UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 81-i

HOUSE OF COMMONS

ORAL EVIDENCE

TAKEN BEFORE THE

COMMUNITIES AND LOCAL GOVERNMENT COMMITTEE

EUROPEAN REGIONAL DEVELOPMENT FUND

WEDNESDAY 9 MAY 2012

PROFESSOR STEVE FOTHERGILL and MATS PERSSON

BARONESS HANHAM CBE

Evidence heard in Public

Questions 38 - 148

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Oral Evidence

Taken before the Communities and Local Government Committee

on Wednesday 9 May 2012

Members present:

Mr Clive Betts (Chair)

Heidi Alexander

Bob Blackman

Simon Danczuk

Bill Esterson

David Heyes

James Morris

Mark Pawsey

Heather Wheeler

Examination of Witnesses

Witnesses: Professor Steve Fothergill, Centre for Regional Economic and Social Research, Sheffield Hallam University, and Mats Persson, Director, Open Europe, gave evidence.

Chair: Good afternoon. Welcome, both of you, to the second evidence session of the inquiry into the European Regional Development Fund-obviously the most important meeting in Parliament today. Thank you for coming and for the evidence you have provided so far. For the sake of our records, could you say who you are and what organisation you represent?

Professor Fothergill: I am Steve Fothergill, a professor at Sheffield Hallam University.

Mats Persson: Mats Persson, director of Open Europe.

Q38 Chair: Thank you very much.

This session will focus mainly on the issue of repatriation, as it is called, of ERDF funds from Brussels and the idea that we should not be in the position where money is transferred from this country to Brussels and then transferred back to be spent in the UK. Could you give us your views on that in general? Do you think that the ERDF has made a significant difference to development in this country and to regeneration of poorer areas? Would that have happened without the current arrangements?

Professor Fothergill: Measuring the impact of any regional policy initiative, whether it be from Europe or from our own Government, is a very difficult exercise, because lots of things are happening simultaneously. There is not only the regional policy initiative, but national economic policy and underlying trends in location. Alongside European regional policy, we have the activity of our own UK Government on the regional development front. It really is very, very difficult to put your hand on your heart and say, "The impact of ERDF in Britain has been x or y," because it is much more complex than that. I know from the work that I am sure Mats will comment on that the academic literature is very mixed in terms of how big the impact has been, but I have to say I rather suspect that a lot of that academic literature is barely worth the paper it’s written on, because the problem of disentangling a policy impact alongside everything else that is going on is so formidable.

Personally, I tend to come at this from a completely different angle and look at projects on the ground and ask, "Would this have happened on this scale in this place if we had not had the European funding?" I think the answer is overwhelmingly no. A lot of the big investment projects that have been co-financed from Europe would not have happened without the contribution of Europe, and I doubt very much whether we are looking at the public finance displacing private finance-I do not think we are in a situation where there is such a shortage of resources that you would get crowding out, as economists say.

In broad terms, I certainly believe that the ERDF has made a very positive contribution. The issue at stake, I suppose, is just how big that positive contribution has been and whether you might have got a larger positive contribution if you had gone down other routes in terms of spending the money-if it had been our own Government that had spent the money itself, rather than routed the money through Europe. I am saying yes, it is basically positive, but with a number of important qualifications.

Mats Persson: I agree with Professor Fothergill that it is, of course, very difficult to nail down exactly what impact the ERDF and the structural funds in general have had on the UK economy, both overall and in individual cases. I agree that it is very difficult to identify a counterfactual-what would have happened absent the funding. It is extremely difficult to isolate ERDF funding streams from other factors in the economy; I agree with that as well. In addition, I want to stress that the models that are being used, in particular by the European Commission, to evaluate the impact of these funds are very poor. They suffer from a number of flaws, which I am happy to go into if anyone is interested in that. I therefore take the jobs figures and growth figures that are being generated from those models with a pinch of salt.

It is also very difficult to quantify the opportunity cost. For every pound invested in a certain area of the economy, we have to take into account that the same pound could have been invested somewhere else and perhaps generated greater benefit. That is the opportunity cost and it is extremely difficult to quantify. That is a very important issue when it comes to the ERDF.

There is a number of reasons why it is very difficult to quantify and to evaluate the impact of the ERDF, but what we do know about the ERDF is the following. We know that the redistribution patterns, from a UK point of view, are not ideal. We know that every single region classified under the NUTS criteria in England apart from one-Cornwall-is a net contributor to the structural funds, so they lose out, in net terms, when they participate in the structural funds. We know that certain quite poor regions are doing particularly poorly out of the structural funds and the ERDF. We have outlined and identified a number of individual areas and regions that do particularly poorly compared with what the wealth levels are-for example, we have highlighted the West Midlands, an area that contains urban pockets of poverty, which pays in £3.55 for every £1 that it gets back from the structural funds. We know that. That is quite easy to quantify. A number of other less well-off regions in England are doing equally poorly, despite being relatively poor in English terms. We know that.

We also know, if we do the simulations that Open Europe did in its report, that of the cash that does come back to these regions, most of the money was raised in that same region, so it is a genuine circulation of money. It is not even redistribution within Britain; it is redistribution among taxpayers in the same region. The question we must ask is this: although it is true that it is very difficult to quantify and evaluate the impact of the ERDF, what magic is happening to that £1 for every £3.55 that the West Midlands, for example, gets back? What happens in Brussels that makes its impact so extraordinary and enables us to say for certain that this funding has a positive impact that otherwise would not happen? The burden of proof is very much on the people who say that this has an additional impact to what would have happened otherwise, because the redistribution patterns of the ERDF are so irrational.

Professor Fothergill: Can I come in here on an important point that Mats is raising, which is why so many of our regions are net contributors? This is because as long as we have a Europe-wide regional policy that is aimed at supporting in large part the very poorest countries and regions of Europe, Britain is always going to be a net contributor to that. Indeed, the proposals that were tabled by the last Labour Government and the ideas floated by Open Europe are basically not intended to challenge Europe’s continuing to support the very poorest regions of central and eastern Europe, and as long as that occurs, we in Britain will be net contributors. That is not necessarily a bad thing because it might meet wider objectives in terms of supporting the growth of markets that we ultimately export to, never mind consolidating the sort of democracy and the market economy in central and eastern Europe.

Q39 Chair: Is not certainty one of the things the current arrangements give? Because of the problems of getting agreement in Europe, you tend to get programmes agreed for a long period of time-for seven years, you have that certainty for both the public and the private sector. We know that UK Governments of whatever complexion can change their policies overnight, so that certainty is not there because the policy changes and the funding is removed.

Professor Fothergill: The certainty is certainly valued a great deal by users out there in the regions, absolutely. It is one of the strengths of European funding from a user’s point of view.

Mats Persson: Certainly that is a perceived advantage in the regions and I can sympathise with that. Of course, if you sit in a region and you know that you have funding locked in for seven years, if you are a council, that is a nice feeling, particularly in these uncertain times, but that in itself is not an argument for continuing with this funding stream. It is merely saying something about the mechanics of the funding; it does not actually say anything about the policy output. Against that certainty, of course, we have to weigh the disadvantages of having funding locked in for seven years, and if the eurozone crisis has taught us anything, it is that the economic climate in Europe can change overnight.

Q40 Mark Pawsey: Professor Fothergill, you talked about looking at this scheme on the basis of projects that have taken place on the ground, and you referred to a number of projects that would not have happened without this EU funding. I wonder if, so that we could better understand the benefits of the scheme, you could tell us some of the projects that you have in mind-give just a handful of examples-and explain why you are certain that, in the absence of EU funding, they would not have taken place.

Professor Fothergill: First, you have to bear in mind the scale of the contribution of European funds to many projects. Typically, it is up to 50%-often, indeed, is 50%-alongside a package of other funders. This is not a small bit-part player. If you are looking for truly transformational examples around the country, go to, for example, the Newcastle Gateshead quayside area, which has been absolutely transformed over the last 10 or 15 years. The two big iconic developments there-the Sage concert hall and the Baltic art gallery-are both substantially ERDF funded. I doubt whether you would have got that development without the contribution of Europe. Again, there is the question whether can we always establish a reliable counterfactual, but intuitively I do not think it would have got it. Go down to Cornwall and look at the Eden centre-a major asset now for the development of the Cornish tourism industry. It was substantially funded in part by the ERDF, and it probably would not have happened in that form and on that scale without the ERDF money.

Q41 James Morris: Is there not an apparent contradiction in what you say? On the one hand you point to projects that have been funded by ERDF, which you say intuitively you believe have benefited, but at the same time you say, "Actually, it’s impossible for us to quantify the benefit." Which is it? Is it impossible to quantify the benefit, so we just say instinctively that we think it is a good idea that these projects have been built, or is it possible to properly quantify the impact of the ERDF?

Professor Fothergill: It is probably not possible accurately and reliably to quantify the impact of the ERDF, because the question we always face is, "What would have happened in its absence?" Often, something might have happened on a lesser scale or perhaps in a different form or location, but we can never be quite sure. If we looked at the issue in terms of the overall aggregate numbers-GDP or employment in a region-yes, you would expect European funding to be having some impact, but there are so many other things having an impact simultaneously, so disentangling what is attributable to Europe and what is attributable to central Government policy-

Q42 James Morris: So we don’t really know.

Professor Fothergill: The truth is that we don’t really reliably know, despite the mountain of reports. I don’t think we do know.

Q43 David Heyes: I guess from what you have said so far that it depends whether you take a national or an international perspective. From the international point of view, if the main purpose of the ERDF is to reduce regional disparities, why should regions with GDP per capita greater than the EU average get any ERDF funding?

Mats Persson: I do not think they should. If it is a genuine cross-border scheme designed to help poorer regions catch up with richer ones in Europe, there is absolutely no economic rationale for richer regions or richer member states to receive funding. As I said, it is difficult to quantify the exact impact, but what we can quantify, as I have demonstrated, are the redistribution flows, which just do not make sense. It is very difficult to argue that point, and we still have not had anyone undermine us on what are clearly irrational redistribution patterns, which are economically quantifiable.

I do not think that there is a case for it, but there is a case for subsidising and helping out genuinely poor regions around Europe that are in a transition phase, where these funds can have the greatest comparative impact and you can gear them towards the economic transition that, for example, a lot of the post-communist European member states are still going through. That is where they can have an impact. They cannot have that kind of impact in Britain because we are in a different state of economic development. They cannot have that kind of impact even in the eurozone periphery, where this is the wrong type of funding. For heaven’s sake, 28% of structural funds in Spain still go towards infrastructure-the exact opposite of what that country needs. These funds are not fit for purpose to have the impact in richer member states that we want public investment to have at the moment. I think the evidence is there.

Professor Fothergill: I have to disagree a bit with Mats there.

Chair: That’s a surprise.

Professor Fothergill: Often, even in some of the more moderately prosperous UK regions, for example, there is still the need for investment in basic infrastructure to open up development sites and so on, but to go back to your core point-

Mats Persson: Why via Brussels? That is the question.

Professor Fothergill: Yes, and I am not arguing about where the money comes from; I am talking about the need for the investment. To come back to your general point: why do the very richest regions need European funding? Actually, the very richest regions get very little European funding. Across the EU as a whole, the vast majority of funding does go to the poorest regions, and even within the UK the funding is heavily skewed to the poorest regions. That is surely absolutely correct, because it is those regions that you are trying to bring on. Even within the so-called competitiveness and employment strand regions, which account for the vast majority of Britain, three times as much on a per capita basis still goes to somewhere such as north-east England as opposed to south-east England, and that is surely correct in terms of promoting regional convergence.

Q44 David Heyes: Some £200 million goes to inner London, the richest region in Europe.

Professor Fothergill: I think that on a per capita basis, it is far lower than for, say, north-east or north-west England.

Q45 David Heyes: Given what you have said about the difficulties of disentangling the impact of these initiatives, is it possible to give any indication of how much England, as opposed to the UK, could save if only the poorer EU regions received funding through the ERDF and the ESF and so on? Is it possible to give a feel for what the impact of that would be?

Mats Persson: Yes, I think it is. I think that we have done a very good job at Open Europe. Obviously I am slightly biased, but I think that we have done a good job of quantifying the potential savings from devolving the funds to the UK level. Now, any saving that has been achieved for the UK as a whole, I suspect-we need to go back and do the figures on this-could well be higher for England in proportional terms, because England does worse proportionally than the UK as a whole, particularly from the ERDF. However, we have calculated that the net saving for the UK as a whole, which gives you an indication of what the saving is for England as well, would be around £4 billion if our policy had been applied to the current multi-annual financial framework. I know that there has been some dispute over the figures, but I hope we have agreed that our figures do stand up to scrutiny, because we have taken the rebate into account, and I will clarify that and send around a separate note.

However, it is quite clear that in addition to the funding-about £8.7 billion for this MFF that is routed via Brussels and then comes back to the UK regions, which is not a net saving, but an amount that the UK could do whatever it wanted with and hopefully spend on very targeted, solid, effective regional programmes-you would also have £4 billion that would be a net saving, with which you could, if you were the UK, also spend on targeted, effective regional funding or urban development schemes. It is a win-win.

Professor Fothergill: Can I put my spin on this, please? There are really two sources of financial saving. One is if we no longer contribute money to Brussels, which then comes back to us, we have that money to spend ourselves as opposed to Brussels spending it. Now, under the sort of proposals that Open Europe has talked about and indeed the Labour Government were talking about, that money would not be a saving; it would be simply reallocated to the regions to do the same sorts of things or better things.

Over and above that, Open Europe calculates that there is a saving that is a net financial gain to the UK. That financial gain arises because we, as Britons, would no longer be subsidising development in other richer member states. However, there is a flip side to that, which is that some of those other richer member states would lose out massively financially. According to Open Europe’s figures, the big losers are Spain, Italy and Greece. I must say that I cannot see those countries willingly giving up that big financial allocation, especially in the present circumstances, without something financial and different in return. The more that we have to give to those countries to buy them off, the less the benefit to the United Kingdom. It is by no means an absolutely rock solid financial gain for the UK.

Mats Persson: Can I jump in there?

Chair: Of course.

Mats Persson: I would answer that question slightly differently, but I do really appreciate your excellent and tremendous job in explaining our figures and also acknowledging that our net saving stands up to scrutiny.

It is of course true that if you go to Madrid, Athens or Rome, they will not embrace you with open arms if you put forward this proposal-particularly not now-but that’s politics. So often when we discuss the EU budget, we tend to mix the ideal policy outcome with politics. It happens all the time. We deal with it all the time. It is true of civil servants. It is true of, with respect, MPs. It is sometimes true of academics as well, but not always. I agree, however, that it is a very good point that this would be difficult to achieve politically, and that is something that we need to take into account, but that is a separate point to the policy outcome. If we acknowledge that the policy outcome is the right one-that richer member states should run their own regional policy-then we deal with the politics.

On the politics, it is true that Spain, Italy and Greece will lose out massively under our proposal, but it is also true, first, that they would lose out anyway. They stand to gain the least or to lose the most ahead of the next MFF because of enlargement. Madrid knows this. They are looking for alternative arrangements, so they will lose out anyway. Our figures, if anything, are actually misleadingly high in terms of net losses for these countries.

My second point, alluding to what I said earlier, is that this is the wrong type of cash for these countries. Spain does not need more roads. Italy does not need more performance de-linked subsidies sent to the Mezzogiorno. Greece does not need funds that require co-financing because it does not have the cash to put up that co-financing. Such funds are pro-cyclical for Greece in that sense. This is the wrong type of cash. This would be an ideal opportunity to take a step back and say, "Okay, we appreciate that you may not be able to lose that amount of cash, but can we now refocus these structural funds, or other types of funds, more around your specific needs?" Greece is one of the biggest net beneficiaries of structural funds, and it still needs a bail-out. Obviously, something is not working, but I am an optimist and I think it is an opportunity.

Professor Fothergill: I would like to add one further thing about the figures. The figure of rather more than £4 billion that Mats is referring to is, in a sense, a retrospective calculation of what would have been the net saving to the UK in the present spending round had we had the particular arrangements that he is advocating, and that the previous Labour Government were advocating. Looking ahead, there is nothing absolutely certain about a sum of that magnitude because it depends on a whole host of decisions about how big the overall budget for the structural funds is, and how much is allocated between particular strands of those funds. It also depends on GDP figures in the UK regions and in other regions. Rather than being £4 billion, if that figure were recalculated for 2014 to 2020, it could be zero or a great deal more. It could even, in extreme circumstances, be negative, so I don’t think that we should regard that net financial gain as something that is highly tangible and waiting to be grabbed. It is not as fixed as that.

Q46 James Morris: Going back to England, I might be misunderstanding it, but are you arguing that ERDF funding could potentially be exacerbating regional inequality in the UK?

Mats Persson: Again, I do not want to be too speculative because that is another claim that would be extremely difficult to prove. Going back to the flexibility versus stability trade-off that the ERDF represents and offers UK regions, we know that the allocation criteria for the regions are very flexible. There is NUTS on one hand, and when it comes to economic issues-

Q47 James Morris: Is that what you mean by irrational distribution?

Mats Persson: Yes, that is part of it. Absolutely. We produced this, for example, showing that if you switch from GDP per capita-or GVA per capita, which is basically what is being used now-and use disposable income instead, the wealth levels of various regions in the UK change radically.

For example, I mentioned the west midlands, which obviously includes Birmingham. It is clearly in need of some urban investment, but it is losing out massively and all of a sudden looks a lot poorer than under the current allocation. The same thing goes for Greater Manchester, which becomes a lot poorer. West Yorkshire, which includes Leeds and Bradford, is in need of urban investment and it looks a lot poorer as well. Because the EU’s allocation criteria require a one-size-fits-all measurement that will apply to all 27 member states, the system fails to target pockets of poverty in the UK. That is quite clear when we see the shifts in wealth levels between regions if we mess around a bit with the economic criteria. In that sense, the areas that need funding the most may not get it, particularly when it comes to pockets of poverty within larger regions.

The UK is particularly bad because, as you know, disparities in wealth can come down to a block of council estates. You don’t necessarily have the same system in Europe; Britain is something different.

Professor Fothergill: Yes, but economies do not operate at that local scale. If you are trying to revive an economy, you often need to undertake action over quite a broad sub-region. You can benefit people on a poor council estate by doing something four or five miles down the road, or sometimes even more. There is an issue about whether or not the statistical indicators are appropriate, but in so far as the Commission needs to be consistent across Europe, it is probably working with the only data with which it can reliably work-GDP data at NUTS 2 scale. Anything other than that runs into all sorts of statistical difficulties. Even the household income-per-head data, which Mats is referring to, is horribly influenced by things such as local commuting patterns, and where poor people live versus middle class commuters, etc., etc. Whichever indicator you choose, you will have some difficulty. Broadly speaking, the indicators that the Commission uses succeed in targeting those places, albeit imperfectly.

Mats Persson: Can I-

Chair: We are going to move on. I am sure you will get your points in.

Q48 Simon Danczuk: I was going to make a point there, but I am not sure whether you need us at all.

Steve, you were talking about the people who live on this council estate. Do you agree that if they knew anything at all about ERDF, they would think it was absolute madness that we as a country give money to Europe and then get a bit of it back as opposed to more of it?

Professor Fothergill: We will always get only a small part of it back for as long as we are committed, perhaps for very good political reasons, to supporting development in central and eastern Europe. If we do not want to support the poorest regions of Europe, fair enough, and we would save a lot of money. Yes, I suppose they would question whether it makes sense for money that is spent in that poor area to be routed to that poor area via Whitehall and Brussels.

Q49 Simon Danczuk: They would think it madness, wouldn’t they?

Professor Fothergill: Yes, but the big question then would be that if it was not routed in that way, would the money arrive? In the current climate of public expenditure constraints, the big question mark is whether any money saved by not being routed through Brussels would actually end up being spent on regional development in the poorer places of the United Kingdom. I have to say that that is a very big question mark indeed.

Q50 Simon Danczuk: That leads to my question to Mats, which is why would regional funding be more effective in England if it was repatriated from the EU? What evidence do you have that it would be more effective if it were done in that way?

Mats Persson: Again, I do not have the gift of prophesy, unfortunately, so it is difficult to know exactly what a future Government could do. That is obviously the problem with the proposal. At the same time, I can again point out what we know. For example, linked to our earlier discussion, we know that we could have economic and statistical criteria that are far more tailored around circumstances in England. At least you would have a chance to create a basket of indicators that can target pockets of poverty, or urban development in a far more effective way than now. That is tailoring of the funds. They will not come with a can of strings attached as we see at the moment. For example, Cornwall could spend its cash on the food niche industry, which it cannot do at the moment. That is clearly an area where there are demand and economic opportunities in that region, but at the moment it cannot spend on that. It would give us much more flexibility to spend on the kind of areas and sectors in the economy that could really generate growth and jobs.

Thirdly, it is a likely net saving. The proposed MFF in 2014-20 gives us a rough indication of the structure of the EU budget, and it is fairly obvious that it would look roughly the same as now, with more cash going to new member states, so if our proposed policy was implemented on that proposal, there would clearly be a net saving for Britain-more cash. All the different factors add up in combination.

Q51 Simon Danczuk: I am conscious of the time, Mats.

Mats Persson: Sorry.

Q52 Simon Danczuk: You have not been asked to prophesy. History tells us, does it not, that Governments of any persuasion will adjust how the money is redistributed? Since I have been an MP, more money has come out of Rochdale and moved to other areas down south or wherever. Political parties do that all the time. History tells us that.

Mats Persson: That is a fair point, but in the end that comes down to decisions also here in Parliament. Surely we must be able to trust MPs to make the right decisions for their constituents, whom they represent. If there is a strong case for more effective, targeted funding streams going to regions and urban development, I have all confidence in you to vote for that, because you hold the Government to account. At the end of the day it comes down to that democratic discussion.

Q53 Simon Danczuk: Steve, when you come in, will you also tell me whether you think that seven years is too long for setting an area’s priorities?

Professor Fothergill: Actually, no. Many of the problems we are dealing with in some of the less prosperous regions are deep-seated, and will take decades to turn round. We have been working hard on turning round some of these problems for some decades already, and we have made some progress. Three-year or five-year periods do not bring any advantage; a seven-year period brings stability.

On the point about trusting MPs and the value of commitments to the regions, the last Labour Government wanted to see the repatriation of European funding. They did not win enough support in Europe to secure that, but it was offering guarantees that the money saved-the money that wasn’t handed over to Europe-would be handed back to the regions to be spent on regional development in England. You have to ask what that guarantee would have been worth in the wake of the 2010 election. Would the coalition have necessarily accepted that they were going to honour a promise made by their predecessors five years earlier, especially in the context of the extremely tight constraints on public expenditure that we all now face? Surely the outcome would have been that they had to discard that promise, and the funds to the regions would have been reduced accordingly.

Q54 Simon Danczuk: Briefly, if we do repatriate the funds, what would happen in Northern Ireland, Scotland and Wales? Do they get to opt in or opt out?

Mats Persson: They could get roughly the same amount as now. I appreciate that there are difficulties with obliging them to spend the cash in a certain way, but that is the nature of devolution. I think it would actually work a lot better for them, as well. Look at Wales, for example: I think they would do a lot better if they had more control of their regional spend.

Q55 Bob Blackman: Obviously, the debate is now centring on what happens from 2014 onward. I want to ask you some specific questions about your view of some of the areas that have been arrived at in the negotiations. The first, obviously, is the issue of three bands, rather than two, for the allocation of funds, under which certain regions of England might do rather better. Professor Fothergill, do you have a view on that?

Professor Fothergill: I think that is a positive step forward, and I know that, out in the regions of England, it is also viewed as a positive step forward. The problem is that in the present spending round there has been little formal differentiation between regions that are just above the magic threshold of 75% of the EU average GDP: those at 78% have been treated the same as those at 135%. If you go back further in time, we had an intermediate category called objective 2. I think there were many people out in the less prosperous regions of England who regretted the passing of objective 2. The Commission’s proposal is essentially objective 2 under a different name-they are now transition regions. We have done some calculations to try to establish whether the UK would be a net winner or a net loser from this proposal, and it looks very much as if we might get at least as much back as we would have to put in to support the transition.

Q56 Bob Blackman: So, broadly, you support the idea?

Professor Fothergill: Broadly, yes.

Mats Persson: I agree that the 75% threshold becomes a very big difference between a region that is just above and one that is just below, but I think that, in effect, this proposal entrenches the problems that we have already with the recycling of money between some of the richer member states. Most of the regions that are in this category will be located in richer member states so, unfortunately, the net effect will be a step backwards or will at least lock in the status quo, which we are not happy with. I would not support it.

Q57 Bob Blackman: How about the position of bringing together the various funding streams as one big pot? Do you agree with that proposal?

Mats Persson: I think that is a good idea in principle, but I am not sure that it is exactly what is happening in practice. I think that would be far better. If you actually want to have this funding at the EU level, notwithstanding how economically rational it is for the richer member states, I would have a single pot of money with a single objective, or at least one or two objectives. I would simplify it and make it much easier for people to understand what the funds are meant to achieve. So I support the idea of a single pot of money.

Professor Fothergill: Pooling the EU money is basically a good idea, but it is not addressing the central problem at the moment. The central problem is the shortage of matching finance to put alongside the EU money, because public spending is so thin on the ground at the moment, and we have had the abolition of the RDAs in England, and they provided the biggest share of the matching finance. Looking ahead, there is a serious problem to be addressed. How do you find that matching finance so that you can draw down the European money?

Q58 Bob Blackman: The European budget is going to be an interesting issue anyway, but that is a separate matter. One suggestion is conditionality; that is, you have to conform to the economic and fiscal requirements of the EU before you get any funding. Do you support that proposal? Mats, you’re nodding, so I can understand you.

Mats Persson: Absolutely. I think the more conditionality the better.

Q59 Bob Blackman: Steve, what is your view?

Professor Fothergill: Would that mean that Greece had its regional development money withdrawn, because it did not meet its particular strings on its bail-out?

Q60 Bob Blackman: I sincerely hope so. Either you sign up to austerity measures to keep yourself in the euro or you don’t.

Mats Persson: Of course it would.

Q61 Bob Blackman: You give me your view.

Professor Fothergill: I don’t think I have a fixed view; I think I have worries about whether a system like that would be workable in practice across the EU. I also have concerns as to whether or not you could hold back money until a member state had been shown to perform well, in terms of the way it was using the ERDF funds. The basic problem, as we were saying earlier, is that it is hard to measure reliably whether the ERDF funds are being spent effectively. You can tell whether they are being spent legally and I suppose you would wish to punish any country that did not spend them legally. Whether they are spending it effectively is a complex issue.

Q62 Bob Blackman: Taking my colleagues’ view from, shall we say, a housing estate in Harrow, people might be saying, "Hang on, wait a minute. We are going to spend all this money on developing Greece, but we don’t know whether it is effective or not; we don’t know whether it is doing any good or not. But let’s just keep spending it, because after all, that is what we are there for."

Professor Fothergill: No, we are saying that quantifying the impact is inherently difficult. That is the problem. I definitely give this a positive impact, but quite how big is not easy always to tell.

Q63 Bob Blackman: Isn’t the fundamental issue here, not whether it is repatriation or who takes it, it is who takes the decisions, and then who gets the glory for the project that happens? Every project has to have the EU flag on it-that it is all done by the EU-when in actual fact it is just British money being recycled. What is your view on that?

Mats Persson: I would reverse it as well. I would say the issue is who gets the blame, for lack of a better word, when the funding is not working. At the moment it is falling into a big black hole between member states and the European Commission. That is not a good situation from the point of view of accountability and making sure that taxpayers’ cash is spent in the most effective way. There is a certain level of that in the structure funds, but that doesn’t make for good economic policy. I must say that it is a bit worrying to hear this idea that you can give somebody cash with almost no performance links whatsoever. That goes against everything that Europe is working to achieve at the moment. The problem has existed for so long in Europe: if you look at the Mezzogiorno, or if you look at Greece, for example, when it comes to the structure funds. Clearly, if we had had performance criteria and links, Greece might not have been in as bad a shape as it is at the moment. The structure funds could have helped it to avoid the kind of situation that it is in at the moment. I think performance links are vital.

Professor Fothergill: Can I make it absolutely clear what I am saying? I am not saying to you, "Don’t have any sort of performance links." There are certain things you can measure very reliably, such as whether the money is actually being spent. That can be an issue. You don’t necessarily want to be allocating more money if there is an absorption problem. I am talking about measuring in a reliable way the economic impact, trying to put output figures or employment figures on the impact of spending, especially in circumstances where there may be quite significant lags in the system.

If you are putting in infrastructure, it may not feed through for five, 10, 15 years, to much higher economic activity in that location, because you are creating the basic conditions under which economic growth can happen. It is highly problematic to attach very rigorous criteria to determine whether you should keep on getting the money.

Mats Persson: You can measure a road being built. You can measure whether wind farms are being built. All these things are measurable. That, again going back to southern Italy, is not happening there. Yet the money keeps on flowing in that direction. I know this is about England, but it just illustrates a wider point. It is clearly possible to have some sort of performance criteria and make that determine continuous funding. I think it is fully possible.

Q64 Bob Blackman: One final issue: there is obviously a lot of debate going on about the EU budget at the moment with suggestions from the Commission of a 6.2% increase. Indeed one of the problems the Commission has identified is that a lot of the decisions that have been repeatedly put off lead to a higher budget in later years. Is there not a risk, with the discussions going on about the EU budget, that this sort of funding is the easiest to remove when actually these funding streams may not come through at all in years to come? Do you have a view on that?

Professor Fothergill: I would be immensely surprised if the Commission’s proposals for ERDF in the next spending round were to survive intact. The experience of the negotiations leading up to the 2007-13 spending round was that the Commission asked for substantially more than it eventually secured. So I would expect the budget to be reduced by the member states. You may, in the end, be looking at a no-growth budget or even a reduction. Who knows? This is a political game that we are entering into.

Mats Persson: I think the budget will probably be lower than what we are looking at at the moment. How that will affect the individual funding streams is subject to negotiations. But I have noted that France and the UK agree on a budget freeze but totally disagree on what should be frozen inside the budget. It would be no surprise to hear that one country is not in favour of reducing CAP spending, so I suspect that the reduction will have to come from somewhere else and the structure funds may be a contender.

Q65 Heidi Alexander: You started to answer my question in response to one of Bob’s questions. You were talking about the problems in quantifying the impact of ERDF spending. We then touched on whether it was the right sort of spending. Are extra roads for Spain right? But, in terms of the bigger picture of economic development of Europe as a whole, there is the point that you made, Mats, about stimulating markets, potentially increasing wealth in other parts of Europe, which ultimately could be an export market for the UK. At that broad, macro-economic level-I am not an economist and I always get very lost when people start talking about this-what research has been done about the wider impact? I am not talking about jobs created in town or city X as a result of project X happening, funded through the ERDF, but it is that bigger picture. It is the bigger picture that might be hard to explain when you are stood on the council estate in Rochdale or Harrow. What is your take on that?

Professor Fothergill: The Commission does try to provide that bigger picture in its various evaluations. It publishes what it calls cohesion reports every three or four years. They are voluminous documents, reviewing the whole picture across Europe. You come back to the point I was making earlier. You can observe the progress, or lack of progress, that may be being made in some of the poorest member states, but saying how much of that is attributable to ERDF is difficult and then working through what the impact of that growth has been on other member states is even more difficult. It is almost an act of faith that if we have a growing market in Hungary, Latvia or Poland it must be good for the United Kingdom. We sell to these places. So one would assume, trite as it may be as an observation, that it is a correct observation.

Mats Persson: It is a very good question. Generally speaking, particularly in the EU15-the older member states-I think the structural funds are too small a share of overall GDP to have a measurable macro-economic impact. That is the reality. It is very difficult to point to a boost in overall EU-wide GDP. The Commission tries, but as I pointed out earlier, its models are not particularly sound-they are quite weak.

In our report, we have a section on how difficult it is to evaluate the overall impact of the funds. To give an example, the Commission itself mentions its so-called QUEST models, which it uses a lot to evaluate this, and I quote from its impact study of the structural funds: "It should also be stressed that these results are based on a macro-economic analysis and depend crucially on the underlying assumption that the money is spent efficiently." In other words, it assumes that money is spent efficiently, which is the same thing that it is trying to prove. That goes to show how incredibly difficult it is to evaluate. It is difficult to explain on the doorstep, because no one has shown that there is an overall macro-economic impact of structural funds.

When it comes to newer member states, that is when the time lag kicks in, because it takes a bit of time to evaluate the specific impact of the pre-accession funding and the general process that took place when those countries adjusted to EU membership and single-market access. It is difficult to assess the impact on new member states, but we know intuitively that it will probably have more impact there than in the EU15.

Professor Fothergill: Yes, but in the UK, for example, we have had at least 20 years’ worth of really rather substantial funding from Europe. That funding has been skewed to particular places-to the poorer areas. It is simple to answer the question: are those places better off as a result of the layers of investment? The answer is definitely yes. You could point to places in which successive layers of European money have brought in successive layers of central Government money. What was investment in, perhaps, roads, and opening up sites and clearing derelict land 15 or 20 years ago is now feeding through to real jobs on the ground. There is a positive impact, but it takes time.

Q66 Chair: One final question. We said that if repatriation happened there might be a lack of guarantees-that Government might simply say, "Well that’s a nice contribution towards the deficit," and it would all go on some other purpose. In a country like the UK, would it not be possible for money to remain here? As part of the agreement, the UK could guarantee that it would allocate a certain amount of money for regional funds and would use them to reduce disparities in a particular UK way, and would guarantee that money for seven years? Could you not take that approach?

Professor Fothergill: The seven-year period is out of kilter with UK public spending rounds, of course. I have always understood that the present Government or their predecessors-

Q67 Chair: But the new deal for communities was done on that basis, along with the spending rounds.

Professor Fothergill: That involved much smaller sums of money; with the European structural funds, we are talking about over £1 billion a year. I am not aware that the Treasury embraces the idea of committing money beyond 2015. You cannot be bombproof in terms of changes in political power. What is a commitment made by one Government worth if a new Government take office, especially if they do so in different financial circumstances, as was the case in 2010?

Mats Persson: Yes. That’s the short answer. It is fully possible and desirable. I have faith in this place. I have faith in Parliament, because the Treasury cannot go round and not spend or spend money; it has to have approval by you guys, ultimately, and that is a comforting thought. It is fully possible because the politics, economics and everything else speaks so much favour in that kind of solution. It is a political and economic open goal.

Q68 Chair: Thank you both very much for coming and giving us your views, and for the entertainment you provided this afternoon. It was very interesting.

Examination of Witness

Witness: Baroness Hanham CBE, Parliamentary Under-Secretary of State, Department for Communities and Local Government, gave evidence.

Q69 Chair: Minister, you are most welcome back to the Committee’s inquiry into ERDF funding. We have already received evidence about it and there has been a degree of a difference of views. Can I begin by asking you whether the ERDF has really been an important source of funding to promote regional and economic growth, and remove disparities between different parts of the country? If you think that it has, is there any evidence to support that or is it just the general feeling that that is what has happened?

Baroness Hanham: I think that there is good evidence. If you look at some of the projects that the ERDF has funded, they are not the sort of projects that will necessarily receive national funding. They are very much start-up companies; they are support for new businesses, for fledgling entrepreneurs and sometimes for bigger regeneration projects that might not get funded.

ERDF funding does a very good job, and we would miss it very much if we did not have it. It is one of those funds that is local. The projects come from the local areas. You say that there is disparity. Of course, as part of the ERDF funding, it has to be given to the less well-off areas, so some areas, like the south-east, will get very little because they are not considered to be regions with too many problems, whereas Yorkshire and Humber, the north-east and the north-west will be receiving quite a lot.

Q70 Chair: We will come back eventually to the difference between regions but, according to your own Department’s figures, we are told £1 billion spent and 9,000 jobs created. That is £113,000 per job, which sounds rather expensive.

Baroness Hanham: I think that we are talking about 2007-13 programme. It is very important to understand that we are only halfway through that, and that money and projects can be put forward till the end of 2014. Our experience with the previous 2000-06 programme is that often the projects do not actually come into fruition till near the end. I think that we already have about 33,000 to 34,000 jobs and new businesses, and we expect that figure to go up very substantially.

Q71 Chair: So these figures are just about completed projects rather than about what we expect to see at the end of the programme.

Baroness Hanham: They are not what we expect to see. They are where we are at the moment. People have to get the programmes developed, sorted out and then get them going. When you look at some of the projects, you have to get young entrepreneurs with ideas who have to be supported to get on and then expand their jobs. There is a bit of a time scale.

Q72 Chair: But on the other side, I suppose the criticism might be that a region like Cornwall appear always to get the most ERDF funding that you can give it. It is always top of the tree in terms of any system of allocations. But it is still there the next time that we look at ERDF funding. It is still just as much in need as it was before.

Baroness Hanham: Cornwall is not straightforward ERDF. It is one of the convergence areas, which means that it is considered by Europe to be very much below the line. Yes, you may go through one programme and still not have achieved it all, but it has got a lot of work to be done in Cornwall so I am not surprised that it is carried through. The convergence funding is more focused than the ERDF.

Q73 Chair: But the fact is that it does not ever seem to get out of the bottom category. Is that a failure of the ERDF? Could we hope that, at some point, Cornwall will be pulled out nearer to the national average?

Baroness Hanham: No, I would expect and hope that Cornwall will be pulled up to the national average in due course and will not need convergence funding.

Q74 Mark Pawsey: Baroness Hanham, we accept that the purpose of the allocation of these EU funds is to help poorer regions catch up with richer ones, and you have just said that the south-east would get very little, but in the period of 2007-13, £200 million has been allocated to London. How would you justify that to residents of poorer regions?

Baroness Hanham: There are poorer regions in the south-east, and London has quite a number of poorer regions-if you go down south of the Thames, places like Hackney, Newham and Lewisham have pockets of deprivation. They have quite considerable pockets of unemployment and they are receiving funds to help them pull it up. I have to say that the London programme, of course, is managed by the Mayor and not the Department. So largely, whatever programme is put forward is run by and dealt with by the Mayor.

Q75 Mark Pawsey: But the programme is based on the GDP within regions, and the regional figure in London and the south-east is high. It is hard to look residents of poorer European and British regions in the eye and say, "We are happy for this money to go down to the prosperous south-east."

Baroness Hanham: You are actually moving into an area of how the money is allocated and where from. We receive an allocation from the European Union and we have to allocate that, but they do suggest regions that we need to support, and some of the areas then are picked up by that.

Q76 Mark Pawsey: So you would not support the case that money should really only go to the poorer regions. There should still be some allocated to richer regions.

Baroness Hanham: That will take us on to the argument that has been put forward on the next programme-from 2014-20-but at present, it is allocated by us to regions where we believe there is a problem, and London will allocate where it thinks it is.

Q77 Mark Pawsey: The strong case was just made to us in the previous evidence session that only countries with a GDP average of less than 90% of the EU average should receive funding. Do you not agree with that?

Baroness Hanham: The Government’s position for the future, as I am sure you know, is that the allocation should go very much to the least well-off countries. Therefore, richer countries such as Great Britain should not receive so much, but that is not the situation at the moment. There are transitional areas that are slightly better off, and then there are the less well-off.

Q78 Mark Pawsey: And if we went with the proposal of 90% below the EU average GDP as recipients of the funds, how much would Britain save?

Baroness Hanham: I have no idea what the figure would be, but we receive £2.8 billion a year in the programme.

Q79 Mark Pawsey: But we receive substantially less than we put into the fund. If the basis of the fund changed, presumably our contributions would reduce significantly.

Baroness Hanham: That would have to be an EU negotiation, because the structural funds are all part of the EU budget that we contribute to, and we get back whatever that proportion is. If we got it back in some way, first of all, we would have to completely renegotiate the system. There would have to be renegotiation by the Government of the structural funds themselves. Anyway, if we went to get it back, we would not at this stage get more than about 70% of it back, and it would take us years to do. So at the moment, we need to carry on the way we are.

Mark Pawsey: There is also a downside of moving to a 90% threshold, which is that there would be a significant adverse effect on Greece, Spain and Italy. How do you think we should deal with that problem?

Baroness Hanham: They have such huge problems anyway, but that again is part of the EU’s distribution of their funding. They are European states that are contributing to the EU and like everybody else, they will get funding back. If we were then able to move to a situation where we said the states that had the greatest problems got the greatest amount of money, that is a position we are taking and adopting for the future.

Q80 Simon Danczuk: Baroness, I am confused. Are you in favour of repatriation of the ERDF?

Baroness Hanham: Not under the present circumstances. I think there is an argument for repatriation. I hope that if it were repatriated, we would still get the same amount of money to spend in very much the same sort of way. But as I say, the Government’s position at the moment is that we should try to get the EU budget contribution down and then get a smaller proportion back for us. But I think there is no suggestion that we won’t get structural funds in the ERDF from the EU for at least the future.

Q81 Simon Danczuk: So the Government are not in favour of repatriating the ERDF?

Baroness Hanham: I think it is, but it is not practical at the moment. You can’t just repatriate funds at the present time. You have got to put it through the EU negotiations and you’ve also got to have agreement from the other member states, which I think we know we would find very difficult to get.

Q82 Simon Danczuk: But that is what the Government want to achieve?

Baroness Hanham: At the moment, the Government’s position for the next period of 2014-20 is, as I was saying, to achieve a reduced amount back for us and more for the less well-off states. For us-going back to Cornwall-I think that we would continue to get funding for Cornwall and we would probably continue to get a sum of money that we could distribute. But I think the ERDF will carry on for the time being and, in due course, if there is a way of repatriating, no doubt that will be discussed, but certainly not immediately.

Q83 Simon Danczuk: I am not particularly keen on going back to Cornwall, but in terms of 2014-20 would the Government not have preferred that to have involved repatriating ERDF back to Britain?

Baroness Hanham: As I say, I don’t know what the negotiations will be at that stage. As far as I am aware at the moment, we are sticking where I have said.

Q84 Heidi Alexander: Baroness Hanham, can I just check something? I think you said that your stated aim for the negotiations for the 2014-20 spending round was to get a reduced amount back for us-i.e. the UK-but to give more to poorer states. That is correct?

Baroness Hanham: That is the position that we have put forward for the 2014-20 round.

Q85 Heidi Alexander: How much do you want to negotiate the reduction in Britain’s contribution to the EU in order to achieve that, because presumably you have got a figure in mind? It is not just that you would give the same amount of money into the EU and get a reduced amount for the UK but more to poorer states. So could you just explain some of the figures around that?

Baroness Hanham: I’ve no idea what the Government, or the Treasury, are wanting to reduce the amount by, but the position is that there will be, or should be, a reduction. This is not something we can do on our own; again, it is something that has to be done with all the other member states. We would put forward our position and if it were agreed, then that would be agreed. But I think that in the economic situation we are in at the moment, and that all the other countries are in, there might be some enthusiasm for reducing the contributions.

Q86 Heidi Alexander: Can I just clarify something? If it was the case that you could not get an agreement around a reduction in the UK’s contribution to the EU, presumably your position would then change about having less money back from the structural funds and more money going into poorer countries and those poorer regions?

Baroness Hanham: I think our view will remain that, but if the situation was that, as you suggest, there was no change and the structural funds remained the same and the contributions coming back were the same, it wouldn’t make sense, I think, for us to refuse to take them, because it doesn’t get us anywhere; we are just left contributing to the budget and we’re not getting any benefit back from it in this term. I’m sorry; that sounds a bit generalised, saying "not getting any benefit". But in terms of the ERDF, we wouldn’t get any benefit from that.

Q87 James Morris: May I just ask a couple of questions about the transfer of responsibilities for distribution of funds from the RDAs to your Department? We have had some evidence from local authorities that there have been delays with projects, problems with payment and so on. What are you doing to tackle these problems?

Baroness Hanham: I’m slightly surprised, I think, about that. We inherited from the 2000-06 programme very substantial liabilities building up. Those were on the basis of the RDAs managing the programmes, or not. There was about £260 million falling on to the DCLG’s account. When the RDAs were abolished, we decided that the most sensible thing was to bring the management back into the centre, and then leave a local emphasis for delivery. I don’t think that there has been a huge hiccup in terms of payments from the centre, for that, and the projects, of course, are only paid for as they achieve certain levels.

Q88 James Morris: Have there been any examples of projects that haven’t been approved that were expected to be approved, as a result of the changes-things that have slipped through the net?

Baroness Hanham: As far as I know, there are not all that many that haven’t been approved and are ready to go.

Q89 James Morris: We’ve got some evidence, actually, from one of the authorities that I represent in the west midlands, that there have been problems with the ERDF not being allocated to innovative projects, and there have been administrative problems around that. Why do you think that’s happening? Do you think that is true?

Baroness Hanham: I don’t know the particular case, obviously, but what often happens in those cases is that the way the project is set up does not conform with the EC regulations. If it does not conform with the EC regulations then it cannot be carried out; if it is carried out, we are in danger of having the money clawed back and the project put into even more-

Q90 James Morris: So, if I am hearing you right, is the process snuffing out potentially innovative and risky projects that might have benefit?

Baroness Hanham: No, I don’t think so, but I think what it is doing is protecting them, in a way, so that they are set up to go in a way that ensures that they will be able to fulfil what they are trying to fulfil from the outset.

Q91 James Morris: Have there been considerable administrative savings from the transfer from RDA to the Department? Has that delivered savings to the public purse?

Baroness Hanham: It has delivered some, but probably not as much as you would suspect, because we have left, in the regions, project development teams. We’ve got the local management committees as well.

Q92 James Morris: Is that the bleeding stump of the RDA, as it were?

Baroness Hanham: It is the experience; but what has changed very much is the fact that all the control-the management and the control of the funding-is now managed at the centre, which means that there is very tight control of what is being spent and what is going out, rather than what I think can be termed rather floppy control in the past.

Q93 Chair: Just looking at the Government’s approach on localism, generally this might be seen as a centralising move. Do you see any role for city regions or cities as part of the city deals getting more control over ERDF spending in the future?

Baroness Hanham: I think the Commission would quite like that. I don’t think we have made any decisions on it yet, because nothing has come forward that would deal with that; but I was talking to Commissioner Hahn a little while ago, who is in charge of all the RD funds, and they are certainly very enthusiastic in the Commission about cities and city deals.

Q94 Chair: Right. The Commission is enthusiastic. Are the Government?

Baroness Hanham: I am reserving my position on that because, as I say, we have had no applications, and no real thoughts about it, but if there are good projects put up, that are supporting regeneration, or supporting small businesses or new businesses-we need growth, as you know, wherever the growth comes from-I think we would consider it.

Q95 Chair: So the challenge is out there to city regions to come forward with the ideas, and then you’ll agree them.

Baroness Hanham: I think that that might be a challenge.

Q96 Heidi Alexander: Can I just ask about the spending of the current ERDF money within England at the moment? I think DCLG provided us with some figures that suggested that, by January of this year, 93% of ERDF money for England had either been contracted, applied for or spent. Yet when you actually look at the figures for the amount of money that has been contracted so far, that falls to 63%, which means that basically a third of England’s ERDF allocation needs to be contracted before the end of next year. Can you tell me how you and your Department are going to ensure that this money is used effectively?

Baroness Hanham: Quite a number of projects are in the pipeline and are set up-not contracted yet, but are set up, coming forward, have got match funding and are ready to go. We know that within that, 93% were either contracted or ready to contract. Moving on from there, we also have the local management committees in the local areas working up projects as well, and we expect that within the next year-well before the end of the time-we will have probably 100%. We do not expect to hand back money to the EU; we expect it to be spent.

Q97 Heidi Alexander: Okay. So if there were some underspend within a particular region, given that you do not want to be handing that money back, is it possible to transfer moneys from one region where there has been an underspend to another English region?

Baroness Hanham: It is easier to transfer it from one project to another within a region.

Q98 Heidi Alexander: So that is a possibility.

Baroness Hanham: Yes.

Q99 Heidi Alexander: But is it possible across regions?

Baroness Hanham: No. I was going to say that you could not, and you cannot. You cannot transfer money across regions.

Q100 Heidi Alexander: Okay. Can I ask what the Department’s position is on over-committing some of the spending at the moment, given the possibility of underperformance? You have this desire to make sure that all the money is spent. What is your Department actually saying? What is your position on over-committing spending?

Baroness Hanham: A small amount of over-commitment would be perfectly reasonable in order to ensure that the money is spent. It is a bit like British Airways; you probably run the risk then of not getting a seat. It makes sense to do that.

Q101 Bob Blackman: One of the issues for local government right across the whole of the UK is identifying match funding for the ERDF. What is your view on the current position? Many councils report through the LGA survey that the problem is that they cannot get the match funding, so the projects fall apart.

Baroness Hanham: Our experience now is that there are really quite a lot of areas for match funding. There are a number of bodies and the Government have a number of pockets now for match funding. The difficulty with match funding is people going out and finding it. I think you had Steve Fothergill of the Industrial Communities Alliance with you, and that organisation is putting together a guide for local authorities as to where they can get match funding from, because one of the difficulties is that they do not know where to go. Mark Prisk from BIS and I sent out a letter to local authorities a little while ago reminding them of where the various budgets or the various elements that can be used for match funding were. We are also finding that academies and universities are beginning to join in on this, and that where the local projects are worked up by the LEPs, they are bringing together quite unusual people to match fund. So I think there has been a hiatus, but I am beginning to see that work out.

Q102 Bob Blackman: One of the areas that is suggested is the regional growth fund. Have any projects been successful in using that for match funding yet?

Baroness Hanham: We have been quite disappointed in the regional growth fund. We had none at all in the first round. I think I am right in saying that 10 projects went forward in the next round, of which three so far have been agreed. I would like to see much more coming out of the regional growth fund because, after all, it is all working in the same direction-to get businesses up and running and to achieve growth. We are looking hard to see how we make sure that they fit the regional growth criteria.

Q103 Bob Blackman: Taking that, one of the suggestions we have heard in evidence is that the regional growth fund should be top-sliced and then allocated against ERDF projects, so that we get the matching funding-so that we get our money that we are already paying to Europe back into the regions-together with the regional growth fund, and actually getting some growth on the ground.

Baroness Hanham: I am sure it is a lovely suggestion, but I have not heard anything that would indicate that that is about to come about. They have not suggested it.

Q104 Bob Blackman: Clearly, suggestions have come forward to us in evidence from a variety of areas, suggesting that as a course. What we are looking at is the Government’s view on those suggestions. From your perspective, are the Government going to look at this as a serious possibility?

Baroness Hanham: From my perspective, I don’t know. To be fair, it is something that has been suggested, and we can take it forward. Of course, it is nothing to do with the Department in terms of how it is allocated.

Q105 Bob Blackman: So, what are the Government going to do to make match funding easier to gain?

Baroness Hanham: The Department, BIS, is doing what it can to make sure that there are areas that funding can come from. As I have said already, all the projects that we have so far, including those in the pipeline, have found match funding. I do not say that it is easy, but I do say that it is there.

Q106 Bob Blackman: But given that the growth in public expenditure is under severe constraint and that local authorities and other bodies are saying, "Well, we haven’t got the money that we once had," identifying specific funding to provide match funding is very difficult indeed. Where are local authorities to get it from?

Baroness Hanham: I can tell you where they get it from. There is a Growing Places Fund. We have Business Coaching for Growth, broadband, the Coastal Communities Fund, the Technology Strategy Board and the regional growth fund. Then there are the universities and private funding. Where there is a project that has a lot of support behind it and is seen to be something that is really worthwhile, the funding, on the whole, can be found.

Q107 Bob Blackman: Clearly, projects initiated by some local authorities and other public bodies have literally fallen apart and have not got ERDF funding purely because they cannot get match funding. What is your message to those local authorities and other public bodies?

Baroness Hanham: My message is to keep looking to see where that match funding can come from. I do not say that it is easy; I was not suggesting that it was easy. What I am saying is that there are areas where match funding can be found, particularly where the local management committees and LEPs are in a strong position to feel out into the communities to find it.

Q108 Bob Blackman: Your Department’s guidance at the moment precludes the use of the private sector. Why preclude the private sector?

Baroness Hanham: I’m sorry. May I just check? [Interruption.] Yes, the private sector can contribute, apparently.

Q109 Bob Blackman: According to the guidance that has come from the Department, other European funds and the private sector cannot be used for match funding.

Baroness Hanham: There are other European funds.

Q110 Bob Blackman: Or the private sector. I would be delighted if private sector funds could be utilised, but it appears that the guidance suggests that they cannot be.

Baroness Hanham: My advice is that private sector funding can be used for ERDF. We will look at what the guidance says.

Q111 Bob Blackman: It would be very helpful to clarify that for all the various different organisations which, at the moment, think that private sector funding cannot be used for match funding purposes.

Baroness Hanham: If that is so ambiguous, we will certainly get it changed.

Q112 Heidi Alexander: It all seems to be a bit of a mess. There is confusion about how we are going to get match funding to these projects for which ERDF funding is available. On the regional growth fund in particular, have you had any conversations with the Chair of the advisory committee, Michael Heseltine, about the problems with getting match funding for ERDF projects? What have you discussed with him about this problem?

Baroness Hanham: I have not personally, but the Secretary of State has. I know that they have discussed it because we were so concerned about not getting any in the first round that discussions have certainly taken place. As a result, we got at least the tail end of the second round, although they were not all agreed. So, yes, those discussions have taken place.

Q113 Heidi Alexander: Just to clarify, it was just the three projects that actually got it?

Baroness Hanham: It is three projects so far that have had support.

Q114 Chair: I hear what has been said about the fact that we should not lose any ERDF through lack of match funding in this round. Unless the Government take a strategic view on this, is there not a danger that projects that have the best outcomes may not be the ones that get funded because match funding cannot be found and that other projects will go ahead because match funding is available? Is that not the Government not having a strategic approach to this matter?

Baroness Hanham: I am not sure that it is the Government not having a strategic approach. I think the approach is the ERDF money is there. It is there for projects that can be approved and that get the match funding. There are areas that we know that we have to match fund for, because those are laid down by the European Commission. There are four areas at the moment that we have to support. I guess the answer is yes; if you cannot get money, you probably cannot put forward your best projects. But I think we are happy that the projects that are coming forward fit the criteria, do the job and contribute a lot to the growth.

Q115 Chair: That wasn’t quite my point. I am not disputing what you are saying. I am asking: might there be some even better projects that might fail because they, in that particular area, do not have an identifiable match funding pot to put against the ERDF?

Baroness Hanham: I suppose the answer to your question is probably yes, if they cannot convince someone else or another funding body that what they have is a really good project.

Q116 Chair: Is it not possible that the Government might like to think about the suggestion that Bob Blackman made a few minutes ago, about some element of top-slicing on the regional growth fund, so that that could be used in those cases where you have potentially very good ERDF bids that could not find match funding from elsewhere?

Baroness Hanham: I have no idea what the view would be-

Q117 Chair: With respect, you are a Minister.

Baroness Hanham: I know. I am a Minister-I quite understand that-but I am not the Treasury, nor am I the Secretary of State. Any negotiation on the regional growth fund will be done by the Secretary of State, and I am sure the Treasury will have a view on top-slicing.

Q118 Chair: You might like to communicate back to both of them that this is an idea that might be worth considering.

Baroness Hanham: I will say that I was asked the question and that I did not proffer a firm answer, but I am sure that that is something that they would want to consider.

Chair: Okay. Maybe at some point we could have a note on that.

Q119 Mark Pawsey: Baroness Hanham, I want to ask you some questions about the recent management of ERDF projects, specifically error rates and interruptions to funding that have arisen as a consequence. I understand that there have been two interruptions: from September 2010 to December 2010 and between March 2011 and July 2011. I wonder if you could explain to us what the errors were that led to these interruptions, how they came about, and where responsibility lies. Is it simply a question of poor management? Does responsibility lie at the door of the RDAs that were managing the projects previously?

Baroness Hanham: These are ERDF funds rather than the interreg ones. These interruptions came about because the criteria that the money had been lent against were not being met. Once these projects are audited by us and by the European Commission, if they find that there is anything at all that is not being fulfilled as far as they are concerned, they will either claw back the money or stop the project until it conforms.

Q120 Mark Pawsey: Could you give us an example of a project that has been stalled in this way?

Baroness Hanham: What they do is not stop the money going to the project, but stop the money coming to the Department. I think that for the two that you were talking about, up until now, we have kept funding until it was sorted out.

Q121 Mark Pawsey: So there has been no effect on the projects?

Baroness Hanham: No. The interruptions have been to our money.

Q122 Mark Pawsey: But if any of the interruptions lasted for longer, would there have been an impact on the delivery of some of these projects?

Baroness Hanham: Only if they were so seriously out of kilter and had made such serious errors and mistakes in how the money was being funded, it might be that we had to stop them.

Q123 Mark Pawsey: Have you any idea of how these errors came about?

Baroness Hanham: They came about because either the project itself did not conform to the regulations-

Q124 Mark Pawsey: In which case they should not have been approved in the first place.

Baroness Hanham: Indeed they should. They have all been 2000-06 projects. Or the RDA did not monitor them closely enough to see what was being done.

Q125 Mark Pawsey: So by abolishing the RDAs and bringing this in house into the Department, can you be confident that such interruptions will not occur in the future?

Baroness Hanham: Yes. I am much more confident than I could have been if I had anything to do previously.

Q126 Mark Pawsey: Because there is more activity taking place now.

Baroness Hanham: Because there is far more hands-on management of budgets and because the people who are in the localities-the project development teams-are not on their own. They do not have pots of money; they have to refer back and they have to come back to the centre continuously, so that we know exactly what they are doing.

Q127 Mark Pawsey: So you are happy that there is a much greater sense of accountability than existed previously.

Baroness Hanham: Absolutely.

Q128 Chair: I am pleased to hear that. Do we take you to mean that there are actually monitorings of outcomes as well as of inputs? One of the criticisms in the past has been that you might be able to show that the money has been spent, but what is achieved is not necessarily-

Baroness Hanham: Yes.

Q129 Chair: Okay. Again, would it be possible to have a note about that improvement, because the monitoring of output is particularly important? Without going into detail this afternoon, it might be helpful to find out what is happening.

Baroness Hanham: Absolutely. I think that part of it is within our statement, but we certainly feel that it is good.

Q130 Chair: Thank you. I want to come on to the future and come back to the issue of repatriation, which the previous Government were in favour of. I understand that they could not achieve that because of lack of support from other member states, and that may well be the case when we come to look at 2014-20. What is the Government’s position? When you go into the negotiating room, will you be arguing for repatriation or not?

Baroness Hanham: The Government’s position for 2014-20 at the moment is all I can tell you now.

Q131 Chair: Exactly. That is what I asked about.

Baroness Hanham: 2020 is a very long way off and things may change. I cannot tell you about repatriation in those terms for 2020 onwards.

Q132 Chair: No, 2014-20.

Baroness Hanham: On the 2014-20, we have not asked for repatriation. We have asked for a reduction in the budget and for the money to be allocated to the less well-off states and the less well-off regions.

Q133 Chair: So, repatriation is not the Government’s policy.

Baroness Hanham: Not for 2014-20.

Q134 Chair: Okay, I understand that. In terms of the position on how money should be spent, there is this third category of regions, between 75% and 90% of the EU average GDP. If the Government’s policy is about having less money back to this country to spend, are we now not in favour of helping that particular group of regions?

Baroness Hanham: I think it would be second on our list. They are the transition regions. They would qualify for sub-ERDF. It would depend how much money we actually get back and how much can then be allocated.

Q135 Chair: If the Government were successful in restricting the budget to how much they thought was desirable, which is the Government’s policy, does that mean that this group of regions would get squeezed out?

Baroness Hanham: It would mean that we would go for the regions that were the least well-off.

Q136 Chair: So does that mean that this group of regions, the third category at 75% to 90% of EU average GDP, would be squeezed out in that scenario?

Baroness Hanham: Some of them might be. They would not be totally squeezed out.

Q137 Chair: But they would get a lot less. These would be the ones where the reductions would come.

Baroness Hanham: They would get less.

Q138 Chair: One of the criticisms that we have had is that when some organisations, particularly smaller ones, are trying to get projects together, they have got ERDF funding, other EU sources of funding, regional funding and Government funding and they are trying to pull them all together. Is there any way that that could be simplified or will the Government be arguing for simplification as part of the settlement from 2014 onwards?

Baroness Hanham: The money is going to individual projects. Is that what you are asking about?

Q139 Chair: Yes. They often draw down on so many funding streams and different funding streams from Europe itself. Is there any way of simplifying the process that the Government would like to see?

Baroness Hanham: I think not at the moment, probably.

Q140 Chair: Are we putting any ideas to the Commission about how that could be done?

Baroness Hanham: We will put forward some ideas to the Commission on it. We have not been, but I think that your point is very well made.

Q141 Chair: Again, if we could have a note at the time when those are put forward, that would be helpful. When we had Dr Palma Andrés from the Commission last time, he said that the Commission had put forward a proposal that 5% of ERDF should be ring-fenced for integrated actions for sustainable urban areas. It was quite keen on that, but the UK Government were not and had opposed it. Do we know why?

Baroness Hanham: No, I am afraid not. Would you like a note on that?

Q142 Chair: It looks from the expressions behind me that a note would be highly-again, a note on that might be helpful.

Finally, in terms of conditionality, is Government policy in favour of funding conditionality and how might that work in the rather tricky circumstances that some countries are currently facing?

Baroness Hanham: I am sure that I ought to know what conditionality means, but I do not.

Q143 Chair: It is basically conforming to overall EU requirements on budgets and other arrangements.

Baroness Hanham: I think that the broad answer to that is we will have to conform, because otherwise we will not get any money.

Q144 Chair: It is other countries probably, rather than us. If Greece or Spain were not conforming and were taking longer to make adjustments that had been required of them, technically they could have the whole of the ERDF funding stream switched off. What is our Government’s position on that?

Baroness Hanham: It would require the whole of the EU to agree to that, I think.

Chair: I think conditionality does mean that that could happen, but of course there is always potential to waive conditionality where appropriate. I wondered if the Government had a policy on that.

Baroness Hanham: Do we have a policy on this? We are apparently not keen on conditionality-if that is a policy. We are not keen on it.

Chair: Right. It sounds like a policy to me, so I will accept it as such.

Q145 Bob Blackman: The Commission published the common strategic framework and also the draft partnership contract, which are now out to consultation. Do you know when the Government will respond formally? If we could have a copy of what response there is, that may well inform our report.

Baroness Hanham: They will respond within the time frame. In the summer. We will be responding in the summer.

Q146 Bob Blackman: In the summer. How long does the summer stretch for?

Baroness Hanham: In July.

Q147 Bob Blackman: Is that on the common strategic framework as well? The partnership, we know, will have a response in July, but for the common strategic framework, apparently consultation is ongoing. We do not have any dates for a response according to the evidence that your Department has supplied thus far.

Baroness Hanham: If I had thought that you were going to ask that question, I would have had the answer. For the common strategic framework, the response will be by the end of June. I am sorry not to have known the answer to that immediately.

Q148 Heidi Alexander: Just going back to the issue of conditionality-I appreciate that you are not keen on it-it is perhaps not for this afternoon, but I think it would be useful to have the reasons for the Government’s position on conditionality. Perhaps a note to the Committee would be useful.

Baroness Hanham: I am happy to do that.

Chair: Thank you very much indeed for coming to give evidence this afternoon.

Baroness Hanham: Thank you very much.

Prepared 15th May 2012