copy the linklink copied!Chapter 1. Building administrative capacity for Cohesion Policy financing

The state of public investment: spending is picking up, but needs remain significant

The 2008 global financial crisis put strong pressure on global investment (IMF, 2018[5]; OECD, 2018[6]). The fiscal consolidation strategies and austerity packages that followed the crisis in OECD member countries strongly affected public investment, which was mainly used as an adjustment variable (OECD, 2011[7]; 2013[8]). This also holds true in the European Union. Of the EU 28 countries, public investment has declined since the 2008 crisis. There was a stabilisation between 2012 and 2016, but this was followed by a slight decline in 2015, which can be partially explained by fiscal consolidation, as well as the impact of ESIF. According to the European Investment Bank (EIB), in recent years and among countries that are heavily dependent on ESIF, these funds accounted for around two-fifths of public investment, or nearly 2% of GDP. This caused them to suffer from a “cliff effect” suddenly turning negative after the 2015 deadline for payments under the 2007-2013 programming period (EIB, 2016[9]). Entering the 2014-2020 programming period, and since 2017, public investment started to rise, as countries and regions implement ESIF investments (Figure 1.2). Nevertheless, according to the 2018/2019 EIB report, while public investment is gradually picking up, it remains low. In particular, the fall in government infrastructure investment was most pronounced in countries subject to adverse macroeconomic conditions and more severe fiscal constraints (European Investment Bank, 2019[10]).

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Figure 1.2. Public investment in EU-28 from 2005 to 2018 (change in real terms)

Source: Authors’ calculation based on (Eurostat, 2019[11]; Eurostat, 2019[12]).

On average, public investment in the EU 28, as a share of GDP, decreased by 0.6 percentage points between 2008 and 2018 (Figure 1.3). Looking at each country, this drop has been particularly large in some EU Member States that are also major recipients of ESIF funding (e.g. Bulgaria, Croatia, Greece, Lithuania, Romania, and Spain).

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Figure 1.3. Many governments in the EU have reduced public investment since the crisis

Change (in percentage points) in the general government public investment as a share of GDP between 2018 and 2008

Note: The 2018 investment-to-GDP ratio for France and the Netherlands are provisional.

Source: Authors’ calculation based on (Eurostat, 2019[11]).

Meanwhile, there are significant needs for investment expenditure by all levels of government. It is estimated that between 2016 and 2030, approximately USD 95 trillion in public and private investment in energy, transport, water and telecommunications infrastructure will be necessary to support growth and sustainable development given the profound economic and demographic changes across the globe (OECD, 2017[13]). This is equivalent to about USD 6.3 trillion per year in the next 15 years. To this should be added an additional USD 300 billion annually if climate concerns are taken into consideration (OECD, 2017[13]); and in the EU, a further EUR 100-150 billion will be needed between 2018 and 2030 to bridge an investment gap in social infrastructure3 (European Commission, 2018[14]). The sticking point, however, is that investment in global infrastructure currently amounts to about USD 2.5 trillion per year (McKinsey Global Institute, 2016[15]; Brookings Insitution, New Climate Economy, and Grantham Research Insitute, 2015[16]). In addition, investment in physical infrastructure alone is not enough to secure regional growth and development – it is only one of many contributing factors. It is just as important to ensure effective investment in “soft infrastructure” such as a robust business environment and appropriate human capital formation. Many, if not all, of these hard and soft infrastructure needs are captured in the EU’s 11 Thematic Objectives (investment priorities) for the 2014-2020 programming period (European Commission, n.d.[17])4.

A growing body of work points to the positive effects of public investment on growth, and OECD research shows that countries with higher levels of public investment increase their productivity faster than countries with lower levels of public investment (Fournier, 2016[18]). In the long-run, increasing the share of public investment in primary government spending by one percentage point could increase the long-term GDP level by about 5% (Fournier, 2016[18]; OECD, 2013[8]). Several studies show that improving the management of public investment can also lead to substantial savings and enhanced productivity (OECD, 2013[8]; IMF, 2015[19]; McKinsey Global Institute, 2016[15]; McKinsey Global Institute, 2013[20]). Some estimates show that it is possible to generate savings of about 40% on infrastructure projects by making project selection, delivery, and the management of existing assets more effective (McKinsey Global Institute, 2016[15]; 2013[20]).

EU Cohesion Policy financing: its benefits and challenges

ESIF are used to finance investment dedicated to enhance economic and social development, reduce regional imbalances and contribute to meeting the development targets outlined in the Europe 2020 strategy, which emphasises smart, sustainable and inclusive growth. They have helped reduce the impact of the double dip recession, making a substantial contribution to the current recovery (European Commission, 2018[3]). For the five countries participating in this project, ESIF remains a major source of public investment for projects designed to stimulate economic development, sustain SMEs, and boost entrepreneurship and employment. Designed to reduce infra- and intra-regional disparities, and more generally to improve inclusion and well-being, Cohesion Policy thus represents the “visible hand” of the EU. The EC provides many examples of successful projects funded through ESIF: for example, ESIF financing has been used to reduce the energy consumption of public and private buildings in Bulgaria and to build modern motorways in Greece. In Croatia, ESIF is providing valuable support to improve the competitiveness of SMEs. ESIF help reduce the number of jobless households in Lublin, Poland, and have facilitated access by more than 750 000 people in Spain to improved basic services (European Commission, n.d.[21]).

Within ESIF, Cohesion Policy is a pillar of the EU’s effort to help governments make a tangible and lasting difference in citizen lives by closing socio-economic disparities. Cohesion Policy investments represent one third of the total EU budget and have funded the equivalent of 8.5% of government capital investment in the EU (European Commission, 2019[1]). While all EU Member States benefit from Cohesion Policy funding, its scale and relative importance as a source of development funding varies – representing up to or over 80% of public investment in some countries and less than 10% in others (Figure 1.4). Successfully managing the investment opportunities and resources that Cohesion Policy funding offers is a challenge, and requires effective administrative capacity of the investment cycle.

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Figure 1.4. Cohesion policy funding as an estimated share (%) of public investment, 2015-2017

Source: (European Commission, 2019[22])

Partnership Agreements (PAs) negotiated between the EC and Member States set out national-level ESIF investment priorities. PAs are designed to achieve the 11 EU Thematic Objectives (TOs) for 2014-2020 via a series of sectoral or thematic, national and regional, Operational Programmes (OPs). PAs also establish an indicative annual financial allocation for each OP. Across the EU, responsibility for managing and implementing OPs is assigned to institutions designated as Managing Authorities (MAs). MAs are usually housed in Ministries, often as specific units. EU Member States can also delegate functions to regional administrations, creating regional MAs with responsibility for ESIF in their territory. MAs, both national and regional, are quite diverse, representing the central and the subnational government levels, including states (in federal countries) and regions.

The operations of each MA is governed by a Management and Control System (MCS) that sets the institutional and legal framework for ESIF investment and OP implementation, as well as the common rules, procedures and monitoring mechanism in a country (Box 1.1). MAs are responsible for a range of activities that require technical knowledge and a broad array of professional competencies. They frequently operate in a tightly controlled legislative and regulatory environment where processes and procedures are clearly set out in order to minimise the potential for error or fraud. MAs can delegate some of their activities to Intermediate Bodies (IBs) while still remaining responsible for overall governance. Beneficiaries are the legal entities, usually businesses, government authorities (e.g. line ministries, agencies, city or municipal governments, etc.), non-governmental organisations (NGOs), or universities which apply for and can receive ESIF financing for a project designed to align with one or more TOs referred to in the OPs.

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Box 1.1. The Management and Control System and key functions of different authorities

ESIF funding is implemented under a ‘shared management’ system, which means the European Commission entrusts the Member States with implementing programmes at the national level. The Member States have primary responsibility for setting up a Management and Control System (MCS) that complies with the requirements of EU Regulations, while the EC plays a supervisory role by satisfying itself that the arrangements governing the MCS are compliant (Figure 1.5). This ‘shared management’ model creates a complex system of multiple checks where EU, national and programme-level bodies participate in a range of internal and external management and control activities. The MCS include all the ex-ante financial controls (i.e. before the EU claims), while the audit bodies carry out ex-post controls (i.e. after EU claims).

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Figure 1.5. Management and Control System in Cohesion Policy implementation: Structure and activities

Note: Lines and texts in red suggest all the checks and control activities; Cohesion Policy expenditure is also subject to audit by the European Court of Auditors, although this is not visually presented in the graph.

Source: Authors’ illustration based on (Byrne, 2014[23]; European Court of Auditors, 2013[24]).

Management and control activities of different entities

Managing Authorities (MAs) are responsible for granting and appraising applications, selecting projects for funding, managing administrative and on-the-spot verifications, authorising payments, collecting data on each operation, and establishing anti-fraud measures. In addition, MAs should provide guidance and support to beneficiaries.

Certifying Authorities (CAs) are responsible for making declarations to the EC and verifying the accuracy of programme accounts. They are also involved in procedures for certifying interim payment applications to the EC. CAs are also responsible for maintaining the computerised accounting records for each operation (e.g. amounts withdrawn, recovered, etc.).

Audit Authorities (AAs) ensure the effective functioning of an OP’s management systems and internal controls. In most cases, AAs are independent of EU funding offices and ministries, generally associated with State chancelleries, Ministries of Finance or Supreme Audit Institutions. AAs themselves are subject to the audit by the European Commission DG Audit and the European Court of Auditors.

MAs may entrust some of their management functions for the OP to one or more Intermediate Bodies (IBs). IBs can be line ministries, regional authorities, local authorities, regional development associations or other public or private bodies.

Beneficiaries are legal entities that receive EU funding, and are usually businesses or government authorities (e.g. line ministries, agencies, city or municipal governments, etc.), but sometimes also civil society organisations, universities, etc. Beneficiaries are responsible for ensuring a clear audit trail throughout the project delivery cycle and providing project information to other authorities in the MCS.

Source: (Byrne, 2014[23]; European Court of Auditors, 2013[24]; Ferry and Polverari, 2018[25])

Governance mechanisms and good institutional conditions support public spending and investment

OECD and European countries have a long tradition of using different mechanisms5 to ensure that governance practices support public spending and investment that contributes to regional development. To help national and subnational governments more effectively invest public funds, particularly in light of declining resources and increasing needs, in 2014 the OECD Council adopted the Recommendation on Effective Public Investment across Levels of Government. The Recommendation is founded on three Principles for Action, which are grouped into a series of 12 recommendations. These focus on governance for investment practices, and are intended to guide policy and decision makers at all levels of government as they design and implement public investment strategies (Figure 1.6).

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Figure 1.6. Recommendation on Effective Public Investment across Levels of Government: Principles for Action

Notes: For the full text of the OECD Recommendation on Effective Public Investment across Levels of Government, please see (OECD, 2014[29]); For the Toolkit for Implementation please visit https://www.oecd.org/effective-public-investment-toolkit/.

Source: (OECD, 2019[30])

The importance of good institutional conditions and governance for the efficient use of EU funds has been widely cited in the academic literature (De la Fuente, 2002[31]; Ederveen, de Groot and Nahuis, 2006[32]; Ederveen et al., 2003[33]) and dovetails with other findings regarding the importance of quality governance and government for effective investment spending (European Commission, 2018[3]). Survey data from 202 EU regions stresses that the quality of regional governance can act as a key determinant for the effective use of EU funds (Charron, Dijkstra and Lapuente, 2014[34]); and in Italy, for example, heterogeneity in regional administrative capacity has been linked to greater or lesser success in absorbing Structural and Cohesion Funds (Milio, 2007[35]).

Defining administrative capacity building for ESIF investment

Article 18 of the Common Provisions Regulation on ESIF emphasises the inter-related nature of the challenges facing EU Member States, from environmental and energy concerns to social inequality (European Union, 2013[36]). The projects funded through ESIF are, thus, intended to be integrated, multi-sectoral and multi-dimensional. As such, the guidance to MAs for the 2014-2020 period is correspondingly detailed in order to facilitate achieving these objectives. For example, for the 2014-2020 programming period, the volume of rules for Cohesion Policy alone runs to over 600 pages of legislation and 5 000 pages of guidance (European Commission, 2017[37]). The European Commission High Level Expert Group that monitors simplification for beneficiaries of ESIF for the next programming period acknowledged that excessive and overlapping guidance at the EU level “has long passed the point of being able to be grasped either by beneficiaries or by the authorities involved” (European Commission, 2017[37]). The simplification of ESIF guidance is a key aspect of the post-2020 period.

Investment and administrative capacity

Quality governance for successful ESIF investment depends on a variety of factors. Certainly, it depends on ensuring good institutional conditions. But it also depends upon various capacities, including investment capacity (Box 1.2) and administrative capacity. In practical terms, the importance of capacity has been supported by findings indicating that, for the EU 12, the planning and implementation for Structural Funds was affected by weak coordination, high turnover of staff, lack of skills and frequent institutional change in the first two framework periods after accession (Bachtler and McMaster, 2008[38]; McMaster and Novotny, 2005[39]). This illustrates the fundamental impact of human resource management and organisational development on administrative capacity. While time, experience and institutional memory appear to help MAs address these weaknesses, this pilot action highlights the room to support MAs all along the learning curve, regardless of their level of experience, and the value in creating opportunities for MAs to learn from one another.

Maximising the effectiveness of ESIF requires public servants with the right tools, skills and systems to develop and manage complex projects, as well as multi-level governance systems that support public investment. This is particularly important given that public investment through EU funds is a shared responsibility among national, regional, local, and the European levels of government, requiring effective multi-level governance mechanisms as well as skilled public servants to manage and administer investment cycles at all levels of government.

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Box 1.2. Defining capacity for effective investment

The issue of investment capacity is fundamental for all actors involved in ESIF investment – including governments, national coordinating bodies, MAs, IBs, beneficiaries and other relevant stakeholders – in order to design OPs, prioritise investment needs, select projects and monitor, evaluate and recalibrate performance. With respect to public investment, capacity refers to the institutional arrangements, technical capabilities, human, economic and financial resources, and policy practices that affect public investment. Strong investment capacities are an enabler to achieve important goals at different stages of the investment cycle (Figure 1.7).

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Figure 1.7. The investment cycle

Source: Adapted from (Mizell and Allain-Dupré, 2013[40]).

To support the effective management of public investment throughout the investment cycle, there are a number of abilities or actions that are fundamental to cultivate and support in each phase. Among these are:

Strategic Planning

Engage in strategic planning that is tailored, results-oriented, realistic, forward-looking and coherent with national and/or other higher-level objectives (e.g. Partnership Agreements). ✦

Ensure the quality and availability of technical and managerial expertise necessary for planning and executing public investment, throughout the investment cycle. ✦

Coordinate across sectors and/or jurisdictions to achieve an integrated (and place-based) approach and to ensure complementarities.

Involve stakeholders in planning to enhance the quality and support for investment choices, while also preventing risk of capture by specific interest groups.

Design mechanisms to monitor and manage risks to integrity and accountability throughout the investment cycle.

Investment design

Conduct rigorous ex ante appraisal. ✦

Link strategic plans to multi-annual budgets

Tap into traditional and innovative sources of financing. ✦

Investment implementation

Design and maintain transparent, competitive, public procurement processes with appropriate internal control systems. ✦

Mobilise private sector financing without compromising long term sustainability of public investment projects.

Engage in “better regulation” at all levels of government, and ensure that regulations are coherent among them.

Monitoring and Evaluation

Design and use monitoring indicators systems with realistic, performance-promoting targets. ✦

Conduct regular and rigorous ex post evaluation.

Use monitoring and evaluation information to enhance decision making and identify necessary adjustments.

Note: ✦ = a critical action for all actors involved in public investment processes.

Source: (OECD, 2018[26]; Mizell and Allain-Dupré, 2013[40]; Allain-Dupré, Hulbert and Vincent, 2017[41]; Rajaram et al., 2010[42]; Dabla-Norris et al., 2010[43]; Milio, 2007[35])

The term administrative capacity has no standard definition, despite extensive use. In the context of the EU, and particularly Cohesion Policy implementation, it can be conceptualised as the combination of capabilities used by countries to achieve effective spending of EU funds, namely human resources (numbers, quality in terms of skills and expertise, human resource management systems that structure incentives, etc.), organisational structure (institutional design, coordination and accountability of bodies in the management and implementation processes), systems and tools (including adaptability to procedures), and governance (legal and procedural arrangements) (Surubaru, 2017[44]; European Committee of the Regions, 2018[45]; EC-DG REGIO, 2018[46]).

Building on this, administrative capacity building (ACB) can be defined as developing skills, experience, technical, management and strategic capacity within an organisation. It is often achieved through the provision of technical assistance, short- and long-term training, as well as specialist inputs. The process of administrative capacity building may involve human, material and financial resources development, but also strategic planning (OECD, 2002[47]) .

Administrative capacity building is also a “learning-by-doing” process in which national and subnational governments can acquire necessary capacities on a daily basis through practice. To build the capacities needed, the “learning-by-doing” process should go hand-in-hand with differentiated and targeted capacity building activities and technical assistances. The administrative capacity of national, regional and local authorities to effectively manage such complex investments and financing mechanisms and ensure quality institutions and governance are therefore crucial for the successful delivery of EU funds and ultimately better cohesion across the EU.

Investing in ACB helps improve ESIF management, which eventually leads to optimising the absorption rate (spending available funds fully); to minimising irregularities (spending funds correctly); and most importantly, to maximising impact and sustainability (spending them strategically) (European Commission, 2018[48]). In other words, ACB increases the capacities of organisations involved in the management of European funds to effectively perform their duties and ensure more performant ESIF investment.

Building administrative capacity through Technical Assistance for Managing Authorities

Administrative capacity is recognised as one of the key factors contributing to the success of Cohesion Policy (Boijmans, 2013[49]; Rodriguez-Pose and Garcilazo, 2013[50]). Given its importance for effective and sustainable ESIF investment, the EU is committed to supporting Member States and their MAs build such capacity. Managing Authorities are quite diverse, representing both the central and the subnational government levels, including states (in federal countries) and regions. They are confronted with similar challenges related to skills, competencies or organisational capabilities, the ways they communicate with beneficiaries and/or the public, coordinate and interact with internal and external stakeholders, and arrange impact assessments, evaluation, monitoring and audits. How these challenges manifest, will differ according to the institutional and political context of a country or a region, as well as their length of Cohesion Policy experience etc. Gaps in their administrative capacities are widely recognised by Member States and EU bodies, hence the availability of support for public administration reform and technical assistance through Cohesion Policy.

The European Commission has made administrative capacity building central to Cohesion Policy and the Europe 2020 strategy. Since the beginning of the current programme period, the EC, and specifically DG REGIO, offers EU Member State administrations diverse mechanisms to strengthen their institutional capacity and professionalise those managing ESIF. These include investments in efficient public administration made under Thematic Objective 11, Technical Assistance to authorities that manage ESIF (Box 1.3), as well as specific programmes, such as TAIEX-REGIO PEER 2 PEER; Integrity Pacts; S3 Platform, Urban Development Network, guidance for practitioners on how to avoid public procurement errors; training seminars; and the EU Competency Framework for managing and implementing the ERDF/CF together with its self-assessment tool, which identify and address competency gaps.

The OECD analytical framework for administrative capacity building

It is important to stress that each MA drove the development process of their Roadmap, identifying actions, timelines and stakeholders, and that the goals, ideas and solutions captured in the Roadmaps were elaborated with the active participation of OP stakeholders in each country. The OECD provided the framework for thinking through the issues, helped articulate the actions, and facilitated the discussions.

To assist MAs think through and design their administrative capacity building Roadmaps, the OECD developed a concentric framework that captures the various dimensions that MAs must work with and/or consider as they move forward in the design and implementation of their ESIF OPs (Figure 1.8). Each dimension moves upward through the organisational and governance structures supporting OP implementation and ESIF investment.

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Figure 1.8. OECD Analytical framework for administrative capacity building