FIRST CONSIDERATIONS ON THE FUTURE OF THE PRINCIPLE OF ADDITIONALITY 29 June 2010

Summary Working Paper drafted by DG REGIO on options for the future of additionality. Conclusions of the first experts meeting on 26 May 2010. Conclusions of the study « The impact of additionality on the real economy of EU Member States ».

WP- What works well Additionality is critical to keep the rationale of the EU cohesion policy. Adapted to the economic cycle to some extent- mid-term verification and exceptional expenditure. Financial corrections though it needs to be tested yet. Allows for regular dialogue between the Commission and MS.

WP- What works worse Comparability - no single methodology - results are not comparable across MS and even across periods. Transparency - too many estimations to capture the whole relevant expenditure. Isolation - not fully in line with the economic governance of the EU (SGP) nor aligned with regular systems of data reporting of public finances. Proportionality - the exercise is rather cumbersome and entails significant use of resources. So far the reliability and usefulness of the verification is often questioned.

In consequence, future verification must… Improve comparability and transparency for better reliability Be further in line with economic cycle and existing data reporting systems Be simpler both for the Commission and Member States Avoid “trade-off” with the rationale of additionality - risk of substitution should be minimised

WP- Policy options for post-2013 Use Gross Fixed Capital Formation as a “proxy” of structural equivalent expenditure Use some COFOG groups and kind of expenditure to set the public or structural equivalent expenditure Ensure compliance by increasing national co-financing rates Others? Combination of options?

Gross Fixed Capital Formation Proposed by the Barca report. POSITIVE: direct link with Stability and Growth Pact (the only indicator of public investment). NEGATIVE: a rather poor proxy of public or equivalent structural expenditure, just reported at national level (no breakdown by regions).

COFOG Divisions and Groups The sum of a number of items would be the equivalent structural expenditure. POSITIVE: better “proxy” of public or equivalent structural expenditure than GFCF though not perfect, possible reporting by region as from 2014. NEGATIVE: not direct link with the Stability and Growth Pact, uncertainty about availability of 2-digit data and regional data - it is still a draft proposal.

Increase of national co-financing rates Additionality would be fully met through national co-financing. POSITIVE: simplification and transparency, no risk of non-compliance with additionality. NEGATIVE: resulting national co-financing rates may be too high possible problems of absorption capacity, not adapted to the economic cycle.

How to set and express the baseline An option is to express the baseline as a share of GDP and not in nominal figures. ADVANTAGES fully adapted to the ups and downs of the economic cycle. no need of revisions of the baseline. DRAWBACKS higher risk of substitution in case of economic downturn. QUESTIONS: Should we set the baseline according to past levels of expenditure? Should we express the baseline as an average of the period or should we set an additionality objective for each year?

Notion of public sector to be captured and the territorial level GFCF and COFOG refer just to the General Government sector. Expenditure of public corporations is not captured (a significant part in some Member States). Data reported refer to the whole Member States - no breakdown by region -additionality would be verified for the whole Member State. Verification for the whole Member State? Is that acceptable? Should we just limit the verification to some items of expenditure? There is a risk of substitution through investments in the most prosperous regions while the Funds are concentrated on less prosperous regions.

Experts meeting 26 May 2010- Conclusions Maintain additionality. “Status quo” is not an option for most Member States. Use COFOG statistics but keep the regional approach. Increasing national co-financing rates is not an option for most MS to verify additionality. Link additionality to the macroeconomic governance of the EU- link with the Stability and Growth Pact (SGP). Express the baseline in terms of GDP and abandon past levels of expenditure.

Study University of Milano on the impact of additionality on the real economy (I) Public investment has a net positive aggregate on economic growth over the long term. Risk of underinvestment under budgetary constraints. Set conditionalities to increase the impact of the Structural Funds. The quality of the institutions is critical.

Study University of Milano on the impact of additionality on the real economy (II) Additionality must remain a cornerstone of the EU cohesion policy. Verification based on historical expenditure should be abandoned (replace by share of GDP). Set obligations of additionality by policy area. Maintain the regional approach. Use a country-by-country approach.

The way forward A second discussion paper will be drawn up after the summer break. Second meeting by the end of year - to set and present more robust and detailed proposals for additionality post-2013. First half 2011: proposal of future Regulations governing EU cohesion policy.

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