In June, the Scottish Government confirmed that almost £10 million of EU structural funding money has been “frozen” by the EU. This blogpost explains what’s going on and outlines some of the other financial risks Scotland’s structural funding programmes face including:
- the loss of budget underspends
- an EU performance review in 2019
- interruptions to the payment of claims
- financial corrections at the end of the programme.
Firstly, what are structural funds?
One of the core policies of the EU is to reduce economic inequalities between its regions. There are two funds available in Scotland to pursue this policy:
- European Social Fund
- European Regional Development Fund.
Together these funds are known as the structural funds. While they aim to fund different activities, they share similar rules and administration.
How much are they worth?
Under the EU’s seven-year 2014-20 budget framework, Scotland was allocated up to €941 million in structural funding.
To access the full amount available from the EU:
- eligible projects must be created and allocated a budget
- money must be spent and claimed back within a set timescale
- all within EU and national rules.
If budgets cannot be allocated or spent in time, the available funds can be reduced. In Scotland’s case, the original maximum in 2014 of €941 million has been reduced to €872 million today. What has happened?
The EU requires the structural funds’ managing authority (in Scotland’s case the Scottish Government) to publish an Operational Plan. This includes a financing plan which sets out how much money will be committed to projects in each year. Under the EU’s “n+3 rule”, there are then three years to spend this money. If after three years the money is not spent and claimed, the money is lost. This is known as decommitment. (Note: this is a simplified version of the full decommitment methodology.)
How has decommitment affected the Scottish structural funds?
- At the end of 2017, the Scottish programmes lost €22 million.
- At the end of 2018, a further €51 million was lost.
As a result, the maximum value of the programmes has been reduced to €872 million.
If further reductions are possible at the end of 2019, a letter will be sent from the European Commission to the Scottish Government in September detailing the risk.
As well as a financing plan, the Scottish Government’s operational plans set out a performance framework with targets for each fund. Targets are based on indicators such as ‘businesses supported’ or ‘unemployed people getting a job’. Programme priorities which have successfully achieved their 2018 targets can expect to gain access to extra money from a performance reserve fund, while priorities not meeting expectations will lose out.
Scotland’s performance against its 2018 targets will be assessed this summer by the European Commission using the Scottish Government’s 2018 Annual Implementation Report (AIR).
The pass rate is 85% – if the indicators in each priority area are within 85% of the 2018 milestone value, then the milestone is deemed to have been achieved and access to the performance reserve will be opened. If a priority area fails to meet the 85% pass rate, the Scottish Government will have three months to reallocate the performance reserve to another part of the programme that is performing well. Full rules are set out in European Commission guidance.
Scotland’s performance reserve is worth €51 million, equivalent to 6% of the total value of the funds.
If the indicators for a priority area drop below 65% of the 2018 target value, this is deemed a serious failure. Serious failures risk the suspension of payments (see below).
The 2018 AIR had to be submitted to the European Commission by 31 May 2019 but is yet to be published.
Interruption and suspension
The Scottish Government claims most structural fund money from the European Commission “in arrears”, i.e. after the project spending and activity has happened.
To prevent fraud, the EU’s rules include a mechanism to “interrupt” the payment deadline for a claim if additional evidence is needed to verify the expenditure or where there are significant deficiencies in management systems. This interruption can last for six months, or up to nine months if the parties agree.
In February, the European Commission interrupted a claim under the European Social Fund citing significant deficiencies in the Scottish Government’s management systems. Media reports cited a figure of £22 million worth of claims, however on 26 June 2019, the Minister for Trade, Investment and Innovation told Finance and Constitution Committee:
“I do not recognise the figure of £22 million; £9.6 million is the amount of money that has been claimed by the lead partners in the process but the Scottish Government is currently unable to claim that back from the EU.”
The Minister confirmed that, despite the interruption, lead partners are continuing to pay the organisations which deliver the projects. This money comes out of the Scottish budget and will only be able to be claimed back from the European Commission once the interruption is lifted.
As well as the February 2019 interruption, the European Commission have instigated pre-suspension procedures for the European Social Fund in Scotland.
Suspension is a mechanism where the European Commission can stop payments for all or part of a fund. This can happen where there is concern about:
- a serious failure in management, control or monitoring systems
- financial irregularity
- a serious failure in achieving 2018 performance targets.
Suspensions and interruptions can be lifted if the concerns are addressed, and the Minister has indicated he believes this will be the case for the £9.8 million currently facing interruption and pre-suspension procedures:
“The solution to all of the four issues that were raised by the audit is a move to a unit cost system. That has been agreed in principle by the EU and we are working through the details of how that would operate in the Scottish context… We are certainly expecting this to be cleared before November, but it should all be resolved prior to that.”
Finally, at the end of the programmes, unresolved failures in management and control systems or serious failure to achieve the 2023 performance targets can lead to “financial corrections”. Financial correction can include cancelling all or part of an EU contribution to an operational programme but decisions on this will not be made until after programme closure in 2023.