Brussels, 14.7.2004

COM(2004)492 final

2004/0163(AVC)

Proposal for a

COUNCIL REGULATION

laying down general provisions on the European Regional Development Fund, the European Social Fund and the Cohesion Fund

(presented by the Commission){SEC(2004)924}

EXPLANATORY MEMORANDUM

1. Introduction: necessity to revise the regulations

On 10 February 2004, the Commission adopted a proposal for the financial perspectives of the enlarged European Union of 27 Member States for the period 2007-2013 [COM(2004)101]. In this context, the Commission took the view that the Union’s intervention in a number of key policy fields required strengthening. In particular, the Commission decided that an ambitious cohesion policy should be an essential element of the financial package.

The decision reflected the work that had been undertaken since the publication of the Second cohesion report in 2001 which launched the debate on the future of cohesion policy in the enlarged Union [COM(2001)24]. On 18 February 2004, the Commission adopted the Third cohesion report [COM(2004)107] which presented a detailed proposal for the priorities and delivery system for the new generation programmes under cohesion policy for the period 2007-2013. The proposal is coherent with the broad guidelines set out in the Commission’s communication on the next financial perspective.

The Third cohesion report concluded that the enlargement of the Union to 25 Member States, and subsequently to 27 or more, presents an unprecedented challenge for the competitiveness and internal cohesion of the Union. Enlargement has resulted in the widening of the economic development gap, a geographical shift in the problem of disparities towards the east and a more difficult employment situation:

- the gap in per capita GDP between the 10% of the population living in the most prosperous regions and the same percentage living in the least prosperous ones has more than doubled compared with the situation in EU15.

- in EU25, 123 million people - representing some 27% of the total population - live in regions with a per capita GDP below 75% of the EU average as against 72 million people, or 19% of the total, in EU15. Of these, four out of ten citizens are living in regions belonging to the 15 “old” Member States while the other six are nationals of the 10 “new” Member States.

- Four million jobs will have to be created if the average level of employment in the 10 new Member States is to be aligned with that of the rest of the EU. Within the enlarged EU, appreciable employment gaps also persist according to age and gender.

At the same time, the whole of the Union faces challenges arising from a likely acceleration in economic restructuring as a result of globalisation, trade opening, the technological revolution, the development of the knowledge economy and society, an ageing population and a growth in immigration.

Finally, economic growth in the EU has slowed appreciably since 2001. As a result, unemployment has risen again in many parts of the Union with all the social implications which this entails. As a springboard to the future, the Union should fully exploit the opportunities provided by the current trend towards recovery.

In an effort to improve the performance of the EU economy, the Heads of State and of Government of the Union meeting in Lisbon in March 2000 set out a strategy designed to make Europe the most successful and competitive knowledge based economy in the world by 2010. The Nice Council in December 2000 translated the Lisbon objectives on poverty reduction into a co-ordinated EU strategy for social inclusion. At the Gothenburg Council in June 2001, the Lisbon strategy was widened adding a new emphasis on protecting the environment and achieving a more sustainable pattern of development.

Cohesion policy makes an important contribution to realising these aims. In effect, growth and cohesion are mutually supportive. By reducing disparities, the Union helps to ensure that all regions and social groups can contribute to, and benefit from, the overall economic development of the Union. Articles 3 and 158 of the Treaty reflect this vision, which has been reinforced in the draft Treaty establishing a Constitution by the introduction of a clearer reference to the territorial dimension of cohesion.

Cohesion policy is also necessary in a situation where other Community policies have important benefits combined with limited but localised costs. Cohesion policy helps to spread the benefits. By anticipating change and facilitating adaptation cohesion policy can help to limit the negative impacts.

For this reason, cohesion policy in all its dimensions must be seen as an integral part of the Lisbon strategy, even if today, as the Commission pointed out in its proposal on the next financial perspective, the policy design underlying Lisbon needs to be completed and updated. In other words, cohesion policy needs to incorporate the Lisbon and Gothenburg objectives and to become a key vehicle for their realisation via the national and regional development programmes.

Strengthening regional competitiveness through well-targeted investment throughout the Union and providing economic opportunities which help people fulfil their capabilities will thus underpin the growth potential of the EU economy as a whole to the common benefit of all. By securing a more balanced spread of economic activity across the Union, regional policy helps to reduce the pressures of over-concentration, congestion and bottlenecks.

The reform of cohesion policy also should provide an opportunity to bring greater efficiency, transparency and political accountability. This requires, first and foremost, the definition of a strategic approach for the policy spelling out its priorities, ensuring co-ordination with the system of economic and social governance, and allowing for a regular, open review of progress made. It calls for further simplifying the management system by introducing differentiation and proportionality in the context of sound financial management. Furthermore, it is necessary to further decentralise the responsibility toward the partners on the ground in Member States, regions and local authorities.

The present draft regulation is the proposal of the Commission for the next generation of cohesion policy programmes. It constitutes the basis on which, according to Article 55 of Council Regulation (EC) No 1260/1999 of 21 June 199 laying down general provisions on the Structural Funds, the Council shall review the mentioned regulation by 31 December 2006 at the latest. The Commission outlines the need to adopt the regulations in the course of 2005 in order to dedicate 2006 to the programming for the period 2007-2013.

2. The new architecture for EU cohesion policy after 2006

The Commission proposes that actions supported by cohesion policy should focus on investment in a limited number of Community priorities, reflecting the Lisbon and Gothenburg agendas, where Community intervention can be expected to bring about a leverage effect and significant added value. Accordingly, for the operational programmes, the Commission proposes a core list of a limited number of key themes as follows: innovation and the knowledge economy, environment and risk prevention, accessibility and services of general economic interest. For employment related programmes, the focus will be on implementing the reforms needed to progress towards full employment, improve quality and productivity at work, and promote social inclusion and cohesion, in line with the guidelines and recommendations under the European Employment Strategy (EES).

Concentration on three Community objectives

The pursuit of the priority themes would be organised around a simplified and more transparent framework with the future generation of programmes grouped under three headings: convergence; regional competitiveness and employment; territorial co-operation.

2.1. Convergence

The “Convergence” objective concerns the less developed Member States and regions which in accordance with the Treaty are the top priority for Community cohesion policy. The Treaty calls for a reduction in disparities between “the levels of development of the various regions and the backwardness of the least favoured regions or islands, including rural areas” (Article 158). Enlargement will bring about an unprecedented increase in the disparities within the Union, the reduction of which will require long-term, sustained efforts.

This objective concerns, first and foremost, those regions, whose per capita GDP is less than 75% of the Community average. The key objective of cohesion policy in this context would be to promote growth-enhancing conditions and factors leading to real convergence. Strategies should plan for the development of long-term competitiveness and employment.

The Commission also proposes that temporary support should apply under this priority to those regions where per capita GDP would have been below 75% of the Community average as calculated for the Union of Fifteen (the so-called statistical effect of enlargement). These are regions where objective circumstances have not changed, although their GDP per head will be relatively higher in the enlarged Union. In the interest of equity, and to allow the regions concerned to complete the process of convergence, support will be higher than decided in Berlin in 1999 for the so-called “phasing out” regions of the current generation.

Programmes would be supported by the financial resources of the European Regional Development Fund (ERDF), the European Social Fund (ESF), and the Cohesion Fund, in accordance with the principles set out in the Treaty.

The Cohesion Fund will apply to Member States with GNP lying below 90% of the Community average. The assistance of the Cohesion Fund will be conditioned to the fulfilment of the conditions of economic convergence as well as of the necessity to avoid excessive public deficits in accordance with Article 104 of the Treaty.

In line with the priorities set by the financial perspective, the Cohesion Fund will strengthen its contribution to sustainable development. In this respect, trans-European transport networks, in particular, the projects of European interest, and environment infrastructures would remain the central priorities. In order to reach an appropriate balance to reflect the particular needs of the new Member States, it is envisaged also to support projects such as rail, maritime, inland waterways, and multimodal transport programmes outside the TEN-T, sustainable urban transport and environmentally important investments in the key fields of energy efficiency or renewable energies.

Emphasis will also be given to the strengthening of institutional capacity and the efficiency of public administration, including the capacity for managing the Structural Funds and the Cohesion Fund.

2.2. Regional competitiveness and employment: anticipating and promoting change

While interventions in the less developed Member States and regions remain the priority of cohesion policy, there are important challenges that concern all EU Member States such as rapid economic and social change and restructuring, trade globalisation, a move towards a knowledge-based economy and society, an ageing population, growing immigration, labour shortages in key sectors and social inclusion problems.

In this context, the Union must have an important role to play. For cohesion policy outside the least developed Member States and regions, the Commission proposes a two-fold approach:

- First, through regional programmes financed by the ERDF, cohesion policy will help regions and the regional authorities to anticipate and promote economic change in industrial, urban and rural areas by strengthening their competitiveness and attractiveness, taking into account existing economic, social and territorial disparities.

- Second, through programmes, financed by the ESF, cohesion policy will help people to anticipate and to adapt to economic change, in line with the policy priorities of the EES, by supporting policies aiming at full employment, quality and productivity at work, and social inclusion.

Under the new regional programmes financed by the ERDF the Commission proposes a stricter concentration of interventions on the three priority themes: innovation and the knowledge economy, environment and risk prevention, accessibility and services of general economic interest.

The single funding source for the new programmes will be the ERDF. From a resource allocation point of view, two groups of regions need to be distinguished:

- The regions currently eligible for Objective 1 not fulfilling the criteria for the convergence priority even in the absence of the statistical effect of enlargement. Such regions will benefit from support on a transitional basis (under the heading “phasing in”) which will follow a path comparable to that for regions no longer eligible for Objective 1 in the period 2000-2006.

- All other regions of the Union covered neither by the convergence programmes nor by the “phasing in” support described above.

As regards the operational programmes financed by the ESF, the Commission proposes to underpin the implementation of the employment recommendations and to strengthen social inclusion, in line with the objectives and guidelines of the EES.

To this end, support should focus on four policy priorities that are crucial for the implementation of the EES and where Community funding can provide added value: increasing the adaptability of workers and enterprises; enhancing access to employment and increasing participation in the labour market; reinforcing social inclusion and combating discrimination, mobilising reforms in the fields of employment and inclusion.

2.3. European territorial cooperation

Building on the experience of the present INTERREG Initiative, the Commission proposes to create a new objective dedicated to further the harmonious and balanced integration of the territory of the Union by supporting co-operation between its different components on issues of Community importance at cross-border, transnational and interregional level.

Action will be financed by the ERDF and will focus on integrated programmes managed by a single authority in pursuit of key Community priorities linked to the Lisbon and Gothenburg agendas.

All regions along the internal terrestrial and certain regions along the external terrestrial borders as well as along certain neighbouring maritime borders will be eligible for cross-border co-operation. The aim will be to promote joint solutions to common problems between neighbouring authorities, such as urban, rural and coastal development and development of economic relations and networking of SMEs.

As far as the broader actions to promote transnational co-operation is concerned, the Member States and regions are invited to assess the usefulness and effectiveness of the existing 13 transnational cooperation zones (defined under INTERREG IIIB) in the light of enlargement. The objective will be to decide together with the Commission on a number of zones for transnational cooperation which are sufficiently coherent and where there are common interests and opportunities to be developed. It is envisaged that such cooperation will focus on strategic priorities with a transnational character such as R&D, environment, risk prevention and integrated water management.

Finally, the Commission proposes that regions should in future incorporate actions in the field of interregional cooperation within their regional programmes. To achieve this, regional programmes will need to dedicate a certain amount of resources to exchanges, cooperation and networking with regions in other Member States.

3. An integrated response to specific territorial characteristics

An effective cohesion policy needs to take into account the specific needs and characteristics of territories such as the outermost regions of the Union, islands, mountain areas, in sparsely populated parts in the far north of the Union and certain border areas of the Union.

It also needs to support in an appropriated manner, urban regeneration, rural areas and areas dependent on fisheries, ensuring complementarity and consistency with the specific agricultural and fisheries financial instruments.

Consequently, the Commission intends, within the convergence objective, to set up a specific allocation to compensate for the specific constraints of the outermost regions, as recognised by article 299.2 of the Treaty and requested by the European Council of 21-22 June 2002 in Seville. In addition, an action “Grand Voisinage” aimed at facilitating cooperation with the neighbouring countries will be included under the new “European territorial co-operation” programmes.

Since the problems of accessibility and remoteness from large markets are particularly acute in many islands, mountain areas and sparsely-populated regions, particularly in the far north of the Union, the allocation of the resources for the regional competitiveness and employment priority will take account of this by using “territorial” criteria, thus reflecting the relative disadvantage of regions with geographical handicaps.

Member States should ensure that the specificities of these regions are taken into account when it comes to the targeting of resources within regional programmes. In an effort to promote more action in these sometimes neglected areas and to take account of the higher cost of public investment in per capita terms, for the next period it is proposed that territories with permanent geographical handicaps should benefit from an increase in the maximum Community contribution.

Building on the strengths of the URBAN initiative, the Commission intends to reinforce the place of urban issues by fully integrating actions in this field into the regional programmes. Regional programmes will need to indicate how urban actions are dealt with and how the sub-delegation of responsibilities to city authorities for these actions is organised.

4. A better organisation of the instruments operating in rural areas and in favour of the restructuring of the fisheries sector

The Commission proposes to simplify and to clarify the role of the different instruments in support of rural development and the fisheries sector. The current instruments linked to rural development policy will be grouped in one single instrument under the Common Agricultural Policy designed to:

- Increase the competitiveness of the agricultural sector through support for restructuring

- Enhance the environment and country side through support for land management, including co-financing of rural development actions related to Natura 2000 nature protection sites

- Enhance the quality of life in rural areas and promoting diversification of economic activities through measures targeting the farm sector and other rural actors.

The present Community Initiative, LEADER+, will be integrated into the mainstream programming.

Similarly, action in favour of the restructuring of the fisheries sector would be grouped under a single instrument, which would focus on actions to accompany the restructuring needs of the fisheries sector, and to improve the working and living conditions in areas where the fisheries sector, including aquaculture, plays an important role.

An important part of these proposals is that the financial resources transferred from cohesion policy to these new instruments will continue to be deployed in such a way that the same degree of concentration is achieved as today on helping the less developed regions and countries covered by the convergence programmes.

Outside these interventions, cohesion policy would support the diversification of the rural economy and of the areas dependent on fisheries away from traditional activities.

5. Simplification and decentralisation: a reformed delivery system

Whereas the delivery mechanism for cohesion policy has demonstrated its capacity to implement quality programmes and projects of European interest on the ground, a number of problems have been encountered in the management of current programmes.

The Commission therefore intends to maintain the key principles of cohesion policy – programming, partnership, co-financing and evaluation. However, it proposes to enhance the efficiency of the policy by introducing a number of reforms designed, firstly, to encourage a more strategic approach to programming, secondly, to introduce further decentralisation of responsibilities to partnerships on the ground in the Member States, regions and local authorities, thirdly, to reinforce the performance and quality of programmes co-financed through a reinforced, more transparent partnership and clear and more rigorous monitoring mechanisms, and fourthly, to simplify the management system by introducing more transparency, differentiation and proportionality while ensuring sound financial management.

5.1. More strategic orientation on the priorities of the Union

The Commission proposes that an overall strategic document for cohesion policy should be adopted by the Council, with an opinion of the Parliament, in advance of the new programming period and on the basis of a Commission proposal, defining clear priorities for Member States and regions.

This strategic approach would guide the policy in its implementation and make it more politically accountable. It would help to more tightly specify the desired level of synergy to be achieved between cohesion policy and the Lisbon and Gothenburg agendas and would increase the consistency with the Broad Economic Policy Guidelines and the European Employment Strategy.

Each year, the European Institutions would examine progress on the strategic priorities and results achieved on the basis of a report by the Commission summarising Member States’ progress reports.

In addition, the Commission proposes to simplify further the system in a number of key aspects.

5.2. Programming

The programming system will be simplified as follows:

At the political level: on the basis of the strategic guidelines adopted by the Council, each Member State would prepare a national framework document on its development strategy, which would be negotiated with the Commission and constitute the framework for preparing the thematic and regional programmes, but not having the role – as the existing Community Support Framework – of a management instrument;

At the operational level: on the basis of the policy document, the Commission would adopt national and regional programmes for each Member State. The programmes would be defined at an aggregate or priority level only, highlighting the most important operations. Additional detail, reflected today in the so-called “programme complement” would be abandoned as well as the management by measure.

The number of funds will be limited to three (ERDF, ESF and Cohesion Fund) compared to the current six.

As opposed to current multi-Fund programmes, future ERDF and ESF interventions would aim at operating with only one fund per programme. In this respect, the action of each fund would be made more coherent by allowing the ERDF and the ESF to finance, respectively, residual activities related to human and physical capital. Funding of these activities would be limited and directly linked to the main domains of interventions of each Fund. This would allow both for a simplification and increased effectiveness of programming.

The Cohesion Fund and the ERDF will follow a single programming system, where transport and environment infrastructures are concerned. Large projects would be adopted by the Commission separately, but managed within the related programmes.

5.3. Financial management and control

Within the framework of shared management, one of the key objectives of the future regulatory package for the 2007-2013 programming period is to clearly delimit on the basis of experience gained from the current body of law, the framework, the nature, and the division of responsibility between the different actors concerned by the execution of the Community budget. These include the Member States and the implementing bodies, on the one hand, and the Commission, on the other. In this respect, a clarification will contribute to improve efficiency, efficacy and the overall balance of the system.

Management and control system

The draft regulation laying down general provisions for the ERDF, the ESF and the Cohesion Fund increase the coherence and transparency of the overall architecture of the management and control systems of the Funds:

- The coherence, as is clearly define the minimum conditions applicable to the control and audit systems at all levels of the process, as well as the respective tasks and obligations of the different actors;

- The transparency, as it is necessary that the different actors concerned by the controls become aware of the results of the controls of each part, in order to improve efficiency, efficacy and the overall balance of the system.

The draft regulation defines a common basis of a minimum set of conditions which any management and internal control system concerned by the management of the Funds shall comply with, and the responsibilities of Member States and of the Commission for ensuring the respect of the principle of sound financial management. To this end, the Member States shall provide an assurance in relation with the management and control systems:

- At the beginning of the period, via the opinion on the system by an independent audit body;

- Each year, via the opinion of the audit authority supported by an annual control report; and

- At the end of the period, via the assurance on the final statement of expenditure.

When the Commission disposes of the assurance on the existence and sound functioning of the national management and control systems – assurance based on its own audits and national audits -, it will be able to base its assurance concerning the legality and regularity of the declared expenditure on the results on national controls. Accordingly, it will be able to limit its own on-the-spot audits to exceptional circumstances only.

Along the same lines, the regulatory architecture proposes that the degree of Community intervention in the management, evaluation, and control is a function – among other things – of the importance of its contribution. The draft general regulation allows Member States to apply their own rules and management and control structures when the national contribution is prevailing to a significant degree. This option applies only if the Commission has received an assurance on the reliability of national management and control systems.

The principle of additionality – i.e. EU resources should add to rather than replace national resources - will remain a key principle of cohesion policy. However, in line with the principle of proportionality, the Commission will verify its application only within the “convergence” objective. Member States would be responsible for ensuring that the principle of additionality applies within the “Regional competitiveness and employment” and “European territorial co-operation” programmes.

Financial management

Concerning financial management, two important aspects are introduced to simplify the system. Indeed, payments will be operated at the level of the priorities, and no longer at the level of the measures as it is the case today. In addition, the Community contribution will be calculated on the basis of public expenditure only. The payment system (payment on account and reimbursement) as well as the principle of the automatic de-commitment are maintained.

The draft regulation also proposes the setting up of a procedure of interruption, withholding and suspension of payments in case of serious problems at the moment of the presentation of the request for interim payment.

With a view to simplify the financial management, the Commission proposes to allow partial closure of programmes for operations, which have been completed. The schedule of this closure is decided by each Member State.

National rules would largely determine eligibility of expenditure, with the exception of a limited number of fields such as VAT, where Community rules would continue to apply.

5.4. Concentration of resources

The major concentration of resources should remain on the poorest Member States and regions with an emphasis on the new Member States. At the level of the individual development programmes, concentration would be achieved by focusing on the Lisbon and Gothenburg priorities as well as, in the “convergence” regions, on institutional capacity building.

With regard to the regional competitiveness programmes, the current emphasis (under Objective 2) on the zoning of eligible areas at the level of communes, municipalities and wards has meant that concentration has been understood almost exclusively in micro-geographical terms. While the geographical concentration of resources in the worst affected pockets or areas must remain an essential part of the effort in the future, it must also be recognised that the prospects of such areas are intimately linked to the success of the region as whole.

As many regions have recognised, this requires the development of a coherent strategy for the whole region as a way of addressing the needs of its weakest parts. For the future, it is therefore proposed to abandon the current system of micro-zoning, allowing the appropriate balance between the geographical and other forms of concentration to be determined in the drawing up of the regional competitiveness programmes in partnership with the Commission.

This should not imply any dilution of the level of effort in deploying EU financial resources. Under the “regional competitiveness” strand, each operational programme should justify its geographical, thematic and financial concentration.

In the context of the partnership, regions would have the responsibility in the first instance for concentrating financial resources on the themes necessary to address the economic, social and territorial disparities at regional level. The Commission would verify and confirm consistency at the moment of deciding the programmes.

Finally, through the principle of de-commitment of unused funds (the “N+2 rule”), a discipline unique to regional and cohesion policy, there would remain a strong incentive in favour of the efficient and rapid realisation of the programmes.

5.5. A stronger accent on performance and quality

Effectiveness calls for a greater focus on impact and performance, and for a better definition of the results to be achieved. Overall, the efficiency of cohesion policy would be improved by the establishment of an annual dialogue with the European Institutions to discuss – on the basis of the Commission’s yearly report – the progress and results of national and regional programmes, so to enhance transparency and accountability towards the institutions and the citizens.

Evaluation before, during and after the end of the programmes would remain essential to the overall effort to maintain quality. In addition, the Commission proposes to set up a Community performance reserve whose main objective would be to reward the Member States and regions which show the most significant progress towards the agreed objectives.

Finally, the Commission proposes that Member State create within their national allocation a small reserve enabling them to respond swiftly to unexpected sectoral or local shocks resulting from industrial restructuring or the effects of trade agreements. This reserve would be used for providing ancillary support to affected workers and to the diversification of the economy in the areas concerned, acting as a complement to the national and regional programmes which should constitute the principal instrument for restructuring in anticipation of economic change.

These proposed changes should bring greater transparency to the operation of the policy, facilitating the access of citizens and companies thus increasing the number of projects coming forward and helping to make a contribution to greater value-for-money through increased competition for support.

6. FINANCIAL RESOURCES

The financial resources dedicated to cohesion policy reflect the ambition of an enlarged Union to promote growth and job creation in its less favoured areas. For the period 2007-2013, the Commission proposes to allocate a EUR 336.1 billion (which equates to EUR 373.9 billion before the transfers to the proposed single rural and fisheries instruments) in support of the three priorities of the reformed cohesion policy.

The indicative repartition of this amount among the three objectives of the reformed policy would be as follows:

- Around 78% for the “Convergence” objective (less developed regions, cohesion fund, and “statistical effect” regions), with the emphasis on help to the twelve new Member States. The absorption limit (“capping”) for financial transfers to any given Member State under cohesion policy will be maintained at its current 4% of national GDP, taking into account amounts included under the rural development and fishery instruments. The regions concerned by the so-called statistical effect would benefit from a specific, decreasing allocation under the Convergence objective to facilitate their “phasing out”.

- Around 18% for the “Regional competitiveness and employment” objective. Outside the phasing-in regions the distribution between the regional programmes financed by the ERDF and the national programmes financed by the ESF would be 50-50.

- Around 4% for the “European territorial co-operation” objective.

For the distribution of the financial resources among Member States, the Commission proposes to apply the method based on objective criteria used at the time of the Berlin Council (1999) for the “convergence” priority, taking into account the need for fairness regarding the regions affected by the statistical effect of enlargement.

Resources for the objective “regional competitiveness and employment” would be allocated by the Commission between Member States on the basis of Community economic, social and territorial criteria.

Finally, the population living in the eligible regions as well as the total population of the Member States concerned would guide the distribution of resources under the “European territorial co-operation” objective.

2004/0163(AVC)

Proposal for a

COUNCIL REGULATION

laying down general provisions on the European Regional Development Fund, the European Social Fund and the Cohesion Fund

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community, and in particular Article 161 thereof,

Having regard to the proposal from the Commission[1],

Having regard to the assent of the European Parliament[2],

Having regard to the opinion of the European Economic and Social Committee[3],

Having regard to the opinion of the Committee of the Regions[4],

Having regard to the opinion of the Court of Auditors,

Whereas:

(1) Article 158 of the Treaty states that, in order to strengthen its economic and social cohesion, the Community shall aim at reducing disparities between the levels of development of the various regions and the backwardness of the least favoured regions or islands, including rural areas. Article 159 requires this action to be supported by the Structural Funds, the European Investment Bank (EIB) and the other existing financial instruments.

(2) Cohesion policy should contribute to increasing growth, competitiveness and employment by incorporating the Community’s priorities for sustainable development as defined at the European Councils in Lisbon and Göteborg.

(3) Economic, social and territorial disparities at both regional and national level have increased in the enlarged Community. Competitiveness and employment should therefore be increased throughout the Community.

(4) The increase in the number of the Union’s land and sea borders and the extension of its territory mean that the value added of cross-border, transnational and interregional cooperation in the Union should be increased.

(5) The work of the Cohesion Fund should be integrated into the programming of structural assistance to seek greater coherence among the various Funds.

(6) Under Article 55 of Council Regulation (EC) No 1260/99 of 21 June 1999 laying down general provisions on the Structural Funds[5], the Council is to review that Regulation on the basis of a proposal from the Commission by 31 December 2006 at the latest. In order to implement the reform of the Funds proposed by this Regulation, Regulation (EC) No 1260/99 should be repealed.

(7) The role of the various instruments providing aid for rural development, namely Regulation (EC) No , and for the fisheries sector, namely to Regulation (EC) No [6], should be specified and they should be integrated into the instruments under the common agricultural policy and the common fisheries policy; these instruments should be coordinated with those under the cohesion policy.

(8) The number of Funds providing assistance under the cohesion policy is therefore limited to the European Regional Development Fund (ERDF), the European Social Fund (ESF) and the Cohesion Fund. The rules applicable to each Fund are to be specified in implementing regulations adopted under Articles 148, 161 and 162 of the Treaty.

(9) To increase the value added of Community cohesion policy, the work of the Structural Funds and of the Cohesion Fund should be concentrated and simplified and so the objectives set out in Regulation (EC) No 1260/99 should be redefined. Accordingly, they should be defined as seeking the convergence of the Member States and the regions, regional competitiveness and employment and European territorial cooperation.

(10) Within those three objectives, both economic and social characteristics and territorial characteristics should be taken into account in an appropriate fashion.

(11) The outermost regions should benefit from specific measures and additional funding to offset the handicaps resulting from the factors referred to in Article 299(2) of the Treaty.

(12) The northern areas of the Union, which are very thinly populated, require appropriate financial treatment to offset the effects of that handicap.

(13) In view of the importance of the urban dimension and the contribution of towns and cities, particularly medium-sized ones, to regional development, greater account should be taken of them by developing their role in programming to promote urban regeneration.

(14) The Funds should take special and complementary action over and above that of the European Agricultural Fund for Rural Development (EAFRD) and of the European Fund for Fisheries (EFF) to promote the economic diversification of rural areas and of areas dependent from fisheries. Furthermore, the regions whose development is lagging behind should continue to benefit from the same financial concentration as in the 2000-2006 period through assistance from these instruments supporting that from the Funds.

(15) Action for areas with a natural handicap, i.e. certain islands, mountainous areas and areas with a low density of population, should be strengthened to cope with their particular development difficulties, as well as for certain border areas of the Community following its enlargement.

(16) Objective criteria for designating eligible regions and areas should be fixed. To this end, the identification of the priority regions and areas at Community level should be based on the common system of classification of the regions established by Regulation (EC) No 1059/2003 of the European Parliament and the Council of 26 May 2003 on the establishment of a common classification of territorial units for statistics (NUTS)[7].

(17) A “Convergence” objective is to cover the Member States and regions whose development is lagging behind; the regions targeted by the “Convergence” objective are those whose per capita gross domestic product (GDP) measured in purchasing power parities is less than 75% of the Community average. The regions suffering from the statistical effect linked to the reduction in the Community average following the enlargement of the Union will benefit for that reason from substantial transitional aid in order to complete their convergence process. This aid will end in 2013 and would not be followed by a further transitional period. The Member States targeted by the Convergence objective whose per capita gross national income (GNI) is less than 90% of the Community average will benefit under the Cohesion Fund.

(18) A “Regional competitiveness and employment” objective is to cover the territory of the Community outside the “Convergence” objective. The regions eligible are those under Objective 1 in the 2000-06 programming period which no longer satisfy the regional eligibility criteria of the “Convergence” objective and which therefore benefit from a transitional aid, as well as all the other regions of the Community.

(19) A “European territorial cooperation” objective is to cover regions having land or sea frontiers, the areas for transnational cooperation defined with regard to actions promoting integrated territorial development and support for networks for interregional cooperation and exchange of experience. The improvement and simplification of cooperation along the external borders of the Community entail the use of the European neighbouring and partnership instrument pursuant to Regulation (EC) No and of the pre-accession instrument pursuant to Regulation (EC) No .

(20) The activities of the Funds and the operations which they help finance should be coherent and compatible with the other Community policies and comply with Community legislation.

(21) Action by the Community should be complementary to that carried out by the Member States or seek to contribute to it. The partnership should be strengthened through arrangements for the participation of various types of partners, in particular the regions, with full regard to the institutional arrangements of the Member States.

(22) Multiannual programming shall be directed towards achieving the Funds’ objectives by ensuring the availability of the necessary financial resources and the consistency and continuity of joint action by the Community and the Member States.

(23) The Community may take steps, in accordance with the principle of subsidiarity laid down in Article 5 of the Treaty, to promote the objectives of “Convergence”, “Regional competitiveness and employment” and “European territorial cooperation”. These goals cannot be achieved adequately by the Member States because of the extent of the disparities and the limit on the financial resources of the Member States and regions eligible under the “Convergence” objective. These goals can therefore be better achieved at Community level through the multiannual guarantee of Community finance which allows cohesion policy to be concentrated on the Community’s priorities. In accordance with the principle of proportionality laid down in the above mentioned Article, this Regulation does no more than is required to achieve those goals.

(24) It is appropriate to strengthen the subsidiarity and proportionality of the intervention of the Structural Funds and of the Cohesion Fund.

(25) Under Article 274 of the Treaty, in the context of shared management, the conditions allowing the Commission to exercise its responsibilities for implementation of the general budget of the European Communities should be specified and the obligations of cooperation on the Member States clarified. Applying these conditions will enable the Commission to satisfy itself that Member States are utilising the Funds in a lawful and correct manner and in accordance with the principle of sound financial management within the meaning of the Financial Regulation.

(26) In order to ensure a genuine economic impact, contributions from the Structural Funds may not replace public expenditure by the Member States under the terms of this Regulation. Verification, through partnership, of the principle of additionality should concentrate on the regions under the “Convergence” objective because of the extent of the financial resources allocated to them and may result in a financial correction if additionality is not respected.

(27) In the context of its effort in favour of economic and social cohesion, the Community promotes the goal of eliminating inequalities and promoting equality between women and men as enshrined in Articles 2 and 3 of the Treaty.

(28) Financial concentration on the “Convergence” objective should be increased because of the greater disparities in the enlarged Union, the effort in favour of the “Regional competitiveness and employment” objective to helping improve competitiveness and employment in the rest of the Union should be maintained and the resources for “European territorial cooperation” objective increased in view of its particular value added.

(29) There should be provisions on the allocation of the available resources. These are allocated annually and a significant concentration on the regions whose development is lagging behind, including those receiving transitional support because of the statistical effect, shall be ensured.

(30) The annual appropriations allocated to a Member State under the Funds shall be limited to a ceiling fixed with regard to its capacity for absorption.

(31) The Commission should establish the indicative breakdown of available commitment appropriations using an objective and transparent method. 3% of the appropriations of the Structural Funds allocated to the Member States under the “Convergence” and “Regional competitiveness and employment” objectives should be placed in a Community reserve for rewarding quality and performance.

(32) The appropriations available under the Funds should be indexed on a flat-rate basis for use in programming.

(34) To increase the strategic content of the cohesion policy through integration with the Community’s priorities and so promote its transparency, the Council should adopt strategic guidelines on a proposal from the Commission; the Council should examine their implementation by the Member States on the basis of a report by the Commission.

(35) On the basis of the strategic guidelines adopted by the Council, each Member State should prepare a national reference document on its development strategy, which is negotiated with the Commission and decided by the Commission, and constitutes the framework for preparing the operational programmes.

(36) The programming and management of the Structural Funds should be simplified having regard to their specific features by providing for operational programmes to be financed by either the ERDF or the ESF, each being able to finance in a complementary and limited fashion actions which fall under the scope of the other Fund.

(37) With a view to improve their complementarity and to simplify their implementation, the assistance of the Cohesion Fund and the ERDF shall be jointly programmed in the operational programmes on transport and the environment.

(38) Programming should ensure coordination of the Funds between themselves and with the other existing financial instruments and the EIB and the European Investment Fund. Such coordination also covers the preparation of complex financial schemes and public private partnerships.

(39) The programming period is to last for a single period of seven years, in order to maintain the simplification of the management system defined in Regulation (EC) No 1260/1999.

(40) The Member States and managing authorities should organise within the operational programmes co-financed by the ERDF the arrangements for interregional cooperation and take account of the special features of areas with natural handicaps.

(41) In order to address the need for simplification and decentralisation, programming and financial management should be carried out at the level of the priorities alone, the Community support framework and the programme complement as foreseen by Regulation (EC) No 1260/99 being discontinued.

(42) The Member States, regions and managing authorities should organise, within the operational programmes co-financed by the ERDF under the “Convergence” and the “Regional competitiveness and employment” objectives, sub-delegation to the urban authorities for the priorities concerning the regeneration of towns and cities.

(43) The additional allocation to compensate for the additional costs faced by the outermost regions should be integrated into the operational programmes financed by the ERDF in those regions.

(44) There should be separate arrangements for implementation of the “European territorial cooperation” objective financed by the ERDF.

(45) The Commission should be able to approve major projects included in the operational programmes, if necessary in association with the EIB, in order to evaluate their purpose, impact and the arrangements for the planned use of Community resources.

(46) Under technical assistance, the Funds should provide support for evaluations, improvement of administrative capacity linked to the management of the Funds, studies, pilot projects and exchanges of experience intended, in particular, to encourage innovative approaches and practices.

(47) The effectiveness of assistance from the Funds also depends on the incorporation of a reliable evaluation into programming and monitoring; the responsibilities of the Member States and the Commission in this regard should be specified.

(48) Member States should foresee, within their national envelope under the “Convergence” and “Regional competitiveness and employment” objectives, a small reserve to respond swiftly to unexpected sectoral or local shocks resulting from socio-economic restructuring or the effects of trade agreements.

(49) It is necessary to determine the elements for modulating the participation of the Funds to the operational programmes. To increase the multiplier effect of Community resources, it is therefore necessary to take into account the nature and gravity of problems faced by the concerned areas, the implementation of Community’s priorities including the protection and improvement of the environment, as well as the mobilisation of private sources in the operational programmes through public private partnership. To that end, it is also necessary to define the notion of revenue-generating project and to identify for this type of projects the basis for calculating the participation of the Funds.

(50) In accordance with the principle of subsidiarity and subject to exceptions foreseen in the Regulations (EC) No on the European Regional Development Fund, No on the European Social Fund and No on the Cohesion Fund, there should be national rules on the eligibility of expenditure.

(51) To ensure the effectiveness, fairness and sustainable impact of the intervention of the Funds, there should be provisions guaranteeing that investments in businesses are long-lasting and avoiding these Funds being used to introduce unfair competition. It is necessary to ensure that investments which benefit from assistance from the Funds can be written off over a sufficiently long period.

(52) Member States shall adopt adequate measures to guarantee the proper functioning of management and control system. To this end, it is necessary to establish the general principles and the necessary functions which the systems of all operation programmes shall fulfil on the basis of the Community body of law in force for the programming period 2000-2006.

(53) It is therefore necessary to maintain the designation of a single managing authority for each intervention and to clarify its responsibility as well as the functions of the audit authority. It is also necessary to guarantee uniform quality standards concerning the certification of expenditures and of the payment requests before their transmission to the Commission; it is necessary to clarify le nature and quality of the information on which these requests are based and, to this end, to establish the function of the certification authority.

(54) The monitoring of operational programmes is necessary to ensure the quality of their implementation. To this end, the responsibilities of the monitoring committees shall be defined as well as the information that needs to be transmitted to the Commission and the framework for examining this information.

(55) In accordance with the principles of subsidiarity and proportionality, Member States have the primary responsibility for the implementation and control of the interventions.

(56) The obligations on the Member States as regards management and control systems, the certification of expenditure, and the prevention, detection and correction of irregularities and infringements of Community law should be specified to guarantee the efficient and correct implementation of operational programmes. In particular, concerning management and control, it is necessary to establish the modalities by which Member States give the assurance that the systems are in place and function satisfactorily.

(57) Without prejudice to the Commission’s powers as regards financial control, cooperation between the Member States and the Commission in this field should be increased and the criteria should be established which allow the Commission to determine, in the context of its strategy of control of national systems, the level of assurance it can obtain from national audit bodies.

(58) The extent and intensity of Community controls should be proportionate to the extent of its contribution. Where a Member State is very substantially the main provider of the financing for a programme, it is appropriate that there should be an option for that Member State to organise certain elements of the control arrangements according to national rules. In these same circumstances, it is necessary to establish that the Commission differentiates the means by which Member States should fulfil the functions of certification of expenditures and of verification of the management and control system and to establish the conditions under which the Commission is entitled to limit its own audit and rely on the assurances provided by national bodies.

(59) The payment on account at the start of operational programmes ensures a regular cash flow which facilitate payments to beneficiaries in the implementation of the operational programme. Therefore, a payment on account of 7% for the Structural Funds and 10,5% for the Cohesion Fund will help speed up implementation of operational programmes.

(60) In addition to the suspension of payments where shortcomings are detected in the management and control systems, there should be measures allowing the authorising officer by delegation to suspend payments where there are doubts about the sound operation of these systems or for the Commission to make a deduction from payments if the Member State concerned has not implemented all remaining measures in a corrective plan of action.

(61) The rule on automatic de-commitment will help speed up the implementation of programmes and improve sound financial management. To this end, it is appropriate to define the modalities of its application and the parts of the budgetary commitment which may be excluded from it, notably when the delays in implementation result from circumstances which are independent from the subject appealing to it, abnormal or unforeseeable and whose consequences cannot be avoided despite the diligence which it has shown.

(62) The procedures for closure should be simplified offering the possibility to those Member States which so wish, in accordance with the schedule they select, to partially close an operational programme in respect of the operations completed; the appropriate framework for doing so should be provided.

(63) It is necessary to adopt the measures required for the implementation of this Regulation in conformity with Council Decision 1999/468/EC of 28 June 1999 laying down the procedures for the exercise of implementing powers conferred on the Commission[8],

HAS ADOPTED THIS REGULATION:

TITLE I

OBJECTIVES AND GENERAL RULES ON ASSISTANCE

CHAPTER I SCOPE AND DEFINITIONS

Article 1

Subject matter

This Regulation lays down the general rules governing the European Regional Development Fund (ERDF), the European Social Fund (ESF) (hereinafter: the “Structural Funds”) and the Cohesion Fund, without prejudice of the specific provisions laid down in the Regulations on the ERDF, ESF and the Cohesion Fund.

This Regulation defines the objectives to which the Structural Funds and the Cohesion Fund (hereinafter: the “Funds”) are to contribute, the criteria for Member States and regions to be eligible under those Funds, the financial resources available and the criteria for their allocation.

This Regulation defines the context for cohesion policy, including the method for fixing the Community’s strategic guidelines for cohesion policy, the national strategic reference framework and the annual examination at Community level.

The Regulation lays down the principles and rules on partnership, programming, evaluation, management, including financial management, monitoring and control on the basis of responsibilities shared between the Member States and the Commission.

Article 2

Definitions

For the purposes of this Regulation, the following terms shall have the meanings assigned to them here:

1) ‘operational programme’ : document submitted by the Member State and adopted by the Commission as part of the strategic reference framework setting out a development strategy using a coherent set of priorities, to achieve which aid from a Fund, or, in the case of the “Convergence” objective, the Cohesion Fund and the ERDF, will be sought;

2) ‘priority’ : one of the priorities of the strategy in an operational programme comprising a group of operations which are related and have specific measurable goals;

3) ‘operation’ : a project or group of projects selected by the managing authority of the operational programme concerned or under its responsibility according to criteria laid down by the monitoring committee and implemented by one or more beneficiaries allowing achievement of the goals of the priority to which it relates;

4) ‘ beneficiary ’: an operator, body or firm, whether public or private, responsible for initiating and/or implementing operations. In the context of aid schemes under Article 87 of the Treaty, beneficiaries are public or private firms carrying out an individual action and receiving public aid;

5) ‘public expenditure’ : any public contribution to the financing of operations whose origin is the budget of the State, of regional and local authorities, of the European Communities related to the Structural Funds and the Cohesion Fund and any similar expenditure. Any contribution to the financing of operations whose origin is the budget of public law bodies or associations of one or more regional or local authorities or public law bodies within the meaning of Directive 2004/18/EC of the European Parliament and of the Council of 31 March 2004 on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts[9] shall be regarded as public contribution;

6) ‘intermediate body’ : any body or public or private service which acts under the responsibility of a managing or certifying authority or which carries out duties on behalf of such an authority vis-à-vis beneficiaries implementing operations.

CHAPTER II OBJECTIVES AND MISSIONS

Article 3

Objectives

1. The action taken by the Community under Article 158 of the Treaty shall be designed to strengthen the economic and social cohesion of the enlarged Community in order to promote the harmonious, balanced and sustainable development of the Community. This action shall be taken with the aid of the Funds, the European Investment Bank (EIB) and other existing financial instruments. It shall be aimed at meeting the challenges linked to the economic, social and territorial disparities which have arisen particularly in countries and regions whose development is lagging behind, to the speeding-up of economic and social restructuring, and to the ageing of the population.

The action taken under the Funds shall incorporate, at national and regional level, the Community’s priorities in favour of sustainable development by strengthening growth, competitiveness and employment, social inclusion, as well as the protection and quality of the environment.

2. To that end, the ERDF, the ESF, the Cohesion Fund, the European Investment Bank (EIB) and the other existing Community financial instruments shall each contribute in an appropriate way towards achieving the following three objectives:

a) the “Convergence” objective shall be aimed at speeding up the convergence of the least-developed Member States and regions by improving conditions for growth and employment through increasing and improving the quality of investment in physical and human capital, the development of innovation and of the knowledge society, the adaptability to economic and social changes, the protection and improvement of the environment as well as administrative efficiency. This objective shall constitute the priority of the Funds.

b) the “Regional competitiveness and employment” objective shall, outside the least-developed regions, be aimed at strengthening regions’ competitiveness and attractiveness as well as employment by anticipating economic and social changes, including those linked to the opening of trade, through innovation and the promotion of the knowledge society, entrepreneurship, the protection and improvement of the environment, and the improvement of accessibility, the adaptability of workers and businesses as well as the development of inclusive job markets.

c) the “European territorial cooperation” objective shall be aimed at strengthening cross-border cooperation through joint local initiatives, at transnational level by means of actions conducive to integrated territorial development linked to the Community priorities, and through networking and exchange of experience at the appropriate territorial level.

3. Under the three objectives, assistance from the Funds shall, according to their nature, take into account on the one hand specific economic and social features, and on the other hand specific territorial features. The assistance shall, in an appropriate manner, support urban regeneration particularly as part of regional development and the renewal of rural areas and of areas dependent on fisheries through economic diversification. The assistance shall also support areas affected by geographical or natural handicaps which aggravate the problems of development, particularly in the outermost regions (Guadeloupe, French Guiana, Martinique, Reunion, the Azores, Madeira and the Canary Islands) as well as the northern areas with very low population density, certain islands and island Member States, and mountain areas.

Article 4

Instruments and missions

1. The Funds shall contribute, each in accordance with the specific provisions governing it, towards achieving the three objectives as follows:

a) the “Convergence” objective: the ERDF, the ESF and the Cohesion Fund;

b) the “Regional competitiveness and employment” objective: the ERDF and the ESF;

c) the “European territorial cooperation” objective: the ERDF.

2. The Funds shall contribute towards financing technical assistance on the initiative of the Member States and the Commission.

CHAPTER III GEOGRAPHICAL ELIGIBILITY

Article 5

Convergence

1. The regions eligible for funding from the Structural Funds under the “Convergence” objective shall be regions corresponding to level II of the Nomenclature of Territorial Statistical Units (hereinafter “NUTS level II”) within the meaning of Regulation (EC) No 1059/2003 of the European Parliament and of the Council of 26 May 2003 whose per capita Gross Domestic Product (GDP), measured in purchasing power parities and calculated on the basis of Community figures for the last three years available on […], is less than 75% of the Community average.

2. The NUTS level II regions whose per capita GDP, measured in purchasing power parities and calculated on the basis of Community figures for the last three years available on […], is between 75% and […] % of the Community average shall be eligible, on a transitional and specific basis, for financing by the Structural Funds.

3. The Member States eligible for funding from the Cohesion Fund shall be Member States whose per capita Gross National Income (GNI), measured in purchasing power parities and calculated on the basis of Community figures for the last three years available on […], is less than 90% of the Community average and which have a programme for meeting the economic convergence conditions referred to in Article 104 of the Treaty.

4. Notwithstanding paragraphs 1 and 2 of this Article, and Article 6, the outermost regions (Guadeloupe, French Guiana, Martinique, Reunion, the Azores, Madeira and the Canary Islands) shall benefit from specific funding from the ERDF to facilitate their integration into the internal market and to compensate for their specific constraints.

5. Immediately following the entry into force of this Regulation, the Commission shall adopt in accordance with the procedure referred to in Article 104(2) the list of regions fulfilling the criteria under paragraphs 1 and 2 of this Article and of Member States fulfilling the criteria under Article 5(3). This list shall be valid from 1 January 2007 to 31 December 2013.

Article 6

Regional competitiveness and employment

1. The areas eligible for funding from the Structural Funds under the “Regional competitiveness and employment” objective shall be those not covered by Article 5(1) and 5(2).When presenting the national strategic reference framework referred to in Article 25, each Member State concerned shall indicate the NUTS I or NUTS II regions for which it will present a programme for financing by the ERDF.

2. The NUTS level II regions totally covered by Objective 1 in 2006 under Regulation (EC) No 1260/1999 which are not referred to in Article 5(1) and 5(2) shall be eligible for a specific and transitional financing from the Structural Funds.

3. Immediately following the entry into force of this Regulation, the Commission shall adopt, in accordance with the procedure referred to in Article 104(2) the list of the regions fulfilling the criteria under the second paragraph of this Article. This list shall be valid from 1 January 2007 to 31 December 2013.

Article 7

European Territorial Cooperation

1. For the purpose of cross-border cooperation, shall be eligible for financing the NUTS level III regions of the Community along the internal and certain external land borders and certain NUTS level III regions of the Community along the maritime borders separated, as a general rule, by a maximum of 150 kilometres, taking into account potential adjustments needed to ensure the coherence and continuity of the cooperation action.Immediately following the entry into force of this Regulation, the Commission shall adopt, in accordance with the procedure referred to in Article 104(2) the list of the eligible regions. This list shall be valid from 1 January 2007 to 31 December 2013.

2. For the purpose of transnational cooperation, on the basis of the Community’s strategic guidelines referred to in Articles 23 and 24, the Commission in accordance with the procedure referred to in Article 104(2), shall adopt the list of the eligible transnational areas. This list shall be valid from 1 January 2007 to 31 December 2013.

3. For the purpose of cooperation networks and exchange of experience, the territory of the Community shall be eligible.

CHAPTER IV PRINCIPLES OF ASSISTANCE

Article 8

Complementarity, consistency and compliance

1. The Funds shall provide assistance which complements national, regional and local measures, integrating into them the priorities of the Community.

2. The Commission and the Member States shall ensure that assistance from the Funds and the Member States is consistent with the activities, policies and priorities of the Community. This consistency shall be indicated in particular in the strategic guidelines of the Community, in the national strategic reference framework and in the operational programmes.

3. Operations financed by the Funds shall comply with the provisions of the Treaty and of acts adopted under them.

Article 9

Programming

The objectives of the Funds are pursued in the framework of a multiannual programming system which includes the priorities, a process of management, decision making and financing organised in several stages.

Article 10

Partnership

1. Assistance from the Funds shall be decided by the Commission within the framework of close cooperation, hereinafter "partnership", between the Commission and a Member State. The Member State organises, in accordance with current national rules and practices, a partnership with the authorities and bodies which it designates, namely:

a) the competent regional, local, urban and other public authorities;

b) the economic and social partners;

c) any other appropriate body representing civil society, environmental partners, non-governmental organisations, and bodies responsible for promoting equality between men and women.

Each Member State shall designate the most representative partners at national, regional and local level and in the economic and social or other spheres, hereinafter “partners”. The Member State shall ensure broad and effective involvement of all the appropriate bodies, in accordance with national rules and practices taking account of the need to promote equality between men and women and sustainable development through the integration of environmental protection and improvement requirements.

2. The partnership shall be conducted in full compliance with the respective institutional, legal and financial jurisdiction of each partner category.

The partnership shall cover preparation and monitoring of the national strategic reference framework as well as the preparation, implementation, monitoring and evaluation of the operational programmes. Member States shall involve each of the appropriate partners, and particularly the regions, in the various programming stages within the time limit set for each stage.

3. Each year the Commission shall consult the organisations representing the social partners at European level on assistance from the Funds.

Article 11

Subsidiary and proportional intervention

1. Implementation of operational programmes referred to in Article 23 shall be the responsibility of Member States at the appropriate territorial level, in accordance with the institutional system specific to each Member State. That responsibility shall be exercised in accordance with this Regulation.

2. The means employed by the Commission and the Member States shall vary according to the size of the Community contribution in relation to control provisions. Differentiation also applies to provisions on evaluation, and participation by the Commission in the Monitoring Committees referred to under Article 62 and to the annual reports on operational programmes.

Article 12

Shared management

1. The Community budget allocated to the Funds shall be implemented within the framework of shared management between the Member States and the Commission, in accordance with Article 53, paragraph 1, point b) of Regulation (EC, Euratom) No 1605/2002[10] of the Council, with the exception of the technical assistance referred to in Article 43.

The Member States and the Commission shall ensure compliance with the principle of sound financial management.

2. The Commission exercises its responsibility for implementing the general budget of the European Communities in the following ways:

a) the Commission shall check the existence and proper functioning of management and control systems in the Member States in accordance with the procedures described in Article 69 and 70;

b) the Commission shall interrupt, withhold or suspend all or part of payments in accordance with Articles 89, 90 and 91 if the national management and control systems fail, and shall apply any other financial correction required, in accordance with the procedures described in Articles 101 and 102;

c) the Commission shall check reimbursement of payment on account and automatically de-commit budget commitments in accordance with the procedures laid down in Articles 81(2), 93 and 96.

Article 13

Additionality

1. Contributions from the Structural Funds shall not replace public or equivalent structural expenditure by a Member State.

2. For regions covered by the “Convergence” objective, the Commission and the Member State shall determine the level of public or equivalent structural expenditure which the Member State shall maintain in all the regions concerned during the programming period.

That expenditure shall be agreed by the Member State and the Commission within the national strategic reference framework referred to in Article 25.

3. The level of the expenditure referred to in paragraph 2 shall be at least equal to the amount of average annual expenditure in real terms attained during the previous programming period.

The level of expenditure shall be determined with reference to the general macroeconomic conditions in which the financing is carried out and taking into account certain specific economic situations, namely privatisations as well as an exceptional level of public or equivalent structural expenditure by the Member State during the previous programming period.

4. The Commission shall, in cooperation with each Member State, verify additionality mid-term in 2011 and ex-post by 30 June 2016 for the “Convergence” objective.

Where a Member State is unable to prove on 30 June 2016 that the additionality agreed within the national strategic reference framework has been respected, the Commission shall proceed to a financial correction in accordance with procedure laid down in Article 101.

Article 14

Equality between men and women

The Member States and the Commission shall ensure that equality between men and women and the integration of gender perspective is promoted during the various stages of implementing the Funds.

CHAPTER V FINANCIAL FRAMEWORK

Article 15

Global resources

1. The resources available for commitment from the Funds for the period 2007 to 2013 shall be EUR 336.1 billion at 2004 prices in accordance with the annual breakdown is shown in the Annex 1.

For the purpose of their programming and subsequent inclusion in the general budget of the European Communities, these amounts referred to in the first subparagraph shall be indexed at to 2 % per year.

The breakdown of budgetary resources between the objectives defined in Article 3(2) shall be such to achieve a significant concentration on the regions of the “Convergence” objective.

2. The Commission shall make indicative annual breakdowns by Member States in accordance with the criteria established in Articles 16, 17 and 18 and without prejudice to the provisions referred to in Articles 20 and 21.

Article 16

Resources for the “Convergence” objective

1. Overall resources for the “Convergence” objective shall amount to 78,54% of the resources referred to in the first paragraph of Article 15 (i.e. a total of EUR 264.0 billion) and shall be distributed between the different components as follows:

a) 67.34% for the financing referred to in Article 5(1), using eligible population, regional prosperity, national prosperity and unemployment as the criteria for calculating the indicative breakdowns by Member State;

b) 8.38% for the transitional and specific support referred to in Article 5(2), using eligible population, regional prosperity, national prosperity and unemployment as criteria for calculating the indicative breakdowns by Member State;

c) 23.86% for the financing referred to in Article 5(3), using population, per capita GNI taking into account of the improvement in national prosperity over the previous period, and surface area as criteria for calculating the indicative breakdowns by Member State; and

d) 0.42% for the financing referred to in Article 5(4), using eligible population as criteria for calculating the indicative breakdowns by Member State.

2. The annual breakdown of the appropriations referred to in paragraph 1, subparagraph b) shall be degressive from 1 January 2007. The appropriation in 2007 shall be lower than in 2006, except for those regions that are not fully eligible to Objective 1 on 1 January 2000 pursuant to Regulation (EC) No 1260/1999 for which the appropriation in 2007 shall be objective and fair.

Article 17

Resources for the “Regional competitiveness and employment” objective

1. Overall resources for the “Regional competitiveness and employment” objective shall amount to 17.22% of the resources referred to in the first paragraph of Article 15 (i.e. a total of EUR 57.9 billion) and shall be distributed between the different components as follows:

a) 83.44% for the financing as referred to in Article 6(1), using eligible population, regional prosperity, unemployment, employment rate and population density as the criteria for calculating the indicative breakdowns by Member State; and

b) 16.56% for the transitional and specific support referred to in Article 6(2), using eligible population, regional prosperity, national prosperity and unemployment as the criteria for calculating the indicative breakdowns by Member State.

2. The appropriations referred to in paragraph 1, subparagraph a) shall be divided equally between the programmes financed by the ERDF and the programmes financed by the ESF.

3. Operational programmes financed by the ESF benefit from up to 50% of the available credits as referred to in paragraph 1, subparagraph b). To this end, operational programmes financed by the ESF shall foresee a specific priority.

4. The annual breakdowns of the appropriations referred to in paragraph 1, subparagraph b) shall be degressive from 1 January 2007. The appropriations in 2007 shall be lower than in 2006, except for those regions whose eligibility to Objective 1 pursuant to Regulation (EC) No 1260/1999 started in 2004 for which the appropriation in 2007 shall be objective and fair.

Article 18

Resources for the “European territorial cooperation” objective

Overall resources for the “European territorial cooperation” objective shall amount to 3.94% of the resources referred to under the first paragraph of Article 15 (i.e. a total of EUR 13.2 billion) and shall be distributed between the different components as follows:

a) 35.61% for the financing of cross-border co-operation as referred to in Article 7(1), using the eligible population as the criteria for calculating the indicative breakdowns by Member State.

12.12% for the contribution of the ERDF to the cross-border strand of the European Neighbourhood and Partnership Instrument pursuant to Regulation (EC) No […] and of the Instrument for Pre-Accession pursuant to Regulation (EC) No […]. These Regulations indicate that the contribution of the two instruments to cross-border cooperation with Member States is equivalent to the one of the ERDF.

b) 47.73% for the financing of transnational co-operation as referred to in Article 7(2), using the eligible population as criteria for calculating the indicative breakdowns by Member State.

c) 4.54% for the financing of co-operation networks and exchange of experience as referred to in Article 7(3).

Article 19

Non transferability of resources

The total appropriations allocated by Member State under each of the objectives of the Funds and their components shall not be transferable between them. By way of derogation, the financial allocation by Member State under the “European territorial cooperation” objective may be subject to flexibility of 10% of the amounts allocated between the cross-border component and the transnational component.

Article 20

Resources for the performance and quality reserve

3,0% of the resources referred to in Article 16(1), subparagraphs a) and b), and Article 17(1) shall be allocated in accordance with Article 48.

Article 21

Resources for technical assistance

0,30% of the resources referred to in Article 15(1), shall be devoted to technical assistance for the Commission as defined in Article 43.

Article 22

Capping of resources

The Commission ensures that total annual allocations from the Funds for any Member State pursuant to this Regulation, including the contribution of the ERDF to the financing of the cross-border strand of the European Neighbourhood and Partnership Instrument pursuant to Regulation (EC) No […] and of the Instrument for Pre-Accession pursuant to Regulation (EC) No […], and from the part of the European Agricultural Fund for Rural Development (EAFRD) pursuant to Regulation (EC) No […] originating from the EAGGF Guidance section, and of the European Fund for Fisheries (EFF) pursuant to Regulation (EC) No […] contributing to the “Convergence” objective, shall not exceed 4% of that Member State’s GDP as estimated at the time of the adoption of the interinstitutional agreement.

The Regulations of the financial instruments mentioned in the previous paragraph other than the Funds include a similar provision.

TITLE II

STRATEGIC APPROACH TO COHESION

CHAPTER I COMMUNITY STRATEGIC GUIDELINES ON COHESION

Article 23

Content

The Council establishes at Community level strategic guidelines on economic, social and territorial cohesion defining a framework for the intervention of the Funds.

For each of the objectives of the Funds, those guidelines shall in particular give effect to the priorities of the Community with a view to promote balanced, harmonious and sustainable development.

These guidelines are established taking into account the medium-term economic policy strategy as contained in the Broad Economic Policy Guidelines (BEPGs).

In the sphere of employment and human resources, the priorities shall be those of the European Strategy for Employment taking into account regional and local specificities.

Article 24

Adoption and review

At the latest three months after the adoption of this Regulation, the Community strategic guidelines referred to in Article 23 are adopted in accordance with the procedure laid down in Article 161 of the Treaty. This decision shall be published in the Official Journal of the European Union .

The Community strategic guidelines shall be subject, if necessary, to mid-term review in accordance with the procedure laid down in Article 161 of the Treaty, in order to take account in particular of changes in the priorities of the Community.

CHAPTER II NATIONAL STRATEGIC REFERENCE FRAMEWORK

Article 25

Content

1. The Member State shall present a national strategic reference framework which ensures that Community structural aid is consistent with the Community strategic guidelines, and which identifies the link between Community priorities, on the one hand, and national and regional priorities in order to promote sustainable development, and the national action plan on employment, on the other hand.

The framework shall constitute a reference instrument for preparing the programming of the Funds.

2. Each national strategic reference framework shall contain a summary description of the Member State’s strategy and its operational implementation.

3. The strategic section of the national strategic reference framework shall specify the strategy chosen for the “Convergence” objective and the “Regional competitiveness and employment” objective, demonstrating how the choices made are consistent with the Community strategic guidelines on the basis of an analysis of development disparities, weaknesses and potential related, in particular, to the expected changes in the European and world economies. It shall specify:

a) the thematic and territorial priorities, including for urban regeneration and the diversification of rural economies and of areas dependent on fisheries;

b) for the “Convergence” objective only, the action envisaged for reinforcing the Member State’s administrative efficiency, including as regards management of the Funds, and the evaluation plan referred to in Article 46(1);

c) for the “Regional competitiveness and employment” objective only, the list of regions chosen for regional competitiveness as referred to in the second subparagraph of Article 6(1).

In order to permit monitoring, the main goals of the priorities referred to in point a) shall be quantified and a limited number of performance and impact indicators shall be identified;

4. For the “Convergence” objective and the “Regional competitiveness and employment” objective, the operational section shall contain:

a) the list of operational programmes and the indicative annual allocation from each Fund by programme, ensuring an appropriate balance between regional and thematic action. This list shall include the amount of the national contingency reserve referred to in Article 49;

b) the mechanisms for ensuring coordination between the operational programmes and the Funds;

c) the contribution from other financial instruments, in particular the EIB, and their coordination with the Funds.

5. For the regions of the “Convergence” objective, the operation section shall also contain:

a) the amount of the total annual appropriation provided for under the European Agricultural Fund for Rural Development and the European Fund for Fisheries;

b) the information required for ex-ante verification of compliance with the additionality principle referred to in Article 13.

6. The information contained in the national strategic reference framework takes account of the specific institutional arrangements of each Member State.

Article 26

Preparation and adoption

1. The national strategic reference framework shall be prepared by the Member State according to its institutional structure and in close cooperation with the partners referred to in Article 10. It shall cover the period 1 January 2007 to 31 December 2013.

2. Each Member State shall send the Commission a proposal for a national strategic reference framework as soon as possible after adoption of the Community strategic guidelines. Member States may decide to present at the same time the operational programmes referred to in Article 31. The Commission negotiates this proposal in the framework of the partnership.

3. Before the adoption of the operational programmes referred to in Article 36, the Commission shall take a decision, after consultation of the committee referred to in Article 105, in accordance with the procedure referred to in Article 104(2) covering the following aspects:

a) the strategy and the priority themes chosen for assistance from the Funds and their monitoring arrangements;

b) the list of operational programmes and the indicative distribution of resources by programme for each of the objectives of the Funds, including the amount of the national contingency reserve referred to in Article 49;

c) and, for the “Convergence” objective only, the level of expenditure guaranteeing compliance with the additionality principle referred to in Article 13 and the action envisaged for reinforcing the administrative efficiency and sound management.

That decision shall be without prejudice to any changes to the operational programmes referred to in Article 32.

CHAPTER III STRATEGIC FOLLOW-UP AND ANNUAL DEBATE

Article 27

Annual report by Member States

1. For the first time in 2008 and at the latest by 1 October each year, each Member State shall present to the Commission a report on the progress in implementing its strategy and achieving its goals, taking particular account of the indicators set, and their contribution towards implementing the Community strategic guidelines on cohesion, as well as of available evaluations.

The report shall refer to the national action plan on employment.

2. The national action plan on employment describes each year how the guidelines of the European strategy on employment are implemented in each Member State.

Article 28

Annual report by the Commission

1. For the first time in 2009 and at the beginning of each year, the Commission shall adopt an annual report summarising the main developments, trends and challenges relating to implementation of the Community strategic guidelines and the national strategic reference frameworks.

2. The report shall be based on examination and assessment by the Commission of the Member States’ annual reports referred to in Article 27 and of any other available information. The report shall state the follow-up measures to be taken by the Member States and the Commission in the light of its conclusions.

Article 29

Annual examination

1. The annual report by the Commission referred to in Article 28 shall be sent to the Council together with the BEPG implementation report, the joint report on employment and the Internal Market Strategy implementation report, with a view to the spring European Council.

It shall be sent for opinion to the European Parliament, the European Economic and Social Committee and the Committee of the Regions.

2. Each spring the Council shall examine the annual report by the Commission, together with the BEPG implementation report, the joint report on employment and the Internal Market Strategy implementation report.

3. On the basis of the annual report by the Commission referred to in Article 28 and on a proposal from the Commission, the Council shall adopt conclusions on the implementation of the Community strategic guidelines. The Commission shall ensure that the conclusions are followed up.

Article 30

Cohesion report

The report of the Commission referred to in Article 159, second subparagraph, of the Treaty shall include in particular:

a) a record of the progress made on economic and social cohesion, including the socio-economic situation and development of the regions, as well as the integration of the Community priorities;

b) a record of the role of the Funds, the EIB and the other financial instruments, as well as the effect of other Community and national policies on the progress made.

The report shall contain, if necessary, any proposals on Community measures and policies which should be adopted in order to strengthen economic and social cohesion. It shall also propose, if necessary, proposals concerning any adjustments linked to new Community policy initiatives in the strategic guidelines on cohesion.

In the year in which the report is presented, it shall replace the annual report by the Commission referred to in Article 28. It shall be the subject of an annual debate in accordance with the procedure laid down in Article 29.

TITLE III

PROGRAMMING

CHAPTER I GENERAL PROVISIONS ON THE STRUCTURAL FUNDS AND THE COHESION FUND

Article 31

Preparation and approval of operational programmes

1. The activities of the Funds in the Member States shall take the form of operational programmes within the national strategic reference framework. Each operational programme shall cover a period between 1 January 2007 and 31 December 2013. An operational programme shall cover only one of the three objectives referred to in Article 3, save as otherwise agreed between the Commission and the Member State.

2. Each operational programme shall be drawn up by the Member State or any authority designated by the Member State, in close cooperation with the partners referred to in Article 10.

3. The Member State shall submit a proposal for an operational programme to the Commission containing all the components referred to in Article 36, as soon as possible following the Commission decision referred to in Article 26 or at the same of the presentation of the national strategic reference framework referred to in the same Article 26.

4. The Commission shall appraise the proposed operational programme to determine whether it contributes to the goals and priorities of the national strategic reference framework and to the Community strategic guidelines. Where the Commission considers that an operational programme is inconsistent with the Community strategic guidelines or the national strategic reference framework, it shall request the Member State to revise the proposed programme accordingly.

5. The Commission shall adopt each operational programme as soon as possible after its formal submission by the Member State.

Article 32

Revision of operational programmes

1. At the initiative of the Member State or the Commission, and after approval by the Monitoring Committee, operational programmes shall be re-examined and, if necessary, revised for the rest of the programming period following significant socio-economic changes or in order to take greater or different account of the Community priorities, particularly in the light of Council conclusions. Operational programmes may be re-examined in the light of evaluation and following implementation difficulties. Operational programmes shall, if necessary, be revised following allocation of the reserves referred to in Articles 48 and 49.

2. The Commission shall adopt a decision on the requests for revision of operational programmes as soon as possible after formal submission of the request by the Member State.

Article 33

Specific character of the Funds

1. Operational programmes shall receive financing from only one Fund, save as otherwise provided in paragraph 3.

2. Without prejudice to the derogations laid down in the specific regulations of the Funds, the ERDF and the ESF may finance, in a complementary manner and subject to a limit of 5% of each priority of an operational programme, measures falling within the scope of assistance from the other Fund, provided that they are necessary for the satisfactory implementation of the operation and are directly linked to it.

3. In the Member States receiving support from the Cohesion Fund, the ERDF and the Cohesion Fund shall jointly provide assistance for operational programmes on transport infrastructure and the environment, including major projects.

Article 34

Geographical scope

1. Operational programmes submitted under the “Convergence” objective shall be drawn up at the appropriate geographical level and at least at regional level NUTS II.Operational programmes submitted under the “Convergence” objective with a contribution from the Cohesion Fund shall be drawn up at national level.

2. Operational programmes submitted under the “Regional competitiveness and employment” objective shall be drawn up at regional NUTS I or NUTS II level, in accordance with the institutional system specific to the Member State, for regions benefiting from financing by the ERDF, safe as otherwise agreed between the Commission and the Member State. They shall be drawn up by the Member State at the appropriate level if they are financed by the ESF.

3. Operational programmes submitted under the “European territorial cooperation” objective for cross-border cooperation shall be drawn up for each border or group of borders by an appropriate grouping at NUTS III level, including enclaves. Operational programmes submitted under the “European territorial cooperation” objective for transnational cooperation shall be drawn up at the level of each transnational cooperation area. Networking programmes shall relate to the whole territory of the Community.

Article 35

Participation by the European Investment Bank and the European Investment Fund

1. The EIB and the European Investment Fund (EIF) may participate, in accordance with the modalities laid down in their statutes, in the programming of assistance from the Funds.

2. The EIB and the EIF may, at the request of Member States, participate in the preparation of national strategic reference frameworks and operational programmes, as well as in activities relating to the preparation of major projects, the arrangement of finance, and public-private partnerships. The Member State, in agreement with the EIB and the EIF, may concentrate the loans granted on one or more priorities of an operational programme, in particular in the spheres of innovation and the knowledge economy, human capital, the environment and basic infrastructure projects.

3. The Commission may consult the EIB and the EIF before adoption of the national strategic reference frameworks and the operational programmes. That consultation shall relate in particular to the operational programmes containing an indicative list of major projects or programmes which, by the nature of their priorities, are suitable for mobilising loans or other types of market-based financing.

4. The Commission may, if it considers it appropriate for the appraisal of major projects, request the EIB to examine those projects’ technical quality and economic and financial viability, in particular as regards the financial engineering instruments to be implemented or developed.

CHAPTER II PROGRAMMING CONTENT

SECTION 1 OPERATIONAL PROGRAMMES

ARTICLE 36

Operational programmes for the “Convergence” and “Regional competitiveness and employment” objectives

1. Operational programmes relating to the “Convergence” and the “Regional competitiveness and employment” objectives shall contain:

a) an analysis of the situation in terms of strengths and weaknesses and the strategy chosen in response;

b) a justification of the priorities chosen having regard to the Community strategic guidelines, the national strategic reference framework and the resultant priorities of the operational programme, as well as the expected impact resulting from the ex ante evaluation referred to in Article 46;

c) an information on the priorities and their specific targets. Those targets shall be quantified using a limited number of indicators for implementation, results and impact, taking into account the proportionality principle. The indicators must make it possible to measure the progress in relation to the baseline situation and the effectiveness of the targets implementing the priorities;

d) a breakdown of the spheres of assistance by category in accordance with the detailed rules for the implementation of this Regulation;

e) a financing plan containing two tables:

i) a table breaking down for each year, in accordance with Articles 50 to 53, the amount of the total financial appropriation envisaged for the contribution from each Fund. The financing plan shall show separately within the total contribution from the Structural Funds the appropriations provided for regions receiving transitional support. The total contribution from the Funds provided for annually shall be compatible with the applicable Financial Perspective and taking into account the phased reduction laid down in Articles 16(2) and 17(4);

ii) a table specifying, for the whole programming period and for each priority, the amount of the total financial appropriation of the Community contribution and the public national counterparts and the rate of contribution from the Funds. It shall show, for information, the contribution from the EIB and the other financial instruments;

f) information on complementarity with measures financed by the European Agricultural Fund for Rural Development and those financed by the European Fund for Fisheries;

g) the implementing provisions