Sustainable Prosperity for Europe

The EU Budget


How to add value with future EU spending? - Workshop held by the EPC in cooperation with the CoR

18 February 2011


Bas Verkerk, Mayor of Delft (NL/ALDE), Member of the Ad Hoc Commission on the EU budget, Committee of the Regions (CoR) opened the Workshop by saying that the EU needs to focus on being more efficient, more visible, and more focused in its expenditure. This is a broad political message, which raises the question of how can the EU be more efficient and visible?

The solution is to make better use of multi-level governance in planning and implementing the European project. The Committee of the Regions (CoR) supports the EU Commission’s plans for greater investment and the development of partnerships between Member States – local and regional partnerships on one hand, and the European Union on the other. Involving cities and regions in policy-making leads to better and more efficient expenditure, so a multilevel governance approach is extremely important.

Following the same logic, the Committee also supports the idea of territorial pacts so that Europe 2020 works down into the regions. The new Europe 2020 monitoring platform has shown that results are much better when cities and regions are involved in implementation and assessment. There needs to be appropriate ownership of the innovative knowledge-based economy that was already part of the Lisbon strategy.

Mayor Verkerk said that in 2010 €194 billion were not spent because Member States could not come up with the necessary co-financing. This was not only a consequence of the economic crisis, but also because European added-value was not sufficiently demonstrated. Member states would rather have the money that they pay into the European budget back, and spend it themselves. The idea of added-value, the accelerating factor, and the multiplier factor all get lost in the process.

The Mayor said that it was important to cooperate further and try to maintain European added-value. The CoR can turn added-value into reality – it is not just a question of cooperation between the various governments, but also public private cooperation. This could be done in a much better way, so that public authorities do not carry risks disproportionately. The possibilities offered by the European Investment Bank, and the specific added-value of European Project Bonds, should also be considered.

In conclusion he said that management of European funds was ‘not going well’, as the European Court of Auditors had pointed out. There is still too much room for error in implementation, even though the error rate had been reduced somewhat.  The EU needs to work further towards the simplification of administrative rules, and ensure that there is greater transparency. ‘We need a more results-focused approach’, he said.

Iain Begg, Professorial Research Fellow, London School of Economics, began the panel discussion by introducing from the beginning a note of cynicism. ‘Has anybody ever come up with the idea of worse spending’, he said. ‘I rather doubt it’. Everybody is in favour of better regulation, and better spending. Nobody wants to impose new regulations or red tape, it just always seems to happen.

Referring to Europe 2020 and the ‘extremely well-known trio’ of underlying objectives, smart, sustainable and inclusive growth, he said that the smart component is easy – it means innovation and research programmes. But not all innovation is growth-promoting, nor is all growth reliant on innovation. Better spending doesn’t always equate to innovation, it is necessary to consider a larger picture of what will be smart growth.

Mr Begg said that sustainable growth is often equated with ‘green’, although the original conception of sustainable within the sustainable development strategy encompassed both competitiveness and social cohesion. In the EU budget review sustainable was equated with the agricultural policy. So it is important not to neglect other dimensions of sustainability when considering what kinds of spending are good from the point of view of sustainable.

He said that inclusive growth was the component most of interest to the CoR because inclusive in the EU budget review was equated with the cohesion policy – a distinctive EU approach. This is partly about the employment rate, but also includes a wider sense of social inclusion. It goes beyond just thinking of inclusive as being just bringing in different regions.

Turning to the notion of ‘better’, he said that one simple conception of ‘better’ is paying less that expected. This requires a clear specification of goals and expectations, and may mean adopting state-of-the-art procurement practices. It also needs sufficient competition in procurement and ensuring that projects are well managed. This might be regarded as the managerial approach to what is ‘better’.

A second way a looking at what is ‘better’ is to consider value for money, where the key concern is quality. This maintains a link between price and quality, an important consideration in thinking of regional development especially. It can also be interpreted in terms of ‘impact’ – does the amount spent achieve an impact that is regarded as desirable.

A third aspect of ‘better’, especially in the context of European-level spending, is to consider externalities, especially cross-border. How does what is spent in one area have an impact on another, for avoiding negative and positive spill-over effects to other localities.

Mr Begg then turned to the ‘elusive idea’ of European added value. ‘Everybody knows what it is but nobody can define it,’ he said, ‘which is a recipe for confusion’. Part of added value was subsidiarity – determining which areas of spending ought to be a European level.

The test involves deciding whether lower levels of government can do it adequately, and, if a higher level of government is required does it need to be done through spending? A third element is keeping spending proportionate – too much money can be a problem. If these tests are passed then it is worth allocating to the European level.

Another way of envisaging added value is to apply a fiscal capacity test, linked to solidarity. Many countries or regions with a relatively limited fiscal capacity require support from the EU budget – they have the projects but not the means to finance them. Good spending involves trying to move outside the fiscal constraints – it is a strong rationale for having a cohesion policy.

He felt that an impact test is desirable, because an emphasis on results is often missing from ways of looking at spending at European level. Spending is viewed as an exercise and less on what it delivers in terms of impact – the inputs are stressed rather than the outputs.

He suggested a notion of ‘investability’, similar to ‘employability’, could help in trying to think about the conditions under which higher levels of investment take place. What is the blockage that stops a higher level investment in a particular country, a particular region, or a particular function of government? Sometimes what needs to be stressed is the most pressing problem – the biggest obstacle to private or public investment coming in. Better spending is targeted at fixing the most pressing problems and increasing the levels of investment at an acceptable cost – a value-for-money approach aimed at the specific problem. If the most pressing obstacles are fixed, the prospect of getting good leverage in other forms of investment is much higher.

Mr Begg introduced a chart, ‘The spatial competitiveness maze’, as a basis for an ‘investability’ approach. The chart illustrated the elements that influence how effective an economy is:

  • top-down sector trends and ‘macro’ influences – from global, national, regional or European trends;
  • the overall level of prosperity;
  • interest rates;
  • the characteristics of companies in the region – large, small, headquarters, research functions;
  • a wide range of things to do with the business environment which can be fixed sometimes at relatively low cost – perhaps by regulatory activity rather than direct spending;
  • the capacity for learning and innovation.

Acting on these different components, from the perspective of ‘investability’, can provide a channel through which high levels of economic activity and better performance can be achieved. Achieving effective delivery also matters, and this requires professional economic development skills, which are too often undersupplied. Engagement with local actors is essential to achieve a degree of ownership – the lessons from cohesion policy of the last 20 years is that, unless regional and local actors are involved, the efficiency with which the problem is dealt with will be diminished. Enough strategic planning is needed to ensure that the overall effect exceeds the sum of the parts.

Some of the approach adopted since 1988 in cohesion policy has transformed the way many countries and many regions approach economic development. It is equally important to be sensitive to the local barriers to development, and have well-aligned incentives connected to spending. Incentives matter.

He outlined some of the problems that arise:

  • ‘capture’ by local interests (clientilism);
  • outright fraud and criminal influence;
  • absorption problems – a function of the volume of spending;
  • spending can severely distort recipient economy, especially in the construction sector;
  • co-financing can be an obstacle, when the rules get in the way of good project choice;
  • projects aimed just at improving net receipts – a ‘disturbing proportion’ of EU spending is predicated on net balances going back to member states, to the extent that some countries are more interested in knowing the money is coming in than that the money is being spent well;
  • excessive bureaucracy can be a problem forgetting good spending, because delayed cash flows or approvals can undermine effectiveness of a project.

He said that financial engineering can make sense, principally where either the authority that wants to borrow has the capacity to borrow, and whether the loan can generate future income. It is mainly related to the level of prosperity – poor regions will be much more inhibited in borrowing than richer regions.

In concluding, Mr Begg said that the nuances of better spending need to be debated, and it should not be expected to come automatically. It is important to be clear about expectations of key policies – especially cohesion policy, which is subject to being pulled in so many different directions simultaneously. National and regional engagement is vital – lessons about lack of coherence between the national and European level in the Lisbon Treaty must be learned in Europe 2020. Probity and efficiency of spending is vital but effectiveness of both the input and output side needs also to be stressed. It should not be taken for granted that ‘better’ is equated with ‘less’.

Click here for Iain Begg’s presentation

Fabian Zuleeg, Chief Economist, European Policy Centre said that looking more closely at the detail of subsidiarity would show that, to achieve better spending, much greater clarity is needed about European level objectives and why they are being pursued.

The EU negotiations for the next multi-annual financial framework are taking place in a difficult economic, political, social and institutional environment. These factors are starting to influence the negotiations. The budget austerity taking place in many Member States has already made it very difficult to envisage any movement by the net payers who have made it clear that they expect budget austerity to be also reflected at the European level.

This has implications for the EU budget. It is already clear that the overall size of the budget will be limited – it might not be that better spending means less spending, but it is very hard to see how the negotiations can result in anything other than a limited budget. At the same time there are increased demands on the budget – more policy areas that need to be financed, and an institutional architecture that also requires funding. Besides more demands with less money there is the pressure, especially from the net payers, to justify European level spending.

These factors call for better and different spending at European level, and this is not simply a matter of cutting cost. Most of the current focus is on trying to deliver existing programmes with less money, by trying to reduce staff costs and overheads. But it is important to be outcome focused – to start from the perspective of clearly identifying the objectives that European money is meant to deliver. To uncover the rationale behind European level spending means looking at outcomes, and also at added-value and subsidiarity.

As well as looking at the quality of public expenditure, its composition and allocation to different objectives, it is also necessary to use the best instruments and tools to achieve the objectives. That does not necessarily mean EU spending, it could be automated tools and instruments, or financial engineering. Sometimes national and regional budgets are far more appropriate to deliver some of the objectives. The effectiveness and efficiency of all instruments needs to be considered.

It is impossible to achieve higher effectiveness and efficiency without discussing overarching EU objectives and the underlying rationale for these objectives. When resources are limited and capped it is important to find a mechanism to decide between different policy areas. This implies appraisal of policy areas and instruments, and an overarching criterion to decide budget priorities. It comes back to the concept of added value.

Added value is an elusive concept, which is defined in different ways. The EU Budget Review Communication defines it in three elements:

  • EU public goods;
  • actions which members and readers cannot finance themselves;
  • actions where funding can secure better results in increased efficiency and effectiveness.

A number of things are being done at the European level that fit into these definitions, but it is doubtful how the definition works in practice. It does not cover all EU spending and it is difficult to delineate areas of overlap, or where there are multiple objectives. It is not clear what objectives are behind some policy decisions, for example political reasons for pursuing certain objectives like EU visibility and integration.

These concepts are not very tight and it is difficult to see how they fit into the idea of added value. It is also doubtful how the definition links to the achievement of common European objectives like Europe 2020.

Mr Zuleeg said that the next steps that need to be taken are to determine the overarching EU objectives regarding the underlying rationale and subsidiarity. Genuine public goods and market failures need to be identified together with the rationale for the major spending blocks. At the beginning of the budgetary review the idea was to have no taboos and that idea is still valid – the major spending blocks should be examined without preset ideas to decide whether a particular policy area is the best way of achieving overarching EU objectives.

In addition the effectiveness of the budget should be assessed, together with alternative instruments, financial engineering, and the potential of national and regional budgets to fulfil some of the EU objectives. Effort should still continue towards reforming funding programmes to achieve greater efficiency and effectiveness on the ground, but, as this has been attempted every time a new multi annual financial framework is negotiated, the likelihood of success is small.

In concluding, Mr Zuleeg said that the current position reflects that negotiations taking into consideration the limitations imposed by member states are well under way. The focus will be on spending rather than governance or own resources. It is still possible to push for a better budget but the outcome is likely to be disappointing, partly because a comprehensive assessment of the different budget areas is still lacking. The most likely outcome is limited reform, which can still deliver better spending by paying more attention to effectiveness and efficiency, but only if the underlying objectives and rationale are clear.

Click here for Fabian Zuleeg’s presentation

Claire Charbit, Deputy Head, Regional Development Policy Division, Public Governance and Territorial Development Directorate, OECD began with a brief explanation of the work of the OECD. It has 34 members, the biggest part from Europe, together with the US, Canada, and Mexico and some Asiatic countries like Japan and Korea. Specific partnerships have been developed with big players like Brazil, India, and China. The mandate of the OECD is to be green, clean and fair, which is the same agenda as Europe 2020.

The OECD believes there is an important role for subnational authorities in public investment. In OECD countries on average more than sixty percent of public investment is made by subnational authorities. These ‘big players’ are still facing big shocks in the financial markets, and Ms Charbit presented details of the evolution of subcentral government (SCG) bond prices. The effects of the crisis were not homogenous across all subnational governments and there is an increase in disparity between top rated and medium to low rated SCGs.

Subnational governments have faced a ‘yo-yo game’. Until early 2010, capital expenditure remained relatively high as many SCGs adopted anti-cyclical measures, but, since the Greek crisis, capital expenditure seem to be again the main adjustment variable, as central and subcentral governments seek to consolidate their budgets.

Central government adopted a series of austerity measures including cutting transfers to SCGs, reforming funding schemes and introducing new fiscal rules. In this context the question is how to do more with less, and Ms Charbit presented some lessons an in-depth study on large countries that have adopted investment-based recovery strategies.

In the great majority of cases the criteria was to execute the budget quickly. This had a good effect in terms of spending money very promptly but a bad effect in terms of the long-term impact of the spending. Instead of taking time to target coherent strategies for public investment, some countries simply spread resources and financed micro-projects without considering the overall impact. There is little coordination between sectors and among levels of government, underling the importance of good governance in mitigating the trade-off between speed and long term effectiveness

OECD analysis points to a few broad lessons for policy:

  • provide infrastructure as part of an integrated regional approach;
  • invest in human capital;
  • emphasise innovation and R&D;
  • focus on integrated regional policies.

Ms Charbit presented some of the challenges to multi-level governance. OECD had identified seven gaps between levels of government.

  1. Administrative: there is often a mismatch between functional areas and administrative boundaries.
  2. Information: lack of coordination between central government and sub central government leads to asymmetries of information.
  3. Policy: sectoral fragmentation across ministries and agencies.
  4. Capacity: insufficient scientific, technical, infrastructural capacity of local actors.
  5. Funding: unstable or insufficient revenues undermining effective implementation of responsibilities at subnational level or for crossing policies.
  6. Objective: different rationalities creating obstacles for adopting convergent targets.
  7. Accountability gap: difficulty in ensuring the transparency of practice across different constituencies.

OECD has identified a number of instruments that can bridge the coordination and capacity gaps. Financial control is one among other instruments for better spending. One example is going beyond indicators based on imports and budget execution:

  • rethinking evaluation for being more outcomes oriented;
  • allowing for more flexible ways in using funds;
  • building capacities at the subnational but also at the national and supra national levels.

Another example is improving the coherence of supranational, national and subnational strategies through:

  • well-designed conditionalities;
  • reinforcing synergies across sectoral approaches;
  • allowing for improved institutional quality;
  • citizens participation and transparent processes.

The final example is improving prioritisation mechanisms by:

  • revealing information at a societal level;
  • shared evaluation of experimentations with results;
  • tender processes.

Click here for Claire Charbit’s presentation

Olivier Debande, Senior Economist, Projects Directorate, European Investment Bank, said there was a lively discussion at the current time about becoming smarter in using available funding – smart growth, smart fiscal consolidation, smart use of EU budgets.

At the EU level there is little budget margin to invest in the Europe 2020 strategy objectives, at a time when discussions on the next Multiannual Financial Framework have begun and most of the Member State governments and the EU are engaged in fiscal consolidation. Major investment needs at EU level have been identified at the same time as trying to reduce budget level to limit tax payer contribution. It is a period to try to do more with less, or increase value for money.

EIB is one of the elements of funding capacity that is trying to support EU objectives using primarily loans. EIB expects to be reimbursed at the end, so it is a different logic than grants. There is a focus on two approaches:

  • The blending route - to try to find a better way to use available funding. For some projects and expenditure, such as a project that is not raising any income in the future, a grant is the best instrument. Grants should not be used to support projects that are capable of raising income as it is a waste of money in the long term.
  • The EIB as a public bank when there is a well identified market deficiency that can be alleviated through loan – if a project can be financed by a commercial bank there is no reason for borrowing from the EIB.

The blending route tries to identify different characteristics of a project – the economic rate of return, the financial profitability, the internal rate of return, and the risk attached to the project. Combining these dimensions provides a way to discriminate between different instruments. The purpose is to find a better allocation of existing funding from pure grant to pure loan, depending on the risk profile of the operation and the maturity of the capital market.

He illustrated what could be achieved in terms of leverage, or multiplier effect, through one of the bank’s new instruments - the Risk-Sharing Finance Facility (RSFF). This enabled the bank to generate a significant leverage effect on the basis of one European Union contribution and an EIB contribution.

The RSFF was based on the idea that the EU was not using debt instruments much to support research, development and innovation, compared to the US. The objective was to increase the EIB loan capacity to support research, development and innovation in Europe. The idea was to use €1 billion from the Community budget and €1 billion from the resources of the EIB. This €2 billion could make some provision for when the bank is lending for research, development and innovation projects, which have a riskier profile than traditional projects. As the EIB is only financing part of the project, and are limited to 50% of the total cost of the project, the Bank can attract co-financing from other investors and financial institutions, resulting of a multiplier effect of around 15. This demonstrates how transforming a basic budgetary amount into another instrument can create substantial leverage, enabling more to be done with the same amount.

Another interesting feature of the RSFF is that the EIB plays a catalytic role. By being involved in the project the Bank is able to attract co-financing, by, in effect, putting a quality stamp on the project.

Mr Debande highlighted some characteristics of a good financial instrument:

  • simple to implement;
  • integrated so that it is not replicated at different levels;
  • designed to be replicable in other regions and Member States;
  • a harmonised approach to limit the cost of developing new instruments.

It is also important to look at revolving instruments – using the repayment proceeds of a project to reinvest in the same type of project. This is important when the constraints of the budgetary period are borne in mind, allowing for longer loan periods for long-term projects.

It is also important to have a partnership approach, to associate all the different stakeholders in the project from the EU level to the local level, including public banks and the private sector.

Finally, he emphasised a clear distinction between Euro Bonds as an instrument for solving the sovereign debt problems, and specialised Europe 2020 Project Bonds. Project Bonds are a new initiative distinct from the Euro Bonds referred to in the European Stabilisation mechanism. Project Bonds are to support and finance major long-term infrastructure projects at EU level, for example, by raising finance on the capital markets for major cross-border projects through a dedicated company.

Click here for Olivier Debande’s presentation

Questions

Responding to the discussion, Mayor Verkerk said that the analysis showed the importance of involving regional and local government in European approaches. Europe is on the right track to make territorial pacts together to make multilevel governance work – this will be more effective than the old Lisbon strategy.

Flaws in investability, spending blocks, gaps and multiplier effects and leveraging effects - need to be addressed by governments and in the types of financial structure that are being developed in the European budget.

General Secretary of the CoR Gerhard Stahl said it was possible to draw a clear conclusion from the discussion – an input approach is the wrong approach. It is important to begin with no taboos and focus on objectives. This means going through the Lisbon Treaty and through all policies to produce a list of policy commitments already undertaken at the EU level. This should direct the debate on financing and instruments. He felt that the second two presentations had concentrated more on inputs and financing, instead of following the academic logic of identifying the objectives, the necessary tools, and then concluding what is needed as financing.

Answering a question about measuring leverage and impact, Iain Begg said one of the ways is to ask whether the project would have happened in the absence of financing. His concern with dramatic figures for leveraging and multiplier effects of RSSF is to know whether it is introducing genuine additional investment.

Olivier Debande answering a question about the future development of instruments said that the Commission had created a group to work on innovative financial instruments, which the Bank had contributed to. The idea is to try to capitalise on lessons learned from developments since 2007 in terms of joint instruments developed by the Commission and the EIB, and to explore a common approach. The Commission is developing two platforms, debt and equity, and is working on developing an efficient delivery mechanism. These platforms under the same umbrella have different instruments sharing the same characteristics.

Speaking about Europe 2020 Project Bonds, he said they would be for large projects and demand driven. To gauge appetite for the Bonds in the financial markets, the Commission will launch a public consultation at the end of February (28 February 2011) to validate the instruments and investigate the demand. Project companies, not the EIB, would issue the Bonds. The EIB would provide guarantees, more like a credit-enhancement instrument, to make the bonds issued by the companies sufficiently attractive to the capital markets. Large infrastructure projects would be suitable including environmental projects with a focus on renewable energy and energy efficiency.

Financial profitability would not be the only criteria, but projects would also be appraised by looking at the environmental impact and using cost-benefit analysis to integrate externalities. The project must support an EU objective and be compliant with all the environment and public procurement directives.

Claire Charbit, responding to a question about the link between multilevel governance and decentralisation said that coordination was important where responsibilities are shared, and when objectives are not automatically the same. This is important whatever the constitutional structure of the country, centralised or federal. Decentralisation reform is a chicken and egg situation – multi-level governance will never be capable until given the opportunity. The key decision about decentralisation is not financial, it is political.

Fabian Zuleeg, responding to a comment about the link between EU spending and outcomes, said that at the moment there was much rhetoric but very little meaning. It was not clear what it would mean in practise to link EU spending to Europe 2020 – should it be linked to the broad objectives, or to the targets, or the flagships initiative. Analysts have been saying that elements of the common agricultural policy and the cohesion policy do not fit into the kind of objectives of Europe 2020. These decisions take political will – the budget cannot deliver all things to all people, it has to be about prioritising doing less on something as well as doing more on something else.

Reply to a comment about the problems of how Europe 2020 was designed he said there is no ownership and has been no real debate in the regions. There are no critical voices about using Europe 2020 as the only guideline for the budget. It has been generally accepted because it has only been used at a rhetorical tool. People have read whatever they want into the smart, sustainable and inclusive terms without any concrete idea of what that might actually mean.

Claire Charbit said that being clearer, fairer, stronger (OECD strategic objectives) are shared objectives, but they are sometimes contradictory. There is a trade-off between them. There is a need to make priorities fit with the regional agenda at the regional level.

Iain Begg, in his concluding remarks, said that it is important to recognise the specific challenges of different territories of the EU and to recognise that what constitutes better spending for them will not be the same for another region. That is the issue behind the concept of ‘investability’ - concentrating on the things that need to be fixed in that area. It may be money that doesn’t pass the test of value for money, or the most efficient form of spending, but it deals with the specific problem (and that is an underlying definition of better spending) - it is problem fixing. The outputs and the outcomes need to be looked at not the input efficiency which sometimes the definition of better spending when it is seen through the eyes of an auditor.

General Secretary of the CoR Gerhard Stahl said that the Workshop underlined that the Europe 2020 debate was a strategic debate to try to present a problem differently - how to use existing money without deciding on new budgetary consequence. Europe 2020 should be seen as an instrument to engage with multilevel governance and not as an answer for budget priorities.

Olivier Debande said that there is a real interest to move to more conditionality in the approach to Europe 2020. The discussion on each priority is linked to a discussion on conditionality. It is important to recognise that financial engineering is not the only solution, non-financial instruments need to be in place, especially to support regions with better implementation capacity and expertise to identify and implement projects.

Fabian Zuleeg said that the debate on Europe 2020 has to answer the question of how to implement broad strategies, which are set at a European level, down to the national and regional level. The reason the Europe 2020 strategy should be so strong is because it recognised the failures of Lisbon, and that there needed to be something that could implement it. Without a strong and effective tool to do that, it is difficult to see how broad strategies will be implemented.

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