Substitution effects, delays, constraints and administrative capacity risk considerably reducing actual investments under cohesion policy and NGEU/RRF
By Jorge Núñez Ferrer and Tomás Ruiz de la Ossa, Centre for European Policy Studies (CEPS)
The economic crisis triggered by the COVID-19 pandemic and the war in Ukraine have led to changes being made to several EU instruments, and a number of new ones being created, most notably the Recovery and Resilience Facility (RRF). This has led to what some analysts have described as a plethora of funds, raising questions whether all the different EU means available will, or even can, actually be absorbed by the authorities involved for their purposes intended. Will bottlenecks occur? Will delays and substitution effects cause the EU’s overall budgetary support to be much lower than planned? Will the pressure to absorb the funding pose a risk to effective spending on projects that really have an impact? Jorge Núñez Ferrer, Senior Research Fellow, and Tomás Ruiz de la Ossa, Research Assistant at the Centre for European Policy Studies (CEPS), have taken a close look at the available data relating to commitments and payments. Considering programme approvals and implementation delays, they have drawn a number of preliminary conclusions on how the “new kid on the block”, the RRF, complements other EU funds, particularly those related to cohesion policy. They also look at the implications of the RRF for the future of the cohesion policy.
Late adoption leading to late operationalisation of funds…what are the consequences?
In October 2020, an agreement was reached at the Council about the Multiannual Financial Framework (MFF) and NextGenerationEU (NGEU) support. This agreement led to the adoption of a Regulation on the Recovery and Resilience Facility (RRF) in February 2021, and to the adoption of other Regulations governing the EU Funds, such as the Common Provisions Regulation in June 2021, governing cohesion policy. This is very late for the Funds to start operating, as can be easily observed from the delays in the adoption of cohesion policy partnership agreements. At the time of writing, five¹ EU Member States had not yet adopted their partnership agreements. For 2021–2027 cohesion policy, however, breathing space has been provided by REACT-EU² as part of the NGEU, adopted on 23 December 2020, offering 100% EU-financed grants under the 2014–2020 cohesion policy rules.
We are writing in autumn 2022, at a time when it is beginning to be possible to check the status of the different funds and gain a first view of the challenges ahead. In this article we present data on outstanding commitments and payments under the 2014–2020 cohesion policy, and data on the implementation of REACT-EU and the RRF. Our objective is to identify the impact of the delay in the regulations, and the impact of difficulties in absorption capacity. Early analyses (even before the final agreement of the MFF and NGEU) already indicated that there would be a substitution effect between cohesion policy support and NGEU funding, due to there being large amounts to absorb, and due to access to NGEU funds being easier³.
To understand the impact of the delay, it is necessary to master some jargon, particularly commitment and payment ‘appropriations’ in the EU budget. See Box 1.
Key aspects to look for
Determining whether the delay in the adoption of partnership agreements has had an impact on financial flows from the EU budget to Member States and regions is not straightforward. This is especially true for the past three years due to COVID-19, the n+3 rule, and the substantially different method of support provided under the cohesion policy and under NGEU. What indicators can give some insight?
Outstanding payments under the 2014–2020 cohesion policy
The past MFF has closed its commitment period, i.e. the time in which projects can be approved. This gives an indication of how much of the 2014–2020 MFF will ultimately be spent compared to the original allocation. The level of committed but as yet unspent funding can also give an indication of the capacity of the Member States to absorb the different funds. A large amount outstanding indicates difficulties in using funds, which will affect the Member States’ capacity to commit and use the new funds for the 2021–2027 period, particularly for cohesion policy, leading to substitution effects with NGEU and funding losses.
The implementation of REACT-EU
REACT-EU was created as a quick lifeline for cohesion policy beneficiaries until the end of 2022, allowing regions easier access to funds (100% EU-financed through central national budgets instead of between 60 to 85% for European Structural and Investment Funds). The funding is distributed based on the funding programmes and plans for the 2014–2020 MFF period. The use of the funds can help identify any absorption capacity problems. Have Member States been able to accelerate spending under the past cohesion policy and top it up with REACT-EU funding? Is REACT-EU adding or substituting for uncommitted and therefore lost funding from the previous MFF?
The implementation of other NGEU funds, and in particular the RRF
The implementation of this EU initiative and instrument is more complex to assess. This due to the delays in the adoption of the rules and the ‘refinancing’ nature of the RRF, as funds are not linked directly to programmes, instead de facto refinancing governments’ budgets for the expenditure they incur when implementing national programmes. However, the delays themselves open a number of questions on the timeline for spending the funds. It is by now clear that either substantial amounts of the NGEU/RRF will not be used, or that the timeframes will need to be reassessed. A number of programmes have not yet been even approved, in some cases due to national elections with long, drawn-out coalition negotiations. In some cases, more serious delays have been caused by rule of law breaches.
Cohesion policy 2014–2020 numbers
The implementation figures up to 31 December 2021 (see Table 1) show that some Member States are struggling to implement their planned expenditure for cohesion policy (European Regional Development Fund, European Social Fund, Cohesion Fund) for the 2014–2020 period. It identifies the Member States lagging furthest behind in payments, which include Spain and Italy, the two largest beneficiaries of the RRF, with 57% and 48% of the funds committed still not claimed.
Table 1. Commitments, spent and outstanding in % by 31/12/2021
The first column shows the level committed for the period. The second is the spent amount vs the available funds for commitments that the EU covers. If more projects are funded than the commitment level allows, the national authorities cover the shortfall with national funds. The third column shows the remaining percentage of commitments that can be realised by 2023; the fourth shows the same figure expressed in millions of euros.
However, the figures show combined EU and national spending, and do not reveal the amount of EU funding used. For that, we have to look at Figure 1 instead. This figure reveals the level of EU cohesion policy funding allocated for commitments to the Member States that had been spent by 14/09/2022. In Figure 1, the countries with an expenditure below 60 % of the available funding have been highlighted in red, since it is there that the risk of failing to use the resources is highest (i.e. de-commitments). Some of the funds ‘paid’ are transfers to organisations or financial institutions that implement programmes, so some unused ‘spent’ funding may be recovered in 2023. This makes the results more concerning, as the picture may overstate the level of expenditure.
Figure 1 — Payments from the EU as percentage of the allocation for commitments in each Member State, 2021
Italy and Spain are the Member States which pose the highest concern in this respect, because their difficulties in using the EU funding imply a lack of capacity to manage the level of funding, while both countries are major beneficiaries of the Recovery and Resilience Facility (RRF) and REACT-EU from NGEU. While the amounts are less significant in absolute terms, Croatia is among the largest beneficiary countries of the RRF in relation its national GDP, therefore, a failure in implementation would be a missed opportunity for the country.
Implementation of REACT-EU
One way to identify the capacity of Member States to provide eligible projects and to implement them is to look at REACT-EU. With an exceptional 100% EU co-financing rate, fast commitments and expenditure should be expected. However, the results are surprising for the extreme heterogeneity in the use of the funds (see Table 2). A number of Member States have managed to commit most of REACT-EU funds quickly, and some have even managed to spend a large amount in the first year and a half. The most revealing factor is to see that Spain has neither been able to commit many projects nor to spend the funds. Italy seems to have a better capacity to commit and implement, even if performance is still below average.
Table 2. Commitments and payments per country, EU 27, year 2021
The surprising speed of commitments and payments in some Member States raises some questions worth exploring, such as the kind of projects approved, their relevance and expected impact. It is unclear what makes for the wide absorption capacity differences in some Member States where similar results could have been expected. Hungary has committed 67,5 % of its funds, which is a good but not exceptional score. However, in the same year, it has also spent 98 % of the funding committed under REACT-EU, more than any other Member State. The reason is unclear, but it could be linked to the fact that Hungary did not use administrative resources trying to implement RRF programmes, as the process of approval stalled due to concerns over the rule of law. Some Member States have committed all of their funds, but not implemented any of the REACT-EU projects, as no funds have been spent. The figures give no indication of either the quality or the value added by the projects that countries have committed funds to or implemented, and a lot of work will be required to better understand the differences.
2021–2027 Cohesion Policy numbers not promising
The analysis of the cohesion policy 2021–2027 implementation in its first year is relatively simple: it is close to zero in terms of commitments and zero in terms of expenditure. This is due to:
- the very late adoption of the implementing legislation (essential for the Member States to start approving and implementing projects);
- the subsequent very delayed approval of national strategies (the signing of partnership agreements); and
- the need to approve operational programmes.
Based on information published by the European Parliament in resolution 2022/2527(RSP) of 6 April 2022, only 0,2% of the funds for 2021 had been committed. Based on the normal budgetary rules, this means that 99,8% of the allocation for commitments for 2021 should be decommitted. In simple words, the MFF has officially lost around €45,3 billion on this policy alone. This has been caused by the difficulties in transposing the rules nationally and in getting projects ready in time to be approved and, most probably, the need to manage REACT-EU and RRF in parallel.
Some other losses should be expected in other budget lines. For rural development, a transitional period for 2021–2022 was agreed to allow the implementation based on 2014–2020 rules, which should cushion the beneficiaries from the impact of delays. The implementation data of what de facto is a 2014–2022 programming period shows that only 66 % of rural development funding under the European Regional Development Fund had been spent by the fourth quarter of 2021, as had 6 % of the additional NGEU rural development funding.
The European Parliament Resolution calls for a reprogramming of commitments, allocating them over the following years as was done in the past. However, given the difficulties seen in the implementation of the RRF and REACT-EU, it is questionable whether rescheduling of the funding would be accepted unanimously by the Council. As a consequence of the war in Ukraine, the numerous new challenges the EU faces poses new financial challenges and redistributing funding which Member States appear to be unable to absorb, seems to be a questionable priority.
Programme approval and implementation delays are reaching a new record in the MFF, extending well into 2022. This will probably lead to additional large under-commitments for this year, also because those Member States with limited administrative capacity would be inclined to prioritise the more flexible RRF projects. However, good projects cannot be ‘rushed’ either. It is not outlandish to expect a third or more of cohesion policy funds to be lost, with more than €100 billion in decommitments over the MFF period. Other shared-management funding such as rural development funding is also likely to be underspent.
Implementation of the RRF
By the end of August 2022, €79,41 billion in grants had been released to Member States, mainly for pre-financing, some for the first financing after milestones were achieved, and €33,37 billion in loans. According to the European Commission’s implementation database, 5 % of the 3 700 projects and 2 000 reforms of the RRF have been completed⁴. The link between the funding released and the investments is not direct. The funding released is in tranches not fully linked to the cost of the milestones. This is reinforcing the need for clear monitoring systems in the RRF or methods for ex-post control and recovery of funds for unrealised investments.
Controls and monitoring are thus an area of concern. The European Court of Auditors is scrutinising the European Commission’s monitoring of the implementation of the milestones and its set-up of appropriate financial control systems⁵. Member States are required to develop the necessary control systems to quantify the financial contribution to each milestone. Setting up control systems is in itself a milestone. Due to the complexity in setting them up, control systems are not required to be fully functional for the first set of milestones to be achieved⁶.
RRF funding has started with a delay, and some Member States have not yet started or had their plans approved yet. It is likely that the RRF commitment period and expenditure will need to be extended. More delays will probably occur, as the European Commission will probably prefer to delay payments than need to reject requests⁷. It is very likely that the delays will lead to a shift of the RRF schedule to the end of the MFF, and even to an overlap with the next MFF.
RRF as impetus for cohesion policy reform
What is clear from previous sections is a growing probability that the RRF will be prioritised, to the detriment of other EU Funds. The difficulty faced by Member States in allocating cohesion policy support for 2014–2020 and REACT-EU funding points to a significant shortfall in the use of the available EU funds. It is also important to point out that if a Member State’s administrative capacity is insufficient to use Cohesion Policy funds, the government will focus its administrative resources on spending RRF resources. Not only is the RRF less onerous to spend without national co-financing, but it is also in the political limelight.
The instability created by the war in Ukraine will probably make it necessary for considerable additional financial resources to be made available to cushion the negative effects of the conflict, to continue to support Ukraine and, possibly, to help developing countries affected by the war. To do so, the EU needs to formalise the mechanisms it has to borrow to cover lending and grant operations. In addition, the EU’s responses to crises have also been relatively slow, and its decision-making, monitoring and control systems seem to be unable to offer support at the speed required. For cohesion policy, deployment delays seem to be partially caused by excessive rules and restrictions that compensate for weak impact monitoring in the past and the present.
A partial compromise was found for the RRF by using milestones rather than ex-ante detailed project-based programming. However, the mistrust between Member States soon led to rigid ex-ante financial pre-allocation controls, which have delayed the approval of plans, slowed down deployment and reduced flexibility. The EU needs to move away from rigid pre-allocation and the ‘specification’ principle that ringfences funding for programmes and projects. It should focus more on achieving milestones, which would represent a move towards a system which covers expenditures as reimbursements, as is partially the case for the RRF.
In future, perhaps a system could be considered that provides EU loans which are eventually transformed into grants, but only if objectives are achieved. After all, NGEU was unconceivable only a few years ago. Therefore, a fundamental reform of the cohesion policy should also be achievable, a reform which gives national and regional authorities the right incentives while reducing administrative burdens.
¹ Ireland, Latvia, Luxembourg, Malta, Spain and Sweden.
² REACT-EU stands for Recovery Assistance for Cohesion and the Territories of Europe.
³ See for example Alcidi C., D. Gross and Corti F, Who will really benefit from the Next generation EU Funds, CEPS Policy insights, PI2020–25, October 2020. https://www.ceps.eu/wp-content/uploads/2020/10/PI2020-25_Next-Generation-EU_funds.pdf
⁵ As described in the annual report by ECA on the implementation of the 2021 financial year: ECA, Annual report on the implementation of the EU budget for the 2021 financial year, 13 October 2022.
⁶ As has been the case for Spain and reported in ECA (ibid,), para 10.30.
⁷ This is becoming clear from anonymised semi-structured interviews conducted by CEPS in the framework of Eurofound (forthcoming) Explaining convergence-the geographical divide and impact of COVID-19, Research report, Publications Office of the European Union, Luxembourg.
This article was first published on the 2/2022 issue of the ECA Journal. The contents of the interviews and the articles are the sole responsibility of the interviewees and authors and do not necessarily reflect the opinion of the European Court of Auditors.