Friday, July 21, 2006

MANAGING STRUCTURAL FUNDS AND INSTRUMENTS

MANAGING STRUCTURAL FUNDS AND INSTRUMENTS
ADDRESSING THE ABSORPTION CAPACITY IN THE NEW MEMBER STATES
Mr Stephen O’Sullivan
Assistant Secretary
Banking Finance and International Division
Department of Finance, Ireland
______________________
Introduction
The enlargement of the Union to 25 members and the prospective further enlargements present unprecedented challenges for the Union as a whole and for its constituent Member States. One of these concerns the successful and productive absorption of the very considerable volume of resources to be transferred from the Member States with above average levels of development to those which are catching up.
There are many aspects to the challenge of absorption. I will say a few words about the overall level of financial commitment involved and talk about the challenges that we in Ireland had to overcome in utilising the funding placed at our disposal from the Union Budget over the years. I am fully aware of course that what may have worked reasonably well in one particular setting does not necessarily constitute a model which all will find appropriate for their particular circumstances. Nonetheless, I do hope that some of the lessons that we ourselves have drawn from our experience of planning, drawing down and implementing the Funds will resonate with you.
My main messages to you today will be
The absorption challenges facing the new Member States are greater that those which we in Ireland had to address;
We overcame our challenges by concentrating on partnerships and planning. The main focus of this paper is around these points; and
Our efforts paid off. Thanks to the structural funding transferred to us by our fellow EU Member States, Ireland’s level of GNP on a sustained basis will be 2.5% above what it would otherwise have been.
The scale of the challenge
The scale of the absorption challenge facing the newer Member States is undoubtedly greater than that which we in Ireland had to overcome. Ireland joined the Union in 1973 at a time when our per capita income was around 60% of the EU average. Between 1973 and 1986, Structural Fund receipts averaged 0.9% of GDP per year. From 1987 to 1992 and again from 1993 to 1999, the annual average level of transfers doubled to 1.9%. Since then, these receipts have fallen sharply and now run at under ½% of GDP annually. Obviously, this will decline further in the next financing round.
A few simple points emerge from these data. First, the scale of the financial challenge facing the new Member States is double that which it was for Ireland, at its peak. Second, we in Ireland moved gradually up to that peak over a number of years. The step change in the level of funding inflows for the new Member States is much steeper than that which we had to surmount. Third, the inflows to Ireland were sustained for a very long period indeed. Between 1973 and 2003, Structural and Cohesion Funds receipts averaged 1.3% of GDP. This is a considerable period of time over which to learn from mistakes and to embed the funding flows into the mainstream of annual and medium-term budgetary planning.
Ireland was fortunate in other respects also. While some of those advantages are shared by a number of the newer Member States, others are not.
First, we are small. When it comes to planning and coordination, that helps a lot. Second, ours is a relatively centralised system and that helps too. In saying that, I am fully aware that the broad trend is towards decentralisation and devolution but there is no doubt in my mind that purely in terms of the effectiveness with which plans can be drawn up and integrated with mainstream macroeconomic management, a relatively centralised system has its advantages. And when you are dealing with flows of the order of 4% of GDP annually, their integration with national economic and budgetary planning is vital. Third, in planning to absorb and apply the Structural Funds, we were from the very outset building on a system and structure which was already there and which had to be developed rather than invented. Finally, the scale of the economic development gap which we were attempting to bridge was less than that currently facing some of the new partners.
These are just some of the factors which suggest to me that the challenges facing the new Member States are greater than those which we had to surmount. They are also some of the reasons why the Irish experience is not necessarily a model which will work for all. But for what it may be worth, I will describe what I think were the main elements in our relatively successful absorption record in the hope that some of the points will be of value to you. And it has been, I would argue, a good track record. During the 1989-93 programming period, Ireland was able to absorb something of the order of 95%+ of its Structural Funds allocation. For the 1993-99 Cohesion Fund round, we claimed in excess of 99% of our allocation. Under the current round, we had claimed in excess of 93% of our allocation by the end of 2003.
The keys to success – partnerships and planning
Successful absorption is not just about pulling in the money, it is also about using it well. If I had to sum up in just two words the key to Ireland’s story, those words would be partnerships and planning.
I said just a moment ago that a relatively centralised system has been one of the factors explaining our good record. Let me now explain and qualify that. The key decisions on the application in Ireland of available Structural Funding are made by central Government on the basis of recommendations made to Government by the Department of Finance. As this Department is also responsible for economic and budgetary planning, including taxation policy, this would appear to be a very highly centralised system of decision-making. However, it is necessary to qualify that view by looking at the process by which the decisions are reached and this is where partnership comes in.
Your first partner – the European Commission
The key partnership is of course that between the Member State and the European Commission. The many legal and political responsibilities of the Commission in this domain embrace regulatory issues, the efficient and proper execution of the EU budget and the consistent pursuit of an economic development agenda in individual Member States which is consistent with the overall goals which the Union sets for itself. This gives the Commission a central role from the highest political level down to desk officer level in influencing programme design, monitoring execution, evaluating the results and achieving financial closure at the end of the funding round. Furthermore, aside entirely from the legal rights and responsibilities of the Commission in this process, individual officers within the Commission are a rich and helpful resource and, in our experience, are of particular value to smaller Member States. So my first recommendation when it comes to successful absorption would be to establish and nurture a genuine working partnership at all levels with the Commission. There will be many occasions when views will diverge and when you may feel, sometimes rightly, that the Commission has got it wrong or is being unnecessarily inflexible but the core point here is that the Commission fundamentally shares your interests in terms of an efficient and effective application of the available funding. It is your first partner in this process. While the final sign off domestically on the National Plan is obviously made by the national Government, the Commission will have been a key partner at all stages in the development of the proposal put to Government.
Domestic partnership – the central Government sector
So also will the domestic actors in the process. The quality of the domestic partnership process is of prime importance in ensuring successful absorption. While the partnership with the Commission is a factor common to all Member States, the nature of the domestic partnership process will differ from country to country.
Domestic partnership starts within the central Government sector. In Ireland, the Department of Finance carries out many of the coordination functions at central level. We do not have a separate Ministry dedicated wholly to regional policy including Structural and Cohesion Fund matters. There may well be disadvantages to this, of course, but one of the advantages of Ireland’s set-up is that centralisation facilitates the integration of the Structural Funds with the domestic budgetary forecasting decision-making process. There is in my view a lot to be said for relatively centralised arrangements for drawdown, accounting, application and monitoring but of course systems of government differ and one size will not always fit all. However, in countries where the functions are dispersed across more than one Government Department, effective coordination along agreed policy lines is clearly vital especially at the planning stage.
Wider Social Partnership
The partnership between central Government and the regional actors can be seen as a special case of the wider process by which decisions are reached on the domestic economic development agenda. In Ireland’s case, that wider process is quite formalised. There has been in Ireland since 1987 a structured partnership encompassing Government and the representatives of the main economic and social interest groups. Originally conceived in the context of arriving at a national consensus on pay developments, the remit of this partnership soon expanded to include discussions across the broad spectrum of economic and social development priorities. Since 1987, six three year agreements have emerged from this process. This social partnership has made a significant contribution to our economic development. It has been used as a forum wherein opinions can be expressed on the development priorities which should be addressed in the National Development Plan and on results obtained. It has contributed to the building of a consensus on the contents of the Plan and has thereby facilitated the absorption of available Union funding.
PLANNING AND Implementation
Developing and perfecting the overall strategy is not sufficient in itself. Delivery structures play a major role in assuring a high level of absorption. I would see the important issues as these:
Early political agreement and broad consultation
I have already mentioned the quality of the partnership at domestic and EU level. In addition, I would emphasise the need for early political agreement for both the content and process of the planning procedure. This is particularly necessary to strengthen the ability of the key officials to deliver on the chosen strategy. Our experience is that political agreement should be concerned with the over arching issues and not with the detail of programme.
Ex-ante evaluation
A good ex-ante evaluation will help ensure that the operational elements of the programmes are consistent with the objectives. It will also improve the reliability cost and demand forecasts. Programme designers, therefore, need to fully consider the ex-ante conclusions. Despite our best attempts, it is not always possible accurately to cost schemes which will be implemented over a seven year timeframe. We have found that conditions will change with implications for the outturn on costs and demand. I am happy to see the initiative being pursued by the Commission and the EIB in this regard with their proposals for the JASPERS and JEREMY support programme for the new member states.
Delivery Structures and Administrative Capacities
Our experience suggests that it is better to build on or adapt existing delivery structures rather than to establish new ones. Inevitably, new structures take longer to develop the relationships and working modalities that are needed for effective implementation, particularly in the early years of a Plan. Existing structures, even if they have to be adapted, have operational resources and experience, and here I am speaking in organisational and human resource terms, which can be of immediate benefit to the roll out of programmes. Success lies in the effectiveness of administrators and managers. They need to have the technical skills needed to supervise programme execution. Officials should have active engagement with Commission officials.
Flexible Programming
The Commission will agree the financial plan at the CSF and operational programme level. There is little freedom on how the EU commitments are allocated across the years, as they must inevitably match with the Financial Perspectives. The programmes will take some time to get to full implementation status due to such reasons as the setting up of control arrangements, promoting schemes, and processing project applications. Therefore, in order to avoid losses under the N+2 Rule it is necessary to ensure that you have a mix of some high spending elements in the operational programmes. We have relied on some of these “winners” in the early years of implementation to ease the pressure on slower spending schemes and those that take more time to roll out.
Accessibility to Project Promotors
Too often good schemes fail because inadequate thought has gone into communication with the potential beneficiaries or the process for accessing funding is made too complex. You need to design schemes to be easily accessed by the target group for which they are intended. We have found it useful to provide resources to support the project promotor in preparing applications. This has the added advantage of ensuring an efficient project selection process by raising the quality of the applications.
Project Pipeline and Project Selection
I think Ireland has a number of useful experiences with respect to organising the project pipeline or stream. I like to describe this as parallel project development in that a number of projects are at different stages of development at the same time. In Ireland, strong central control ensured that only critically important and strategic projects were developed initially. However, given the certainty with respect to funding, we also pursued a policy of developing the next tier of projects in order to ensure no discontinuity in effort.
CONCLUSIONS
I’m aware that I have taken a broad interpretation of my brief here today. I have perhaps strayed outside the question of “Managing Structural Funds and Instruments” to consider some of the issues which arise at the macro level in tackling the question of how best to absorb available EU funding. In conclusion, let me say that

The absorption challenges facing the new Member States are greater that those which we in Ireland had to address;
The key to successful absorption is to focus on partnerships and planning;
The first partner is the European Commission whose desk officers are a rich and helpful resource, especially for smaller countries;
On the domestic scene, early political agreement is vital as are excellent relations across the main central Government agencies involved;
A relatively centralised system facilitates the integration of the Funds with decisions on the domestic public expenditure;
This has to be balanced by very broad genuine consultations with the key domestic actors;
On the planning side, good ex ante evaluation is the key;
Where possible, build on and adapt existing delivery mechanisms;
Focus on high spending elements early in the programming period;
Financial absorption is not an end in itself. What matters is physical investment and projects delivered. Project cost inflation can lead to a situation where the financial absorption record looks good but the actual content is less than planned;
Resource those seeking to access schemes, especially when it comes to smaller community-based and demand led schemes;
Do not wait until your plan is approved before you start thinking about your projects. It is essential to think of how projects will be developed at the earliest possible stage. Despite failure to agree the Financial Perspectives, all member states should be working on how to ensure a ready stream of projects for the new programming period;
Administrative capacity most be reinforced with ability, not numbers of personnel. The aim should be to use modern management methods and structures in support of the Funds. Members States can be innovative in their own right in this regard.

Thanks for your attention

12 October 2005

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