Written evidence submitted by Jeremy Miles AM, Counsel General and Minister for European Transition, National Assembly for Wales (SPF0012)
Thank you for your letter of 26 March requesting the Welsh Government submit written evidence to your Inquiry into Wales and the Shared Prosperity Fund.
I welcome the opportunity to present the Welsh Government’s response and this is set out in the attached paper.
Please let me know if I can be of further assistance.
For twenty years, the Welsh Government, in line with its devolved responsibilities for regional economic development, has delivered European Structural and Investment (ESI) funding programmes in partnership to create significant benefits for communities, individuals and businesses across Wales. The Welsh European Funding Office (WEFO), part of the Welsh Government, is the managing and paying authority for ESI funding, working alongside partners across Wales in local government, businesses, universities and colleges, the third sector and other public bodies.
ESI funding in Wales has been invested effectively in line with the parameters and guidance set by the European Commission and the UK Government. The investment has helped Wales to reduce some of the key structural barriers to inclusive growth and partially mitigated the impacts of austerity in Wales. Funding has provided jobs and skills training, supported research and innovation, and connected parts of Wales through opportunities for businesses as contractors to public sector-led investment. It has also provided extensive support to business, including advice, guidance and funding, namely through Business Wales and the Development Bank of Wales. Since 2007, this investment has led to the creation of over 53,300 new jobs and 14,560 new businesses, funding or support for 28,800 businesses, 94,800 people helped into work and the achievement of over 320,400 new qualifications.
Outside of the EU, sustained investment is vital to build on the progress made and continue to reduce the inequalities within the UK that persist. This is why, we have repeatedly made the case to the UK Government for ‘not a penny less, not a power lost’ as a result of leaving the EU – asking for promises made to the people of Wales during the referendum to be honoured and ensuring devolution, voted for twice by the people of Wales, is respected.
Our positions, which are clearly stated in Securing Wales’ Future (January 2017) and Regional Investment in Wales after Brexit (December 2017), are supported by our partners across Wales and beyond. A summary report offering an independent analysis of the responses to the engagement exercise accompanying the issue of the policy paper shows significant support for the Welsh Government proposals for the new regional investment model. The proposals were supported by National Assembly for Wales Committees and an All-Party Parliamentary Group. Key stakeholders across Wales were also in support including FSB Wales, CBI Wales, Universities Wales, Welsh Local Government Association, TUC Cymru and Wales Council for Voluntary Action, in addition to think tanks such as the Joseph Rowntree Foundation and the Institute for Public Policy Research.
This level of support has put us in a strong position to develop successor arrangements with our partners across Wales, leading to the launch of our consultation ‘A Framework for Regional Investment in Wales’ in February this year, which provides everyone with the opportunity to determine what approaches will work best for Wales. Our consultation, which closes on 22 May, covers a set of proposals for investing replacement funding from the UK Government to build on the successful legacy of Welsh-managed ESI funding programmes, while also recognising that we approach the future with new ideas, more flexibility and greater creativity. This will enable us to deliver even greater benefits across Wales, empowering regions to develop their own distinctive strengths and opportunities.
Clearly, the circumstances have changed beyond recognition since the launch of our consultation and your Inquiry. The size, nature and purpose of any future UK Shared Prosperity Fund (SPF) to replace EU funding will now need to be considered in the light of the economic damage that COVID-19 has done, and will do. Of course, the Welsh Government has long argued that a simpler and more effective means exists of fulfilling the Conservative Party promise that Wales would be not a penny worse off as a result of the leaving the EU. That would involve baselining the annual amount which Wales has received during the round of EU funding which is currently coming to an end. We believe that would be straightforward to implement and would avoid the bureaucracy which the proposed UK SPF throws up. In the circumstances which we will all face after the coronavirus crisis is over, we believe that our proposal has even greater merit.
Our key ask remains that the UK Government makes the funding available and quickly. It is of even greater importance now that the UK and the Welsh Government, together with our key stakeholders across Wales, demonstrate a strong commitment to work effectively together towards economic recovery, with future regional investment having a key role to play in that recovery. This has never been more important than now when people’s lives and livelihoods are at stake.
Two decades ago, the West Wales and the Valleys (WW&V) economy was struggling and performing poorly compared to other regions in the UK and EU. That position is best captured by the labour market statistics. The employment rate was 63.3%, some 8.4 percentage points below the UK rate and the rate of economic inactivity was 31.6%, some 7.8 percentage points above the UK rate. This data demonstrates why Wales is a significant beneficiary of the ESI funds.
By 2018, the employment rate in WW&V had increased to 71.3% and the gap with the UK almost halved to 4.7 percentage points. The relative position on economic inactivity has changed in similar fashion. Clearly then, economic outcomes have improved in labour market terms. However, economic performance has not improved enough to eliminate Wales’ need for ESI funds which, although significant for Wales, are not large enough on their own to compensate for the adverse impact of macro-economic policies. Indeed ESI spending represents less than 2.5% of the Welsh Government ’s budget, which has seen real terms reductions over the last decade due to austerity measures. The Welsh Government itself is only responsible for around half of identifiable public spending in Wales. This indicates how important it is to be realistic about our expectations of what success looks like with regard to the impact of ESI funding: it was designed to add value to domestic spending, not replace it.
Even if success is not always evident in higher level macro-economic data at the NUTS2 geography level, evaluations demonstrate that the ESI funds have been transformative for individuals and businesses, and have provided opportunities to test innovative project ideas. For example, the area of marine energy has received significant ESI investment to help establish demonstration sites and test areas in North and West Wales and support Welsh and international companies to develop and test technology in Wales.
The ESI funds have played a part in the labour market success experienced in WW&V since 1999 as have other Welsh Government policies. Data from the Office of National Statistics shows that there were 1.45 million jobs in Wales in 2018, the highest since records began and, that between 2017 and 2018, job numbers increased more quickly in Wales than the UK as whole. Employment rates in WW&V have increased from 64.6% in 2000 to 71.2% in June 2019. Unemployment has fallen in WW&V from 6.7% in 2000 to 4.6%, with economic inactivity falling from 30.8% to 25.2% in the same period. The number of working age adults with no qualifications in WW&V was 17.1% in 2008 but fell to 9.3% in 2018.
However, the Welsh economy faces a number of barriers that limit its potential to out-perform the UK and EU economy such that it would no longer qualify for ESI funds. In particular, Wales has a relatively elderly population so that it has the highest dependency ratio of any UK country or region. Demographics are discussed in greater detail below. A second constraint and, more important in terms of explaining economic performance, is the lack of large cities or economic mass in Wales, especially so in WW&V. Multiple credible studies find that productivity is generally higher in large cities than in smaller cities, towns and rural areas. This is because large cities reap economic benefits from people and activities locating together. These benefits are known as agglomeration benefits. Wales is the least ‘agglomerated’ of Britain’s countries and regions.
A wide range of evidence has demonstrated that economic mass or ‘agglomeration’ can be positively associated with productivity (and hence pay) and that, conversely, sparsity tends to be negatively associated with productivity and pay. Wales’ economic history, and its past dependence on agriculture and extractive industries, has resulted in an economic geography where economic activity and population is relatively dispersed compared to much of the rest of the UK. As outlined in our ‘A Framework for Regional Investment in Wales’ consultation document, our vision is to build a more high-tech and high value modern economy which is diverse and inclusive. This will require creating and sustaining a skilled workforce and creating a more equal, prosperous and greener Wales.
Transport improvements have the potential to increase effective economic mass by reducing travel times both within Wales and between Wales and adjacent areas of England. In addition to the productivity gains associated with greater effective economic mass, transport improvements can also widen labour markets, helping people to access jobs and, thereby, reduce unemployment and inactivity. Furthermore, a wide body of evidence shows that the quality of transport infrastructure is one of the more important factors that inward investors consider in making location decisions. Research has shown that, reflecting these considerations, improved transport infrastructure has in fact resulted in better economic outcomes.
The nature of the investment made in transport infrastructure needs to reflect the underlying economic geographies of the areas in which investments are made and the problems that those investments are intended to address. For example, investment in rail may be particularly appropriate to facilitate commuting to inner urban areas; where journeys are more diverse in nature, perhaps reflecting polycentric settlement patterns. Road infrastructure investment may also generate large economic benefits.
As a result of capital allocations from the UK Government that fail to meet Wales’s transport needs there is an infrastructure gap relative to the UK. Although Wales has 11% of UK rail track miles, we receive only around 2% of expenditure on rail enhancements from the UK Government. Treasury statistics show that rail capital expenditure per head in Wales is around 40% of the level in England.
We have used ESI funds to invest in rail and road projects over the last 20 years to open up business and employment opportunities, including £165m for the South Wales Metro, £80m on the A465 Heads of the Valleys road, £56m on Harbour Way in Neath Port Talbot, and £90m on A55 and A40 improvements. This investment, however, could not possibly compensate for years of historic and on-going underinvestment that is a consequence of decisions taken by successive UK Governments. Without ESI funding, which has enabled us to plug some of the deficit in transport investment, the infrastructure gap would be even greater. In the years ahead, we would expect to use the proposed SPF to invest in connective infrastructure to improve wider economic and social outcomes in WW&V.
Workforce skills are crucial too in determining economic performance. Workforce skills have strengthened markedly over the last two decades in WW&V partly as a result of initiatives made possible by ESI funds. However, skills levels have also improved elsewhere in the UK, with the net result being that workforce skills remain somewhat weaker in Wales at the higher end of the qualifications spectrum, for example the gap has increased in the proportion of working age adults (males and females aged 18-64) qualified to NQF level 4 (degree level) or above over the last decade. Interestingly though there is evidence demonstrating that the skills gap has closed at the lower end of the qualifications spectrum. The proportion of working age adults with no qualifications decreased by 7.8 percentage points in WW&Vs over the last decade (compared to decreases of 6.8 percentage points for Wales as a whole and 5.9 percentage points for the UK). There was also a slight narrowing of the gap in the proportion qualified to NQF level 2 (5 GCSEs A*-C or equivalent) or above between WW&Vs and the UK, but not between Wales and the UK.
It is also important to note that most comparisons between England and Wales are skewed by the performance of London which, if removed, reaffirms the view that, while Wales is not falling further behind, it is still significantly below the UK average. In the last decade, Wales has grown from a GVA per head of £16,232 to £20,738, a percentage growth of 28%, exceeding UK percentage growth of 25%. This rate of growth exceeds the North East (19%), Yorkshire and The Humber (21%) and Northern Ireland (26%), but is lower than London (31%) and the West Midlands (34%). This is particularly impressive given the gaps in expenditure in Wales regarding largely reserved matters, particularly Research and Development (R&D).
In total, Research and Development (R&D) expenditure has more than doubled since 2001, with ESI funding supporting world-class research facilities as part of major university expansions such as Swansea University’s Bay Campus, Aberystwyth University’s Innovation and Enterprise Campus and Cardiff University’s Centre for AI Robotics and Human Machine Systems and Brain Research Imaging Centre (CUBRIC). Under the ESI programmes 2014-2020 Wales allocated £388 million for Research and Innovation, the highest of any of the UK devolved Governments.
In 2017 the UK total expenditure on R&D was £34.8 billion, while in Wales it was £742 million, equivalent to 2.1% of the UK total spend. Comparisons with R&D expenditure in the other devolved Governments are set out below:
Going forward, regional investment must continue to be focused on delivering inclusive growth, particularly for the parts of the UK which need it most. A key lesson learned is that an exclusive, top down focus on productivity and economic growth will concentrate investment in major cities like Cardiff and not be fairly distributed throughout Wales to help those that need it most. Helpfully, the UK and the Welsh Governments share some key priorities to achieve this, namely increasing employment, reducing inequality and strengthening the Welsh economy.
We detect a welcome shift in the UK Government thinking since the general election towards a recognition that place - where an economic benefit is created - needs to be an element of the assessment of value for money when considering the return on a government-funded investment. We would like to see that embedded in the policy objectives and made more explicit in the Green Book guidance. We would argue for an approach which both protects regions from distortionary competition while differentiating between stronger and weaker regional economies as the Assisted Areas map has done in the past.
A key lesson learned that the UK Government can act on is to provide assurance on the need for multi-annual budgets for the SPF as well as for other areas of public spending. All our conversations with partners and beneficiaries cite this as one of the most highly valued features of current arrangements, as it allows for longer-term planning across a sector, with linked and mutually supportive interventions being supported over time, for example ensuring that we have the skills locally to make the most of infrastructure projects.
Based on feedback from our stakeholders, there are key elements of ESI funding arrangements which have also proven to be beneficial and we want to keep and build upon. These are:
Equality, human rights and protection of the environment, which have been integrated into European-funded interventions over the last two decades, and are key to the Welsh Government and wider Welsh public sector commitments.
Aligning investments with wider Welsh Government policy to ensure better strategic join up and value for money.
Working collaboratively across the UK, Europe and internationally, to help us find real solutions to shared challenges and ensure Wales’ remains an active and respected partner in Europe and internationally.
Co-financing, as it facilitates partners (e.g. from the Welsh Government , the UK Government, Local Authorities, universities and the private sector) coming together with additional budget contributions to enhance projects within communities.
The Welsh Government is working with the OECD on a two-year project focused on its regional development agenda and on maximising the potential for growth throughout Wales, reducing inter- and intra-territorial disparities, and enhancing the well-being and quality of life for all. In particular, the OECD project provides an in-depth look at regional governance and future investment capacity, namely the frameworks, institutions and practices that support decision-making and implementation in Welsh regions and how we use these most effectively to increase inclusive growth across Wales.
For two decades, we have delivered ESI funding in close partnership with a range of stakeholders across Wales. We have also undertaken significant engagement with stakeholders to develop the proposals in our consultation, A Framework for Regional Investment in Wales. We intend to use such a broad-based partnership to oversee the implementation of the future funding programme and deliver the outcomes that we all want to see. Based on this collaboration and robust socio-economic evidence, the Welsh Government proposes a new national framework for regional investment focused on four broad investment priority areas:
Productive and competitive businesses
Reducing the factors that lead to income inequality
Supporting the transition to a zero-carbon economy
Healthier, fairer, more sustainable communities
In addition, our consultation provides a commitment to:
Delivering outcomes to ensure that we maximise the return on our investments and help create the Wales we want to see.
Decentralising funding and decision-making closer to the people they aim to benefit in all parts of Wales with regions working in partnership to prioritise portfolios of integrated interventions to deliver economic policy focused on people and places. This is aligned with the Welsh Government’s plans for greater regional collaboration including the potential vehicles of the proposed Corporate Joint Committees being taken forward by the Local Government and Elections (Wales) Bill and our Regional Economic Frameworks being co-designed with stakeholders in each region of Wales.
Integrating our policies and wider opportunities for investments in Wales, the UK and internationally, including City and Growth Deals.
Creating a single fund that would reduce the administrative burden on organisations seeking to benefit from future regional investment funding and facilitate greater opportunities for joining up investments.
Ensuring regions and local areas have the necessary capability and capacity to maximise the opportunities from regional economic investment.
Creating a simpler and more proportionate framework that maintains our commitment to openness, fairness and transparency of investments.
It is also crucial to stimulate opportunities for greater private sector involvement in future regional investment delivery. As well as co-financing, greater private sector involvement could be achieved in future, for example by not penalising businesses for potential profit margins/ income generation where returns are reasonable and where the activity delivers greater benefits for Wales as a whole. Investment in R&D is hugely important, as it offers a strong multiplier effect, improves productivity and levers private involvement in research. The Welsh Government’s full position on R&D is set out in Protecting research and innovation after EU Exit (March 2019).
The assessment is unfair because the complexity and bureaucracy required to access European funding is not the choice of those managing and delivering funds. Managing authorities are criticised for adopting risk profiles and imposing auditing processes that are required in order to access funding by separate organisations. This is why we are aware of no evidence that the Welsh Government is more complex or bureaucratic as a managing authority than others across the UK or EU.
They key lesson to learn is that each administration should be able to make its own arrangements for prioritising funding across potential areas of intervention such as business support, skills, R&D etc. The arrangements for allocating funding to individual beneficiaries of the fund, setting rules for what is eligible for funding, ensuring that funding agreements have been complied with and the audit of the entire process should be the responsibility of each nation. That is why we believe it is so important that the entire quantum of replacement funding is managed under one ‘umbrella’ regardless of whether actions relate to reserved or devolved competence, or indeed to the powers and responsibilities of local government, third sector, universities or private sector.
The future of regional investment presents us with the opportunity to work differently and develop new approaches over time, while retaining best practice. We wish to continue to empower a broad-based partnership at a national Wales-wide level, as well as regional partnerships to oversee the management of the funds. This will help ensure integration and added value through interaction of different programme strands/projects.
A significant restriction of ESI funding regulations is that it is tied closely to the geographical areas that qualify for the funding at each level (i.e. WW&V, a ‘Less Developed Region’ and East Wales, a ‘More Developed Region’), making it difficult to integrate activities across borders and maximise beneficial outcomes fairly across all parts of Wales.
Most of the EU funding governance regime is just good management of public funding, but there is a perception from some stakeholders that the system is overly bureaucratic, has too many multiple layers of audit and inspection, blocks new entrants, and fails to act on specific opportunities that are identified by key stakeholders as well as individual experts.
Being outside the EU will provide the opportunity to align the administrative landscape with the economic geography of Wales, no longer separating East and West Wales artificially, but instead basing investment decisions in line with the regions set out in our Economic Action Plan. This provides the opportunity, which can benefit all parts of Wales, for partnerships to work more effectively across borders and better integrate activities with wider investment opportunities at Wales, UK and international levels. For example, from the outset, equal partnerships between bodies up and down the Wales/England border have been a focus for the co-design work with stakeholders in developing our consultation. We will be looking to see what arrangements the UK Government has in mind for English regions, and will want to see how they will support those regions in engaging with bodies in Wales.
The current rules and conditions governing the use of ESI funding within Wales are determined partly by EU legislation and partly by national rules established by the Welsh Government. As covered in our consultation proposals, we are committed to ensuring activities continue to have the right governance in place to manage public resources effectively, fairly and in an open and transparent way. Beneficiaries of future regional investment funding should expect to have to account to the Welsh Government for how they have used the funding and whether they have achieved the pre-agreed objectives and impacts. However, the absence of EU regulations in future, will enable us to achieve the right governance in a simpler, more flexible way, and provide opportunities to learn from each other’s successes.
The UK Government first announced its proposal for a UK Shared Prosperity Fund in the Conservative Manifesto in 2017 and the Prime Minister reassured Parliament that a consultation would be published and consulted on by the end of 2018. The UK Government missed these deadlines, despite repeated requests from Welsh Ministers for clarity.
Only eight months remain until the current ESI funding programmes tail off. The single most important thing that the UK Government can do is make the funding available and quickly. Existing EU programmes do run into 2023, but not uniformly. As our current programmes tail off, successor investment programmes are needed from early next year. This will help ensure an even level of support, ensure that existing delivery partners will still have a role in future arrangements and retain operational capacity, and provide planning certainty for new arrangements to be established. This is particularly important as we plan for the economic recovery in response to COVID-19.
Our new Economic Resilience Fund, worth £500m and announced on 30th March, is a key and immediate response, and aims to plug the gaps in the support schemes already announced by the UK Government, including the Job Retention Scheme and the Self-Employed Income Support Scheme. We are also taking full advantage of the EU’s flexibility regarding re-prioritising current ESI funding to help deal with the crisis situation directly.
The Welsh Government's approach to the development of a future regional investment model has been immediate, clear and outward looking, and we have engaged widely with stakeholders across Wales and the OECD to develop our consultation. Welsh Ministers will be considering the stakeholder responses to our consultation, which closes in May, in July so that we remain on track to deliver, with our partners across Wales, successor regional investment programmes from 2021. The same urgency and flexibility is now needed from the UK Government and we see the SPF playing a key role so that the future livelihoods of people, communities and businesses across Wales are not put at risk.
This is even more significant in light of the substantial impact of COVID-19 and the negative impact it is having on our economy. COVID-19 impacts are affecting the supply side of the economy through reduced workforces and supply chains and the demand side through falls in consumer confidence. This is likely to be further compounded by issues around finance and cash flows.
Due to the nature of the workforce opportunities for homeworking are less prevalent in Wales than across the UK as whole. There is strong presence of industries and sectors in Wales that have already been temporarily closed down and others that are likely to be impacted throughout the crisis – tourism, hospitality and events are notable examples. 17.8% of all enterprises headquartered in Wales in 2019 fall into industries included on the UK Government list of businesses that should remain closed. The proportion of Welsh enterprises is higher than the proportion for the UK as a whole (15.7%) as well as the proportion in England (15.4%) (UK Business Counts, ONS). The total numbers of employees in those industries represented 16% of employees in Wales in 2018, a similar proportion to the UK as a whole and England (Business Register and Employment Survey). Furthermore, Wales has a larger share of manufacturing output compared to the UK as a whole – accounting for 17% of Welsh GVA compared to 10% for the UK. This means that Wales faces particular challenges in this sector in the face of the current crisis. However, the widespread nature of the crisis means that a range of sectors in Wales are likely to be impacted.
During the previous recession in 2008/2009, output in the private sector was harder hit in Wales than that of the UK and took longer to recover. Previous periods of protracted economic dislocation have also shown that the people most severely affected are those who are most disadvantaged in the labour market, for example those with low skills, ill health, and disabled people. It is hugely important now that the UK and the Welsh Government, together with our key stakeholders across Wales, demonstrate a continued and strong commitment to work together on a plan for economic recovery across the UK. Our cross-UK response to COVID-19 shows that we can work co-operatively and constructively together, building a partnership approach which delivers and also recognises devolved competence. Addressing inequalities across the UK will become even more relevant because of COVID-19.
It’s been nearly three years since the SPF was first announced by the UK Government in the Conservative party manifesto of 2017. Since then, there has been no clarity from the UK Government about what it actually means for Wales and the other devolved Governments. Instead, the UK Government has just made passing references to the SPF, most recently in the Conservative Party manifesto (December 2019) and 11 March budget.
We have always maintained that the development of a future fund must involve real participation and genuine agreement across the four UK Governments, rather than a solution imposed by the UK Government. A ‘one size fits all’ approach cannot work if we are to take full advantage of the opportunities to join things up in Wales effectively. The Wellbeing of Future Generations (Wales) Act (WBFGA), our integrated approach in the Economic Action Plan, and the regional model in Wales are all distinctive features not found in England.
As a net beneficiary of ESI funding, we are clearly disappointed and concerned about the lack of progress and engagement by the UK Government on this hugely important agenda for Wales. However, we are still keen to work constructively with the UK Government so we can make contributions to the debate on a proposed future model of the SPF, which fully respects the devolution settlement, and meets Wales’ needs and opportunities.
We had a constructive meeting with the Secretary of State for Wales on 10th February. We now hope to build on that constructive meeting to secure agreement on some key principles of how the UK and the Welsh Government might work together effectively in the immediate future. We believe that Wales is well placed to move ahead in advance of the rest of the UK in terms of starting to deliver the replacement for the ESI funds and we are keen to work with the Secretary of State for Wales and his UK Government colleagues to achieve that.
We look forward to the feedback from our partners and stakeholders across Wales on our regional investment consultation proposals. The Welsh Government will continue to use the expertise of key stakeholders and experts across Wales to inform our agreed Welsh position on future regional investment and how it can work most effectively in Wales.
Both the ESI Funds and the SPF that will replace them are Government budgets and, as such, they exist to implement and add value to policies rather than themselves setting a distinct policy framework. In the case of ESI Funds, the underlying policy is the EU’s Cohesion Policy, which aims to strengthen economic and social cohesion by reducing disparities between regions across the EU. There is a significant overlap between what we share as policy objectives and EU Cohesion Policy.
Co-financing has been an important aspect of ESI funding. The SPF should be constructed in the same way. Co-financing facilitates partners coming together with additional budget contributions which will not only enhance projects within communities, but will also create a sense of ‘ownership’ among sectors to deliver a project well. This means using the SPF to leverage contributions from the Welsh Government, the UK Government, Local Authorities, universities and colleges, the private and third sectors.
A ‘one size fits all’ approach cannot work across the UK. The Welsh Government is actively supporting a strong regionalisation agenda, with greater delegation to regions and local areas. We believe that they are best placed to determine their needs, opportunities and strengths and form new and dynamic partnerships which can innovate and link places and investments in fresh and imaginative ways. Our consultation proposals, developed in genuine partnership, provide a model for a more effective, integrated set of interventions focused on the needs of specific regions and places, with our Wellbeing of Future Generations (Wales) Act (WBFGA) at its heart.
The Welsh Government has previously retained significant autonomy in the selection of projects in line with priorities (known as Specific Objectives) agreed with the European Commission (EC). Each Specific Objective identifies the socio-economic need and the specific improvements to be achieved through ESI funding. They also identify the results to be achieved, and all proposals are expected to make a measurable contribution to these results. However, the requirement to demonstrate measurable results is key to presenting a convincing case for investment to the EC, hence the specific focus on outputs.
Our consultation sets out proposals for creating an effective monitoring and evaluation system to help deliver our outcomes-focused approach in line with the WBFGA. We want future interventions to be monitored through a common set of indicators which could be applied across our national framework. Regions, however, could include additional indicators for specific initiatives. Evaluation should examine the longer-term difference made and benchmark regions’ performance, not just between themselves and the rest of the UK, but across Europe in line with the OECD’s standards.
In summary, we propose maintaining high standards of evidence-driven policy, while creating a more proportionate system to monitor and evaluate in future. Where appropriate, we will establish a consistent set of indicators comparable across interventions and geographic/ regional areas. We will also ensure the sharing of best practice and lessons learned across Wales and beyond.
It was only in the Conservative Party Manifesto (December 2019) that financial information regarding the SPF was announced. The Manifesto noted that: the SPF will ‘at a minimum match the size of the funds in each nation’; ‘Wales will receive at least the same level of financial support as it currently receives from the EU’; and included assurances that ‘Wales gets a fair deal, with major investments in infrastructure and industry to deliver real opportunity across the nation’. Despite these references, we still enter the next financial year (2020-2021) with no certainty that funding will be continued from January 2021 when the current ESI programmes tail off. The Welsh Government has frequently made the case for a smooth transition between investment programmes to avoid a disruptive cliff-edge for businesses, communities and people across Wales.
As noted in earlier sections, the aim of ESI funds is to improve social and economic cohesion within the EU. This funding has made a significant difference in Wales in areas with distinct structural and demographic challenges. These problems still exist in various regions of the UK, particularly Wales. The Welsh Government is strongly of the view that the amount of funding received in Wales from the EU is justified and commensurate with our needs in this area; indeed any reduction in funding from current levels would be detrimental to promoting prosperity in Wales and to any chance of rebalancing the UK economy.
The Barnett formula is a population-based calculation used to determine changes to devolved Governments’ budgets for existing responsibilities, reflecting changes to comparable expenditure programmes in England. The Barnett formula is not used to allocate funding for newly devolved programmes.
When an area of responsibility is devolved, the funding allocations are generally based on current levels of expenditure as this maintains the existing service and is more likely to reflect need than a population-based approach. This provides the most appropriate model for determining the allocation to Wales to replace ESI funding. The current level of ESI funding in Wales is linked to the scale of economic challenge which it faces and therefore has a clear needs basis. A population-based calculation like Barnett would give Wales a raw deal and create significant negative financial implications. The level of replacement funding to Wales should therefore continue to be allocated on a needs basis, which would be the fairest way for supporting economic activity.
Importantly, the principles of future funding must reflect the intervention logic behind the last UK Partnership Agreement for ESI funds, where there was an understanding that the structural challenges that Wales faced justified additional funding over and above a population share. Given the socio-economic situation in Wales has not changed substantively since the last round of funding allocations, for reasons discussed above, as the All-Wales Parliamentary Committee made clear as well as other reports and evidence, there is a strong case for the current proportionate allocation to be maintained.
In future, we would be keen to explore fuller flexibility in how the Welsh Government manages its funding, including higher borrowing limits and increases to the annual and aggregate limit on drawing on the Welsh reserve, with greater flexibility to shift between capital and revenue. When allocating investment funds to support balanced regional development, it would be important to consider specific criteria, including differences in population growth, or the initial levels of funding received via ESI funds (for instance, this could be achieved through an Indexed Per Capita (IPC) formula). Further criteria may also be used, such as local and regional socio-economic characteristics, in order to have a more distributed approach and capitalise on the opportunities of the future.
We propose that the UK Government allocates a specific, clear and transparent allocation to the Welsh Government directly, badged as our share of the Shared Prosperity Fund. This will be for the Welsh Government to devolve and allocate appropriately in line with the priorities to deliver inclusive growth agreed in consultation with our partners.
This will include the decentralisation of some funding to the regional level, closer to the people which the funding aims to benefit in all parts of Wales. This is aligned with the Welsh Government’s plans for greater regional collaboration including the potential vehicles of the proposed Corporate Joint Committees being taken forward by the Local Government and Elections (Wales) Bill and Regional Economic Frameworks being co-designed with stakeholders in each region of Wales.
We reject competitive bidding in which the UK Government is the judge and jury when it is also responsible for spending in England. The Welsh Government will continue to operate within a Programme framework whereby projects are rigorously evaluated against criteria which are set transparently and ensuring that these are applied consistently. We have a very successful track record in governance and the control environment which is demonstrated in the substantially low error rates against the EC materiality threshold of 2%. This is discussed further in response to Question 10.
The challenge with competitive bidding is that it often acts as a proxy for existing productivity and agglomeration advantages, meaning that funding does not go to those who need it. If Wales were required to bid in to a UK pot, not only would we expect to receive less funding, but that funding would be disproportionately allocated to Cardiff, major cities and universities, and not spread more widely. It is also a concern that a competitive principle would spur more competition and duplication across regions and local authorities, deterring co-operation and unfairly advantaging those with greater resources and capacity to bid in. The SPF however can support investment that improves Wales’ ability to compete with the best.
One of the strongest areas of support for the Welsh Government’s proposed replacement of ESI funding in previous stakeholder engagement exercises is the retention of a longer-term multi-annual funding approach.
Multi-annual financing provides stability and confidence to organisations, particularly Higher Education and the Third Sector, enabling them to retain expertise and acquire match funding. This is particularly important when considering repayable finance through the likes of the Development Bank of Wales and medium and long-term investment programming and planning that can be necessary for large and costly infrastructure projects.
The Welsh Government is prevented by budgetary rules from ensuring any replacement funding would be delivered multi-annually, meaning any commitments on multi-annual financing will need to be made within the fiscal rules and taking account of the financial context at the time.
One of the most important things that the UK Government can therefore do is provide assurance on the need for multi-annual budgets for the SPF as well as for other areas of public spending. All our conversations with partners and beneficiaries cite this as one of the most highly valued features of current arrangements, as it allows for longer-term planning across a sector, with linked and mutually supportive interventions being supported over time, for example ensuring that we have the skills locally to make the most of infrastructure projects.
The UK Government has always said that leaving the EU would result in an increase in the powers of the devolved Governments. With the current ESIF arrangements, the administration of this regional development funding is fully devolved to the Welsh Government. Welsh Ministers will continue to make the case to the UK Government for sustained investment and for an assurance that the Welsh Government - working in a transparent way and with the guidance of the broad-based partnership represented on the Regional Investment Steering Group - can retain the autonomy and take the crucial decisions on how funding promised by the UK Government will be spent in Wales.
ESI funding in Wales has been managed highly effectively during the two decades of devolution, ensuring high levels of compliance with the regulations and rules required to allocate funding. High levels of funding have been invested, spent, monitored and evaluated in line with EU rules, aligned where appropriate with Welsh and UK Government priorities. EU funding in Wales has demonstrated a strong track record of value for money, as evaluated by the Wales Audit Office,  and other detailed evaluations of projects and programmes.
WEFO within the Welsh Government, responsible for the coordination of EU regional investment since devolution, has amassed extensive knowledge and experience in managing and administering large sums, complex projects and diverse stakeholders. It has developed strong expertise in programme design, programme management and project assessment as well as effective monitoring, control, verification and record keeping functions. Its processes have been subject to various reviews (for example those by the European Funds Audit Team [EFAT], Guilford Review and the Wales Audit Office) with no significant changes required.
EFAT undertake the role of the Audit Authority for ESI funding programmes in Wales, and carry out independent audits on WEFO’s systems and controls as well as testing the eligibility of expenditure claimed by projects. This work provides assurance to the EC on how funds in Wales are being invested and spent in line with EU regulations and national eligibility rules. EFAT is subject to regular audit and review by both the EC and the European Court of Auditors (ECA).
Each year, EFAT produces an Annual Control Report for the EC for approval, which covers an error rate and audit opinion on expenditure certified by WEFO to the EC for the accounting reference year. Wales’ error rates continue to be significantly below the EC’s 2% threshold (e.g. 0.05% in 2018 and 0.10% in 2019 across all four ERDF and ESF programmes). 
WEFO works closely with other Welsh Government departments and has a strong track record in fostering cross-sector relationships, helping align policies, and supporting the investment needs of diverse policy sectors (Auditor General for Wales, 2018; Holtham, 2019; Welsh Government, 2019). The quality of Welsh projects has also been recognised internationally, including through the EC’s annual RegioStars awards.
Independent evaluations show the successful delivery of ESI funding in Wales. For example, unemployed participants on EU-funded employability projects are 46 per cent more likely to find work over twelve months than non-participants. Economically inactive participants are 84 per cent more likely to find work than similar economically inactive people who have not benefited from this support. The way EU funding has been administered in Wales has allowed new approaches to be trialled, for example via preventative actions such as investment in early years, mitigating the risks of dropping out of education, employment or training in later life.
As our work with the OECD has identified, regional economic development is an ongoing learning process. Both the Welsh Government and the EC’s approach to delivering ESI funds have improved significantly in the last two decades, both in terms of their administration and focus. Extensive ex-ante assessments after each programming round have been carried out to evaluate and monitor our effectiveness and improve future programmes. Together with working with our stakeholders, and socio-economic analysis to identify needs, challenges and opportunities, they provide a robust evidence base and rationale for prioritising investments, learning lessons, testing new ideas, and identifying best practice to maximise impact.
The Welsh Government has undertaken extensive stakeholder engagement, including with the OECD, substantive policy development, and significant evidence gathering and analysis to reach its positions set out in Securing Wales’ Future (Jan 2017), Regional Investment in Wales After Brexit policy paper (Dec 2017), the Economic Action Plan (Dec 2017), and, more recently, our current consultation A Framework for Regional Investment in Wales.
The Welsh Government is committed to good management of public funding, and would be happy to provide the UK Government with necessary reassurances that best practice on replacement rules, monitoring and evaluation and international benchmarking will be retained. This would be aided by the UK Government proactively linking the necessary data to do so, which the Welsh Government is currently unable to access, significantly limiting our ability to evaluate more widely. Beneficiaries of future regional investment funding should expect to have to account to the Welsh Government for how they have used regional investment funding and whether they have achieved pre-agreed objectives and impacts.
We are committed to working in partnership. The UK Government has to work, in a way which will secure UK-wide buy in to the SPF concept that we will need if our political differences are not to defeat the delivery of outcomes that we all want to see. That engagement has not happened to date which is disappointing.
Since the 2016 referendum, the Welsh Government has been consistent in pressing the case for strengthening the intergovernmental relations systems to establish mechanisms that would bear the weight of the significant and ongoing business our administrations will need to do jointly. One of the most important things the UK Government should do in order to create a stable system for overseeing a future fund would be to establish enhanced Ministerial and official level arrangements for economic coordination and cooperation in advance of the end of the transition period. Such a forum would allow our Governments to oversee both the coordination of regulations and the strategic goals of a future fund such as the SPF. Agreement of the overarching purpose of the SPF should be agreed by our four Governments on the basis of parity.
For projects that lever in funding from UK Government programmes, we would expect UK Government involvement in that project’s governance, as was the case in the past, for example DWP. We also want to continue to empower a broad-based partnership at a national (Wales) level, as well as regional partnerships to oversee the management of the funds. This will help ensure integration and added value through the interaction of different programme strands/projects. That is why we believe it is so important that the entire quantum of replacement funding is managed under one ‘umbrella’ regardless of whether the actions relate to reserved or devolved competence, or indeed to the powers and responsibilities of local government, the third sector, universities or the private sector.
Regarding lessons learned from the role of the collaboration between the UK Government and the Welsh Government in the administration and funding of City and Growth Deals, this is a challenge as it is a new arrangement without any precedent. It is an arrangement whereby the UK Government channels its share of the Deal funding through the Welsh Government. However, we are clear that there is a joint responsibility across both parties in ensuring the Deal partners deliver against the commitments set out in each Deal’s Heads of Terms.
Given our experience so far, this type of arrangement is still under development and is potentially too cumbersome to replicate on a larger scale such as the SPF. At present Wales has two Deals in the ‘delivery’ phase with the remaining two in development. Each Deal is different in its organisation and delivery arrangements to the extent that we do not think the model would work for something on the scale of the replacement for the ESI funds.
There are lessons to be learned from the collaborative working between the UK Government and the Welsh Government on the Deals. For example the overarching governance framework has not yet been properly developed and agreed. The UK Government and the Welsh Government have recognised this and are now jointly working towards an appropriate structure, starting with the development of a Memorandum of Understanding (MOU). The MOU has been broadly agreed as a useful starting point but needs to be refined and has not yet been signed off by Governments. However, it should be highlighted that we are encouraged by the precedent to provide funding through the block grant and outside the Barnett process and on the multi annual basis afforded by this working arrangement.
The Welsh Government is committed to regionalisation, which requires a body with the legal ability and the operating capacity to work at the regional level. Potential vehicles to deliver greater collaboration at this level are the Corporate Joint Committees (CJCs), proposed in the recent Local Government and Elections (Wales) Bill, with enabling powers for economic development. It is planned that these will be formed from the membership of the constituent local authorities to ensure democratic accountability and they will be in operation from 2021, with the legal abilities to manage and distribute funds.
However, if they are to be the delivery vehicle, CJCs will need to reflect the requirements in the ongoing Social Partnerships (Wales) Bill and the commitments to stakeholder engagement such as those set out in the Wellbeing of Future Generations (Wales) Act (WBFGA). The consultation is very clear that any future model for delivery will continue to have a strong commitment to strategic, strong and inclusive partnerships with all our stakeholders across the public, private and third sectors.
Priorities for investment will be identified at regional level by the Regional Economic Frameworks currently being co-designed with stakeholders in each region, aligned with the existing City and Growth Deals. This regional model is outlined in our Consultation and has been developed working closely with Chief Regional Officers and City and Growth Deal leads. We now have an opportunity, made even more urgent by the economic impact of COVID-19, to work effectively together in order to ensure economic recovery.
A City Deal is an agreement between Government and a city or city region. It gives the city and its surrounding area certain powers and freedom to: take charge and responsibility of decisions that affect their area; do what they think is best to help businesses grow; create economic growth; and decide how public money should be spent. A Growth Deal is very similar in purpose, but is less geographically restrictive. The UK Government City and Growth Deal policy has evolved over time, resulting in significant differences in governance, assurance, funding and implementation between deals across the UK and indeed across Wales. This is a relatively new mechanism for channelling government funding into local government and, as such, is continually evolving.
We recognise City and Growth Deals as an important and valuable delivery partner and the Welsh Government is already a key partner in their governance arrangements. City and Growth Deals exist for specific purposes outlined by the UK Government with governance and delivery arrangements established for the specific purpose of the Deal. In the regional investment model proposed in the Consultation, the Deals are able to develop proposals for the investment in their region, forming a key part of the future Regional Economic Frameworks, and the Welsh Government will continue to work with them closely. Formal accountability for the use of this UK Government funding sits with the Welsh Ministers, and they are accountable for its use to the National Assembly. The Welsh Ministers are also accountable to the National Assembly for the use of the Welsh Government funding allocated to the City or Growth Deals.
We will need a consistent public subsidy regime for any SPF to operate across the UK. We would argue for an approach which both protects regions from distortionary competition while differentiating between stronger and weaker regional economies as the Assisted Areas map has done in the past. The exact shape of the regime is clearly something in which devolved Governments will want to have a say before a UK-wide public subsidy framework is put in place. Public procurement is another key area in this respect. These are frameworks which will have implications beyond the SPF of course, but the SPF will be difficult to operate consistently and fairly without these in place.
Currently, the EU wants the UK to adhere to its rules on State aid based on those that were in place when the UK was a Member State, with the intention for the UK to remain in alignment with any future changes to the EU State aid rules. This was outlined in the EU’s draft Partnership Agreement text that was published on 18 March 2020.
The implications for State aid rules from the SPF are difficult to assess as they will depend upon the eventual agreement reached on subsidies regulation in the ongoing negotiations between the UK and the EU. It is therefore difficult to state with any certainty what form of subsidy regime will be in place in the UK at the close of the Transition period, nor what the implications of the regime will be for the future UK SPF. We can only speculate as to what this will look like, as State aid is proving to be a point of ‘enhanced’ discussion.
The EU seeks the UK’s continued alignment with the EU State aid rules on an ongoing basis as a requirement of continued access to the EU Single Market, with the Court of Justice of the European Union as the final arbiter in State aid cases. The UK seeks a far looser arrangement, closer in substance to the WTO Agreement on Subsidies and Countervailing Measures, based upon precedents from previous EU Free Trade Agreements, such as those with Canada and Japan, and which respects the UK’s sovereignty.
 See for example Chapter 3 of this document. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/386126/TIEP_Report.pdf
 See for example: https://www.sciencedirect.com/science/article/pii/S0094119019300105.]
 ONS, Gross expenditure on R&D, 2020, Regional tables
 Findings given relate primarily to the following evaluations: Synthesis report: impact of the 2000-2006 Structural Funds in Wales; ESF Leavers Survey 2009-2014 Additional Analysis; ERDF Support for Business evaluation; and Ex-Post Evaluation 2007-2013 Structural Funds.