Reforming the EU’s Cohesion Funds

The city of Bytom lies at the heart of Silesia – a region in the south of Poland that used to be the industrial center of the country. Through the second half of the 20th century, the Communist government fostered steel and coal production on a wide scale. Following the political transformation of 1989, the newly elected democratic government closed down most industrial outlets in the region in an effort to improve productivity. This resulted in unprecedented structural unemployment – people who spent their lives working in industry lost all prospects of finding a job in the new service-based economy. Since the transformation, the city has experienced a painful decline.

Image courtesy of LUCPOL, ©2006, some rights reserved.

Image courtesy of LUCPOL, ©2006, some rights reserved.

Today, with a 21.5% unemployment rate, an atmosphere of inevitability and ubiquitous melancholy surrounds the town. The people, old and helpless or young and endlessly intoxicated, resemble the town:  an urban jungle, half abandoned, smelling of odors typically not associated with this part of the world. Within this apotheosis of human tragedy one comes across a rather peculiar structure. There, next to a church, lies a modern, high-tech educational-cultural-recreational centre that resembles a pent house. Walking through the large, almost state-of-the-art complex, one finds a large white sign. It states that the “project was co-financed by the European Fund for Regional Development”.

The European Union (EU) spent more than 2.5 million euro on a project that clearly does not target the needs of the local community. While the centre does undoubtedly have a social benefit, in a town like Bytom, art exhibitions and ecological rooftops should not take primacy over real development aid. What then is the formal process of EU fund allocation? How does it look in practice? How much scope is there for malpractice? And finally, what can be done to improve implementation?

Instead of focusing on the specific procedure of EU fund allocation, it is first useful to examine the structure and function of EU cohesion funds. The aim of these funds is to correct the vast imbalances between different member states. The system effectively redistributes income from the wealthiest states in the EU, like Germany or Sweden, to the new and poorer member states like Poland or Bulgaria. The largest EU cohesion fund is the aforementioned Regional Development Fund (ERDF), which allocates funds to particular regions within the EU in order to foster sustainability, entrepreneurship and technological innovation. The European Social Fund (ESF) focuses on building human capital and improving employability while the European Cohesion Fund (ECF) supports transportation networks and environmental policies on a national level.

From a macroeconomic standpoint, cohesion funds focus on the key determinants of long run economic growth i.e. investment, technological progress and labor productivity. At the same time they aim to minimize the environmental impact of development by promoting efficiency and sustainable energy. In the long term the new EU members are expected to converge in development with the wealthier member states.

Unfortunately, the bureaucratic journey from Brussels to the EU’s periphery is not an easy one. After the European Parliament and the European Council jointly agree upon the EU’s budget, a Partnership Agreement is signed with each state, which outlines how the funds will be allocated by establishing key priorities. As the negotiations between the EU and the member states come to an end, the member states and regions decide on the specific projects while the EU monitors their implementation. While the EU does work with member states over the course of the partnership, these last stages of implementation give domestic bureaucracies more autonomy. This institutional framework conforms with the principle of “subsidiarity” – the idea that all policies in the EU are to be implemented by public bodies closest to the impacted citizens. Committees in the regional governments therefore judge project applications and allocate funds accordingly.

The last part of the process places considerable responsibility on individual bureaucrats by relying on their expertise, judgment and integrity in deciding on the viability of specific projects. At this point, the governmental apparatus meets the external environment. The bureaucrats are at the centre of this confrontation and are influenced by external interests, their own opinions and undoubtedly also by the power that they hold. At this final step of the policy process malpractices are bound to occur either due to the lack of expertise or personal integrity.

The EU must therefore rely on local governments to monitor and evaluate the thousands of projects. Even if all standards are met formally, there is a possibility that the funds are used inadequately. Referring to the case described at the beginning of this article, the educational-cultural-recreational center certainly met all the criteria set by the EU. However, it was the responsibility of the local government of Silesia to judge whether the project cost-effectively targeted the needs of the community.  The EU aims to limit malpractices by implementing the principle of “additionality”, which means that the local government may not substitute EU funds for domestic funds. In the case described, the local government provided only 15% of the funds. Perhaps if this proportion would be increased, the funds would be allocated more efficiently. This is simply because voters are more mindful of how their tax money is spent and may not mind if French or German taxpayer funds are squandered.

On the level of local governments two other changes could potentially be implemented to limit malpractices. Firstly, the opportunity cost of a given investment should be reported and carefully analysed. If the 2.5 million euros could have been spent on building a center for the homeless, then it should be specified why the chosen project is better. Secondly, when considering the technicalities of the project, the lowest cost alternative must always be evaluated i.e. if a lower cost contractor would be chosen, would it be possible to help the local community more? Does the benefit obtained by building a more technologically sophisticated structure justify the higher cost?

On the level of the EU, the monitoring system could be improved. Of course, one cannot require the EU to monitor thousands of projects effectively – it is more efficient to have the local government take on this role. EU representatives should however conduct detailed and unannounced random inspections. If these inspections would yield unsatisfactory results and expose major issues, funding should be decreased and people should be held personally responsible. Having a stake in the projects that bureaucrats choose would lead them to feel accountable for their actions. These checks, while infrequent, should be conducted in person because, as it was pointed out, all projects by law must meet the criteria on paper. The real threat of exposure would be a sufficient incentive to improve standards and act ethically.

The EU’s internal development aid is an important part of the European integration project, but the centre in Bytom and countless projects like it expose systemic flaws in the system of allocating these much-needed funds. Reform of control mechanisms, both top-down and bottom-up, is urgently needed.