation of that if that is helpful to the Committee.


  46. It is unusual to do that. If you could drop us a line afterwards.
  (Mr Flamson) Yes. We are not trying to hide anything in this respect. I think state aid was a problem at the beginning of a programme, where we in Merseyside were inundated with a number of schemes and it just so happened that we did not have the right vehicle, it was the successor to what was an English Partnerships scheme, which was then a Regional Development Agency scheme, particularly the property development side, that is where we were getting hit with delays, because we did not have a vehicle that had been approved by the Commission that says, this is an exemption if the scheme carried on under the banner of the Property Investment Programme, the PIP scheme. There was a delay in that, that was one problem, and that has been solved. There was another delay because I think that the DTI state aid unit did get, I think, just too many applications and had to tool up very quickly. It is not a major problem in Merseyside now because the threshold in terms of state aid are not inhibiting investment. They were a problem and they became a very publicised problem in relation to property development schemes, that is what caught the attention. That has now gone and we do not have state aid representations or state aid issues raised within our partnership.

Adam Price

  47. On the particular issue of investment aid or operating aid, has there been discussions within the region about the potential advantages of a range of tax subsidies or different mechanisms that could be used as exemptions for National Insurance contributions? I understand that the executive of the National Assembly have said that there was at one point a joint working group between officials of the three government offices of the regions and the National Assembly looking specifically at this issue of operating aid. Is that your understanding?
  (Mrs Yates) I can only think that that might be the network I referred to right at the beginning, the joint objective network. I know some work was done to look at state aids in the preparatory period of all of our programmes. I would echo what John Flamson is saying about Merseyside, it is not causing a specific problem in South Yorkshire, we are not contemplating taking any action, such as you described, but we have made notification of state aid type schemes where appropriate and suffered a bit of frustration waiting for the exemptions to come back and we have done them jointly with South Yorkshire. From my point of view my advice would be we should try and avoid getting entangled in notifications because of the delay and also the risk that the end result is that you are told you cannot do it. Work within the rules, maximise the potential, but really try not to court an argument with the Commission about whether something is permissible or not, we have not got the time.

  48. One final question, the National Assembly has recently submitted an action plan for the Objective 1, we in West Wales and the Valleys are calling for a range of enhanced tax credits for R&D using the operating aid but there has not been any discussion within the three English Objective 1 regions on exploring these possibilities for investment aid and operating aid and tax exemptions.
  (Mr White) If I can respond to that, the issue of tax exemptions in England is really an issue for the Treasury, and I understand that you will be speaking to them next week and they will be dealing with the whole issue of tax exemptions and they will be able to respond fully to your question.
  (Mr Flamson) To help you, the business community, if I can put it that way, within our partnership structures has not been raising issues of fiscal policies or tax or other similar incentives. It is influencing on other areas of the programme, but whether it will, that is another matter.

Chris Ruane

  49. What type of monitoring do you operate within your different regions? Do you monitor the projects that have been refused? Are there any questionnaires or any contact with unsuccessful projects as well successful ones? Who is responsible for monitoring the evaluation, is it carried out primarily at a local or a regional level?
  (Mr White) If I, perhaps, kick off, overall responsibility does lie with my Department as a managing authority. In terms of monitoring the programme level we do delicate to the government offices. In terms of evaluation do you mean the formal evaluations, the midterm, or more evaluating?

  50. What on-going monitoring is there? You have the three yearly.
  (Mr White) In terms of formal evaluations, the midterm evaluation there will be a steering group set up with the RDA and the chair and they will appoint an independent consultant to point that out. A similar process will operate in terms of the ex post evaluation, after the end of the programme. That is the formal evaluation. In terms of monitoring at project level perhaps I can pass over.
  (Mr Flamson) It is important to see monitoring as part of

  overall programme management. We have had some fruitful discussions within our partnership, the difference between audit, monitoring and evaluation. We would get DTLR or European Commission auditors to ensure that things are done in a proper way and check that projects exist, and so forth. When you engage in monitoring, and we put a lot of attention to that in Merseyside, looking at samples of projects, looking at all projects above certain thresholds, monitoring visits what that does is it tells you whether projects are complying with their contracts. Are they delivering what they said they would in some sort of reasonably measurable way. When you start moving into evaluation it is a different area because you are beginning to assess. So what? Are they making a difference? Not only are they delivering the outputs but are those outputs having a meaningful benefit. In Merseyside we have introduced a comprehensive beneficiary data base, which is establishing a database of residents and businesses who are in receipt of services from funded schemes. It is still early days, we are starting to get some information through on that, so we know who we are dealing with in terms of groups of businesses and whether we are making any difference. We appointed a monitoring and evaluation manager externally through partnership funding deliberately to increase the attention to this area, precisely some of the things that you are saying is that we have not done sufficient on projects that were refused. You do get a sort of feedback because it becomes a natural thing if you refuse it, but we want to systemise that more. Increasingly in terms of our programme management. It is interesting that the monitoring and evaluation manager that introduced these checks along the implementation of the project to check it is on course. Not only is it going to start and draw down money but is it on course or has something has shifted that might be very understandable in the project.

  51. Has any of your monitoring evaluation or auditing led to changes in procedure? We have this wrong, let us change the way we do it.
  (Mr Flamson) It has in terms of what we were talking about before about the preapplication and the application stages. It has reinforced our view that the specification of projects needs to be clearer, that the outputs need to be smart and measurable and that you need to give real attention to driving the projects, otherwise you will have a fictitious basket of outputs that do not come to fruition because the projects do not kick in soon enough. In answer to your question, yes, it has, it has effected the attention that we are putting on programme management and being clear about the conditions that we would put on offer letters, it is having that. I think it is starting, I can only give you early indications, to begin to inform our commissioning exercise in looking at beneficiaries, are we getting through different fund or training or labour market schemes, are we missing any particular geographical areas or groups of people. I would give that a few more months and that will begin to affect what we go out to market on. Yes, that should be a virtuous loop, you should go through project development, appraisal and implementation, then good evaluation and that should affect your strategy your project development and commissioning. That is what we are aspiring to, I do not want to deceive you, it is still early days.
  (Mrs Yates) The last pages of the brochure, pages 20 to 22, describe the approach in South Yorkshire. Thinking of examples where monitoring has made a difference, looking a clutch of projects in one particular area in South Yorkshire where we were not really sure we were getting the quality of training delivery that we expected has meant that we have tightened up now on our requirement for evidence of the success of community based, it is more advice giving about training available, where we now want to combine what is going on in small communities and have a more general approach within the area across South Yorkshire. We have definitely found ourselves moving down the track of having across the subregion projects rather than individual small, local delivery.
  (Mr Bayly) Can I add to that that experience with some difficult projects has led us to review our guidance material. I think it will lead to some changes in the internal sequencing of the appraisal process. I have to say that it is a response to internal monitoring and ad hoc feedback rather than structured evaluation as yet. The virtuous circle John Flamson describes is what we aspire to.

Mr Williams

  52. Two years into your projects do you expect any major changes in your Objective 1 strategy following a midterm review by the European Commission?
  (Mr Flamson) I would anticipate streamlined and simpler governance procedures whilst maintaining the meaningful engagement of a range of partners in generating policy and good ideas. I think that we will probably see a re-thinking of the ambitions round our business development area and, you know, a closer identification of the match funding required by that. Thirdly, I think that we will see maybe a concentration on some bigger projects or, if I can put it another way, a greater flexibility within the programme to generate bigger projects or respond to them.

  53. Is there going to be an infrastructure programme?
  (Mr Flamson) Not exclusively. It could be large projects related to some of our growth sectors. The early discussions are giving us some confidence, particularly in the pharmaceutical area, with some of the big players that there is a lot more to go out there, that will have real economic growth and that will create real jobs and training opportunities, so we may say that we need to concentrate more rather than less in certain sectors, we are looking at digital academics, and so forth. In some big projects there could be infrastructure or property related. We do not want to be hidebound by our financial tables and budgets for the life of the programme and we do not want to be inflexible to things that we as a group of partners are saying, this is a breakthrough idea or a breakthrough scheme, and that could be a management development programme rolled out at a much higher level than we thought previously or it could be a major leisure complex or a big pharmaceutical training centre. As it stands the flexibility within the programme is not sufficient.
  (Mrs Yates) I can anticipate that by the mid term point there will be partner pressure for the movement of funds across the programme. I personally do not think that we will have sufficient evidence to warrant doing that. Just reflecting on the points there about targeting sectoral support. In South Yorkshire we have given a little time to think about cluster development and are now pursuing a great deal of thinking about the sort of early activities we want to do to develop five separate clusters. By the mid-term point we want to start to reap the rewards of doing that. I can anticipate there will be resistance to the wholesale movement of funds across the programme because it will be too soon to say whether the horses we are backing are going to be the winners.
  (Mr Bayly) With us on the management front partners are recognising that this is a rather exciting opportunity to integrate the Objective 1 structures they developed with the emerging local strategic partnership development agenda that is developing in England, with all of this delivering the regeneration leg to a strategic partnership for Cornwall. I think that is looking ahead beyond Objective 1 and rather an interesting structural opportunity. I think in terms of funds management the position has a little in common with what Sylvia Yates described in Yorkshire. I suspect the partners may well want to find additional money, particularly for their flagship project, but they are going to find it difficult to find the resilient evidence of which measures they might run down to deliberate that additional funding. I think that will be a challenge.

Mrs Williams

  54. Is it necessary, do you think, to demonstrate additionality for Objective 1 projects, that is, that the structural funds are not being used to replace funding which would otherwise have come from local or central government?
  (Mr White) It has always been a principle that structural funds should be the minimum necessary to allow the project to go ahead, it is a principle that we stick to, and they must demonstrate, certainly, a need for the structural funds. Previous experience, which my colleagues will confirm, is that some projects demonstrate that better than others. I do not think any of us would see Objective 1 as a bottomless pit that should be just stepped into. We do feel that projects do need to demonstrate a need for Objective 1 funding.
  (Mr Bayly) We certainly apply the additionality principle. It is quite interesting debating how it applies to some projects. I referred earlier to the Combined Universities of Cornwall project. It could be argued that the provision of an expansion of the provision of HE capacity is a mainstream UK Government activity. But in practice this kind of project was against the Government's normal policy for HE as currently articulated. There would never have been a significant increase in HE provision in Cornwall coming through the normal government procedures. In that sense it is additional and we accept it is additional.
  (Mr Flamson) It is a constant challenge to applicants and I think it does work on two levels, one is on a project level, in proving this would not have happened or would not have happened in the way which it is being proposed, and I think the other is that it becomes part of the mind set if the partnership matures, where you can well in advance of projects, and I will give you an example, talk to higher education institutions and put it quite bluntly to them and say, we are not in the business of subsidising the courses you were going to run, let us discuss with you the things that this area needs that only you as a university or universities can really do but you could not do without further investment. I think that then starts to begin to tie the strategy down to propositions. That would be my advice to anybody. That is when you use additionality as a positive thing rather than as a rule.
  (Mrs Yates) I think reflecting the South Yorkshire experience that is just encapsulating the cliched approach, because you have all of that discussion before you even start to talk about projects and you have worked out what more it is that you want that you are not getting and then you have a structure for the sort of thing that you need to see. It takes the pain out of the process further down the track.

  55. What systems are there in place to ensure that these rules and guidelines are adhered to?
  (Mr Bayly) The main contribution is the government appraisal process. Part of that appraisal process is to ensure that the project is compliant to the rule book that applicants frequently see as horrendously complex. It is one of our roles to understand that rule book and interpret it intelligibly to applicants to help them understand where it may bite.
  (Mrs Yates) In our individual jobs we are accountable through our chairs and programme monitoring committees for what we are doing. We are setting a good quarry for auditors and can expect in the lifetime of a programme probably up to five sets coming and looking at what we are doing. We are probably all very mindful of sticking to the things we have to stick to or we will get tripped up.
  (Mr Flamson) It is an important area for external challenge. Any partnership should be challenged regularly, are these things bringing something new or bigger or better to this area that would not have happened. I do not see that as a negative thing, I think it is a constructive thing, because out of that can come some really good projects.


  56. This is probably the last question, what preparation are you making for the end of the Objective 1 process, also for the post Objective 1 period?
  (Mr Bayly) I think one of the interesting things over the last couple of years in Cornwall is that the phrases you most frequently hear about Objective 1 are "once in a lifetime opportunity" and "we are not going to get a second chance". In that sense I think it is interesting the partnership has really seen the strategy as its own exit strategy, that it is exiting Cornwall from deprivation in a sustainable way. I think if the structures are grown in that way that is not a glib answer, it does create the resilient way forward. I think I would interpret that in two detailed points. First of all I talked earlier about the importance of the partnership attached to developing capacity. That is true in terms of community economic development at a local level. It is equally true at a strategic level. What I said a moment ago about trying to move the Objective 1 structures into something which is more of a strategic partnership is very positive from a management point of view. In terms of target areas for spend I think that echos what John Flamson was saying about the focus on the business community. At the end of the day this is not going to work if there are not prosperous small businesses adding value. The priority attached to the small business community and to the development of intellectual capital that those small businesses can lock on to and the incubation and frameworks that run with that are central. If there was not complementing that a social inclusion strategy that was promoting greater access for all to the success of this mission then it would not work. It is getting the balance right there that has been central to ensuring that the programme is sustainable and sustainability that delivers a resilient exit strategy.
  (Mrs Yates) I endorse all of that. I see this on two levels, planning for the end when the tap gets switched off has to be in the fabric of all of the activity that we support. What we are doing, for example, with the voluntary and community sector in South Yorkshire is providing support now so that they can plan for their own legacy and how they continue beyond 2006 and 2008. On a political level there are thoughts about transitional funding and discussions about what South Yorkshire may or may not qualify for in future programmes in term of our obsession with delivery today.
  (Mr Flamson) I would echo a lot of those. I think this is an important matter for mid-term evaluation. In the English regions the evaluation will be conducted by the Regional Development Agency chairing the steering group and that will bring some external challenge. I actually see it on four levels, one, strategy, do you have the right strategy and do you know who the custodian of that is, economic strategy or skill strategy for the area or areas? I think that that needs to be asked. In Merseyside's case we are entrusting the economic strategy to the Merseyside Partnership and all partners are supporting that. Secondly, it is round funding, what funding will still be required in our sub regions and regions beyond 2006, and that will be very much an exercise led through the Regional Development Agency which will presumably still exist then. I think the cases now need to be made. The third test is round projects, are we supporting projects now that are enduring and sustainable? The Merseyside Special Investment Fund is a good example, because one of the by-products of that is that after it has done its business during the lifetime of the programme it will carry on because it will have developed sufficient capital. Thirdly, and I think it is partly a political issue, are the organisational structures in place in what ever region or subregion to implement the strategy with the funding that will be available with the projects that will be still on the ground? In Merseyside's case we now believe that there is a sort of subregional cluster of organisations, like the Learning and Skills Council, with connection service, a small business service as well as the Mersey Partnership, and then connecting into those local strategic partnership. One can say that the infrastructure is in place to make what we are doing sustainable.

  Chairman: Thank you very much indeed for coming this morning. I think your information has been very useful. I want to thank you for your candid and succinct answers. Thank you very, very much.


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