UK Shared Prosperity Fund Update

Shared Prosperity Fund – the replacement to European Structural Investment Funds (ESIF) - Update

The future of the support for activities that were previously funded by the European Structural and Investment Funds is becoming clearer.  But while more clarity is welcomed it is not looking like an approach that will be welcomed by the Scottish Government.  Here we outline the background before bringing the situation up to date (15 January 2021).

One worry (among many) for some organisations who have relied on funding from Europe as a consequence of leaving the European Union is that the UK will no longer be eligible for European Structural and Investment funds (ESIF).  After the UK has left the EU, this funding will stop.  European Structural and Investment funds includes:

• European Regional Development Funds (ERDF)
• European Social Funds (ESF)
• European Agricultural Fund for Rural Development (EAFRD)
• Youth Employment Initiative (YEI), and
• European Maritime and Fisheries Fund (EMFF).

The Government has pledged to set up a Shared Prosperity Fund to “reduce inequalities between communities”. The UK’s ESI funding allocation over the 2014-20 financial framework period is €17.2 billion (around £15.2 billion at November 2018 exchange rates) – when combined with co-financing from the UK, €26.8 billion is expected to be spent on ESI-related projects over this period.  Although England receives more ESI funding than any other country of the UK in total, this is largely because of its higher population; in per-person terms, Wales receives more than twice as much as any other country of the UK (€140 per person per year, compared to a UK-wide average of €36).  Scotland gets around €50 per person per year. The impact of structural funding is hard to measure, particularly in wealthy countries like the UK.[1]  However the funding is important to smaller communities and many VCSEs.

ERDF mainly focuses on support to small businesses and on research and innovation, with a smaller emphasis on moving towards a low carbon economy.  ESF, on the other hand, is strongly focused on employment.  ESI funds are administered jointly between the EU and nominated Managing Authorities in the Member States. The Managing Authority puts together an Operational Programme, laying out their strategy and priorities for the funding; this is then agreed with the European Commission, which then allocates funding to the Authority so they can distribute it.  The Scottish Government take on the Managing Authority role.  For the past two programmes we have been responsible for the ex-ante evaluations. Clearly that approach won’t be followed but the country does need a clear alternative.

Promised replacements for funding

In the short term, the Government has guaranteed all EU funding agreed before the UK leaves the EU, even in the event of no deal being reached. This includes the structural funds, so beneficiaries would still receive their money from the UK public purse.  The Government has said it will use the structural fund money that would normally be sent to the EU following Brexit to create a United Kingdom Shared Prosperity Fund.

Because the UK is a net contributor to the EU budget, it would, in theory, be possible to reallocate some of the money that currently goes to the EU into the Shared Prosperity Fund with no further impact on the public purse. In practice, this may not be the case – the economic impact of Brexit may mean that there is less money to go around, and there are already several interests competing for a share of this money.  The consequences of COVID-19 are hard to calculate but the impact will be significant. Enterprises are struggling, jobs are being lost, young people have limited apprenticeship opportunities and investment in re-training for all ages is essential. Health and wellbeing as well as community cohesion is being severely undermined. 

The objectives of the Shared Prosperity Fund initially were:

• to reduce inequalities between communities
• strengthen the foundations of productivity as set out in the Industrial Strategy
• emphasise the role of the Industrial Strategy both at a national and local level
• respect the devolution settlements in Scotland, Wales and Northern Ireland

The consultation on the Fund has been delayed.  In January 2019, a further Parliamentary Question (PQ) implied that the delay had been due to no-deal Brexit planning.  It is not clear when it will take place.

PQ responses said that final decisions on the Fund’s design will be taken during the Spending Review – this implies that full details about the Fund would not come out until the Spending Review report, which was to be  published alongside the Budget in the autumn 2019.  Part of the solution for distributing funding among the countries of the UK could be to use the Barnett formula, which is currently used by the Treasury to determine changes in the size of the block grants given to the devolved administrations of the UK.  If that was to be the case if the money currently paid into the EU budget were to instead be spent directly by Westminster, then income to devolved administrations may end up lower than it currently is.  EU funding is allocated based on a classification of the sub-regions of the EU that uses their GDP per person,  Funding from the Shared Prosperity Fund could therefore use a similar system, although it could use measures other than national income if they were considered more useful for identifying needs.

Match funding and additionality

All EU structural funds adhere to the principle of ‘additionality’, which is the concept that EU funding should not replace existing national funding but should rather supplement it.  This means the recipient country can do things that it could not do if it were relying only on its own resources.  If the Shared Prosperity Fund aims to result in similar levels of investment as the ESI, then those designing the fund will need to consider the total amount of investment enabled by ESI funds.  The current system of EU structural funds is pre-allocated – that is, amounts for each area are determined, and it is then up to the Managing Authorities for each area to distribute this funding to beneficiaries. We have been involved in the last two ex-ante evaluations of the Structural Funds in Scotland reviewing how allocations are determined.   Competitive funding models can increase flexibility because funding can be directed to any project. However, because the allocation is based on the perceived merit rather than on general needs of areas, this could lead to less developed areas losing out on funding.

There are various options on how the funding could be allocated across the UK.  The Shared Prosperity Fund could:

• centralise the administration of the funds (by having Westminster take on the current roles of both the Managing Authorities and the EU)
• choose to decentralise decision-making powers even further (perhaps to local authorities), or
• replicate the current system by having separate funds for the different countries of the UK.

We have seen that an inquiry report from the Work and Pensions Committee described the European Social Fund as being “mired in inordinate bureaucracy”.  Our experience with Structural Fund evaluations and strategy development projects is that there could be more effective and efficient delivery mechanisms.  However, many of these regulations and barriers are imposed by the Managing Authorities in an attempt to prevent ineligible funding or fraud.  There is a need, as with any funding stream to see longer-term commitment to the objectives.  Andy Burnham, mayor of Greater Manchester, said that he “would like to see a 10-year commitment to funding at the current level with more flexibility about how we deploy it”.  The All-Party Parliamentary Group on Post-Brexit Funding for Regions, Nations and Local Areas produced an inquiry report about the Shared Prosperity Fund.  The report’s conclusions are, briefly:

• The Fund’s budget should be no less in real terms than the funding streams that it replaces
• It should be administered in multi-year financial allocations “of the longest practicable duration”
• The shares of funding received by the four nations of the UK should be maintained, at least for now, and funding allocations within those nations should be a devolved matter (indeed the report suggests splitting the Fund into four separate funds to make this clear)
• Funding within England should be allocated based on a needs-based formula that uses up-to-date statistics
• Narrowing the differences in prosperity across the UK should be the Fund’s main objective
• The Fund should engage closely with local authorities and local partners.

There are several issues that will need to be considered when setting up the Fund. These include:

• the priorities and objectives of the Fund
• the amount of money to be allocated
• the method of allocating it between the countries and regions of the UK, and whether this is based on need (and what measure is used to determine need)
• the model by which funding will be allocated, whether pre-allocating an amount for a country or region or inviting competitive bids from across the UK
• the length of the planning period and the way this could conflict with domestic spending priorities, and
• who administers the funds (whether they are controlled from Westminster or by the devolved administrations) and the degree to which local authorities are involved?

Many organisations have already made comments about the possible design. Although these vary in their emphasis (for example, the Welsh Government is strongly opposed to the idea of administering the Fund from Westminster), most organisations seem to agree:

• that the level of funding should be at least maintained at its current level
• it should largely be allocated based on need, and
• local authorities and partners should be closely involved.

Situation in Scotland

The Scottish Parliament’s Economy, Energy and Fair Work Committee carried out an inquiry in 2018 into the European Structural Funds in order to inform ideas about their replacements. The final report was included in a published letter to Lord Henley, then a minister at the department for Business, Energy and Industrial Strategy. The Committee’s conclusions were that whatever replaced European Structural Funds should be “not top-down, not centrally-driven, not short-term, not rigidly bureaucratic”, and should instead “be based on the best characteristics of ESIFs – including longer timeframes (beyond electoral cycles), the focus on regional development and an ethos of partnership working

The Conservative Party had stated they would introduce the UK Shared Prosperity Fund when EU Structural Funds start to taper off.  They said it “will ensure this funding continues to be spent on skills, but will be simpler to access and targeted at those who need it most to ensure that it works for this country.” 

In November 2020, the Scottish Government published a paper Replacement for EU Structural Funds.  It states that “given the tight timescales they have no choice but to develop our processes to deliver this programme and to proceed on the basis that full funding to do so will be devolved to Scotland by the UK Government.”  The strategy outlined that Councils would play a central role in the approach. Councils have been and would remain integral to determining and deciding regional strategies in the form of growth deals, regional economic plans and a variety of other activities. They recognise this and outlined they would build on this expertise when (and if agreed with the UK Government) they roll out this programme aligned with the National Performance Framework.  The intention was to work with existing and emerging regional economic vehicles including the Regional Economic Partnerships, Highlands and Islands Enterprise and the South of Scotland Enterprise, building on their local knowledge and ability to hit the ground running. Full details of the Scottish Government’s proposed approach is available here Scottish Replacement for EU Structural Funds.

However, a UK government announcement (15 January, from Steve Barclay, MP) outlines that Whitehall is to bypass the devolved administrations and replace European structural funds with a centrally-controlled fund.

In Scotland, that means more than £100m is set to be spent by the UK government on projects normally devolved to the Scottish Parliament.  The Shared Prosperity Fund replaces European Commission development and social fund grants.  The Scottish government as outlined above had set out its own plans for replacing EU funds.  The UK Treasury Secretary, has removed some of the uncertainty about the way the Shared Prosperity Fund will operate.  In the past seven years, £780m has come through the Scottish government by that route. It has been spent on transport infrastructure, economic development and workplace training. Following Brexit, that is being wound up.  In a letter to the Scottish Finance Secretary, Kate Forbes, Mr Barclay said the Shared Prosperity Fund would be a UK project, aimed at "levelling up" areas in most need.

He stated that, “to help local areas prepare over 2021-22 for introduction of the UKSPF, we will provide additional funding to support our communities to pilot programmes and new approaches. We will work closely with the Scottish Government on how best to use this to prepare for the introduction of the UKSPF and will provide detail on allocations for 2021-22 in a prospectus soon.” This decision clearly runs counter to the preferred approach by the Scottish Government. 

David Gourlay, Director, Hall Aitken

[1] UK Shared Prosperity Fund, 2019, House of Commons Library