INTERVIEW: Where does €260 bn of EU funding go? 

Dividing the EU pot of regional development funds between newer and more advanced member states is a major challenge, as Marc Lemaître of the European Commission’s Directorate-General for Regional and Urban Policy (DG-REGIO) explains in an interview with PropertyEU.

To the outsider, it can be a mind-boggling exercise trying to understand all the various European funds, programmes and finance instruments at work across the EU. 

But to insiders such as Marc Lemaître, who heads the Directorate-General for Regional and Urban Policy (DG-REGIO) within the European Commission, this is second nature.

Appointed to the post in June 2016, the Luxembourg national was formerly director of office for administration and payment of individual entitlements – a job title that sounds almost Orwellian. But in the last three years, he has settled into the job of executing policy for this department whose objective is far from dystopian destruction, describing itself as being made up of 700 professionals from all over the Union who use their expertise to target investments that foster growth and create jobs.

We meet one Friday at his modern, modest office in a mainly residential suburb of Brussels to hear all about DG-REGIO’s objectives, not least how €260 bn of EU funding for regional development gets invested. Dressed casually for once (for which he apologises), Lemaître talks slowly and deliberately as he explains how the DG-REGIO helps with assessing interventions financed through the European Regional Development Fund (ERDF) and the Cohesion Fund (CF). The DG-REGIO also indirectly manages projects financed through the Instrument for Pre-Accession (IPA) and Urban Innovative Actions.

Big money 
From the €260 bn, about €199 bn is invested through the European Regional Development Fund (ERDF), about €63 bn through the Cohesion Fund (CF) and about €50 mln through the Instrument for Pre-Accession (IPA).

The European Regional Development Fund (ERDF) and the Cohesion Fund (CF) are two of five major investment instruments under the European Structural and Investment Funds. 
Collectively, these funds are aimed at key EU priority areas - supporting job creation, business competitiveness, economic growth, sustainable development and improving citizens’ quality of life. This in turn helps achieve Europe’s 2020 Strategy for smart, sustainable and inclusive growth and the objectives of the Cohesion Policy. Given these objectives encompass economic growth, employment, and sustainable development, how this department operates is useful information for property developers and investors alike.

Lemaître makes it clear that the private sector has a role to play. He describes the Cohesion Policy as an all-encompassing policy to stimulate public and private investment. The basis of the investment is to adopt a ‘territorial approach’ and strategise on what ‘coordinated investment actions impact a variety of priority areas’.

In the current funding cycle (2014-2020), the urban dimension is at the very heart of the Cohesion Policy. At least 50% of the resources for this period are for urban areas. Around €10 bn from ERDF will be directly allocated to integrated sustainable urban development. In the current cycle, the DG-REGIO monitors and manages the Urban Innovative Actions programme, whose objective is to identify and test new solutions through pilot projects in cities.

‘Close to €30 bn’ is programmed to be used for energy efficiency measures,’ Lemaitre adds.

The Instrument for Pre-Accession (IPA), on the other hand, is a fund through which the EU provides technical and financial assistance to ‘enlargement countries’ or countries aspiring to join the EU. 

Fund deployment
Explaining more, the ERDF aspires to what is called ‘balanced development’ in the different regions of the EU. The Cohesion Fund (CF) aims to implement transport and environment projects in countries where the gross national income (GNI) per inhabitant is less than 90% of the EU average. Unsurprisingly, given the objectives of these funds, in the current cycle most of the money is deployed in projects in Eastern Europe. In the current cycle these are Bulgaria, Croatia, Cyprus, the Czechia, Estonia, Greece, Hungary, Latvia, Lithuania, Malta, Poland, Portugal, Romania, Slovakia and Slovenia. 

Lemaître says the macro-economic impact is ‘most visible’ in member states where support is the highest as a share of its GDP. ‘The catching up process is quite dynamic,’ he says. 

The average GDP growth in the EU is around 1.4%, according to data. But Poland has been growing at 4.5%, Hungary at 4.9%, the Czech Republic at 2.7%, and the Slovak Republic at 2%. These ‘much higher’ figures are pleasing, he notes. ‘We do believe that what we see through our modelling and then through ex post analysis, we contribute significantly to this positive growth differential of those member states.’

When it comes to more developed member states that receive very little from Cohesion Policy, any improvements are much more likely to be seen ‘at extremely local level’. Funds might provide a lift to a deprived neighbourhood within a city, for instance, which it has done in Sweden. ‘It is not that you are changing the whole landscape of a country, rather being meaningful at a local level,’ points out Lemaître.

Recent discussions, however, have been taking place about changing the criteria for deploying funds to regions and member states. This could result in countries such as Poland and Hungary receiving less than they currently do. The EU Commission has added other conditions such as the integration of migrants, youth unemployment, climate and education levels to the traditional measure of economic growth.

The projects the DG-REGIO is involved with are quite varied. For example, two sections of motorway, totalling 25 km in length, between Tábor and Veselí and Lužnicí in the Czech Republic's South Bohemian Region have been constructed with EU financing. They are to form part of a high-speed road connection between the Czech capital, Prague and the Austrian motorway network. About €350 mln from the Cohesion Fund has been invested in this project.

An example of a major low-carbon infrastructure investment project in Poland would be in the tourist area of the Ziewala Valley in Lubelskie with the construction of a photovoltaic farm. The installation will contribute toward Poland’s goal of 15% renewable energy by 2020. Almost €900,000 from the ERDF is invested in this project. 

Although projects in developed member states are not dramatically changing the landscape of the country, they aim to create new market opportunities and bring about social impact.

‘Countries like Sweden, Denmark or Finland are already top of the class in research and innovation, and we try to push them to be even more ambitious and implement innovative projects,’ explains Lemaître. An example of this is the setup of the Danish cleantech industry which generates a little more than €40 bn in revenue per year and employs about 120,000 people. The Copenhagen Cleantech Cluster project is a network of companies and research institutes to spark ideas for new cleantech products and services and develop them into viable businesses. Almost €10 mln was invested by the ERDF to help create this network. 

In Sweden, South East Malmö project was aimed at uplifting the deprived neighbourhood in Malmö which suffered from high levels of unemployment. Social integration, local growth and job creation were achieved by bringing together public, private and non-profit members. Both the ERDF and the European Social Fund (ESF) contributed about €80,000 to help realise that project. 

All this sounds well and good, but how is success defined, what are the funds actually going to and how is it accounted for? Lemaître assures that there are sufficient rules and checks in place. ‘In the present period we have made a particular effort to ensure that we get results for the money deployed,’ he says. ‘We agreed with member states upfront on quantifiable targets at different operational levels to ensure we get value for the money given to them.’ 

The question of performance, value for money and transparency makes Lemaitre think of an overall aim to achieve energy-efficient renovation of close to 1 million households, which it hopes to exceed. Around 329,000 have been decided upon and 85,000 implemented.

Checks have been taking place despite concrete spending not yet being very advanced. He also mentions that there are so-called ‘performance reserves’. Funds can be attributed to investment areas performing well and subtracted from those that under-perform. ‘We have seen that, thankfully, not everyone has achieved their targets, because otherwise it would look a bit suspicious. But on the other hand, we have seen some significant over-achievement, which does suggest that the ambition was set at a relatively prudent level. But we do still believe that this is helpful to concentrate minds, especially on the ultimate output of the spending. 

Climate policy and the energy transition
Climate change and sustainability are definitely a part and parcel of Cohesion Policy, as Lemaître makes clear. 

Both the ERDF and the Cohesion Fund (CF) invest in projects that are aimed at promoting the low-carbon economy and sustainable urban development. This places the coal industry at odds with the department. 

‘Coal-based energy production is not compatible with a climate-neutral Europe in 2050,’ says Lemaître. ‘About 250,000 people in Europe are directly employed in coal mining or coal-fired power plants, and these are geographically concentrated. This number is even higher if one looks at the entire value chain. Around half of these are located in Poland, mostly in the southern part of the country. This clearly constitutes a social challenge.’

The climate challenge is evident in other parts of the EU as well. Germany has seen a decline in the installation of renewable power, in particular of windmills, since 2017. This is something very much noticed and commented upon at the DG-REGIO. Germany is off-track even to meet its 2020 targets for the share of renewables. In 2019, the installation of new windmill capacity has collapsed. Is this a question of money? ‘Probably not. It is way more complicated than that. There are regulatory hurdles, due to increased litigation or environmental protection, that is slowing down progress.’

The Renewable Energy Progress Report of April 2019 says for 7 member states there is some uncertainly relating to achievement of 2020 goals. Those are Austria, Germany, Latvia, Romania, Slovenia, Slovakia, and Spain.

Major challenges ahead 
If the remit of the DG-REGIO sounds wide, then that is because it is. But it is not dependent upon Lemaître staying in office, rather the political will in the new European Parliament and Council. 

Commenting on his time at DG-REGIO, Lemaître says ‘policy orientation we have undertaken is not dependent on individual people sitting here or there. So, whenever I would be asked to make way for someone else, I expect, very honestly and in all modesty, that these policies on general orientation and its priorities, would not fundamentally change.’

But one thing that might fundamentally change is the funding of the EU itself. The EU is facing a ‘difficult future’ says Lemaître from a financial point of view because of the withdrawal of the UK. 

The game plan has been to ask the remaining 27 member states to increase their contribution. At the same time, there would be some savings. Therein lies the challenge. The needs of the EU are not decreasing, certainly when it comes to climate change and migratory pressure. Nevertheless, Lemaître hopes the policies he describes will remain intact and with more or less the same financial firepower behind them.

This is Part 2 of the interview with Mark Lemaître. Part I appeared in the October issue of PropertyEU.

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