Opinion of the Committee of the Regions on:

- the 'Proposal for a Council Regulation (EC) amending Regulation (EC) No 1164/94 establishing a Cohesion Fund`, and - the 'Proposal for a Council Regulation (EC) amending Annex II to Regulation (EC) No 1164/94 establishing a Cohesion Fund` (1999/C 51/03)

THE COMMITTEE OF THE REGIONS,

having regard to the Proposal for a Council Regulation (EC) amending Regulation (EC) No 1164/94 establishing a Cohesion Fund and the Proposal for a Council Regulation (EC) amending Annex II to Regulation (EC) No 1164/94 establishing a Cohesion Fund (COM(98) 130 final) 98/0104 (AVC) - 98/0118 (CNS) ();

having regard to the Council Decision of 19 May 1998 to consult it on this subject, in accordance with Article 130d and the first paragraph of Article 198c of the Treaty establishing the European Community;

having regard to the Bureau decision of 13 May 1998 asking Commission 1 (Regional policy, structural funds, economic and social cohesion, cross-border and inter-regional cooperation) to prepare the opinion;

having regard to the draft opinion adopted by Commission 1 on 30 September 1998 (CdR 235/98 rev.) (rapporteurs: Mr Apostolákos and Mr O'Neachtain);

whereas Regulation (EC) No 1164/94 establishing a Cohesion Fund () and the European Commission communication Agenda 2000 (COM(97) 2000 final);

whereas the Opinion of the Committee of the Regions on the Cohesion Policy and the Environment (CdR 134/96 fin) () and its Opinion on the Views of the Regional and Local Authorities for European Structural Policy (CdR 131/97 fin) (),

adopted the following opinion at its 26th plenary session (meeting of 19 November 1998).

1. Introduction

1.1. The purpose of the Cohesion Fund established in 1994 following the Maastricht Treaty was to help the less prosperous Member States prepare for EMU and the budgetary discipline that this implied, while maintaining efforts to reduce the development gap and increase their capacity for growth and prosperity. The fund is in effect a means of compensating the weakest Member States for undertaking substantial spending on the infrastructural projects required for social and economic growth, while seeking to control their budget deficits.

1.2. On 16 March 1998 the European Commission published its proposal for amending Regulation (EC) No 1164/94 establishing a Cohesion Fund. The proposal does not entail a radical reform, but rather seeks to adjust the Fund in relation to a number of key elements. As stated in the Communication 'Agenda 2000` the Cohesion Fund is to continue to provide assistance to the four current recipient Member States, which are eligible under the criterion of per capita GNP being less than 90 % of the Community average; Greece, Ireland, Portugal and Spain. The Cohesion Fund is to be allocated some ECU 21 billion (1999 prices) for the period 2000-2006 at a rate of ECU 3 billion per year.

The main areas of amendment are:

- The stipulations regarding macroeconomic conditionality will continue to apply. The participating Member States must ensure that they avoid any unnecessary public debt. Those countries participating in the Euro must also meet the provisions laid down in the Stability and Growth Pacts. In situations where it is evident that these conditions are not being met the Commission will intervene and freeze finance.

- The Commission proposes that there should be greater use of other sources of complementary private finance.

- In the interests of encouraging the Polluter-Pays Principle, the Commission is introducing a provision to vary its rates of assistance in order to avoid discouraging this principle.

- Member States will be given increasing responsibility in relation to Financial control. The Member States are to have responsibility for verifying to the Commission that operations have been properly carried out and when irregularities occur the Member State must take any necessary administrative or legal action. Member States shall be responsible for reimbursing any funds paid which are the subject of irregularities.

- In the interests of ensuring that the most environmentally sustainable option is chosen there is to be a fuller assessment of alternatives to the project proposed and the environmental impact thereof.

- The Commission proposes simplification of Financial Management - but the management and monitoring of funds is to be more rigorous.

2. General comments

2.1. The Commission's decision to maintain the Cohesion Fund notwithstanding EMU is widely welcomed by the Committee of the Regions. The first report on Economic and Social Cohesion in the EU, published in November 1996 shows that structural policies have had a strong equalizing effect. The Committee of the Regions in particular recognizes the crucial part played by the Cohesion Fund in convergence between the Member States, but recognizes that so far none has reached the threshold of a GNP of at least 90 % of the Community average.

2.2. The COR notes that while advances have been made in the Cohesion countries in the fields of both transport (which is vital to these countries due to their peripherality) and environmental services (where these countries may have lagged behind in the implementation of EU Directives) there is still significant work to be done improving such infrastructure. Indeed in a number of the Cohesion countries a considerable infrastructural deficit still exists. The demands for continued improvement and the conflict between investment in such infrastructure and the necessity of ensuring budgetary restraint both for those not participating in the Euro and those participating in the Euro (in the light of the provision of the Stability and Growth pact), provides the rationale for the continuation of the Fund.

2.3. The Committee of the Regions also believes that the Cohesion Fund has a continuing role to play in achieving environmentally sustainable development in the Member States concerned. Given the commitment to sustainable development and environmental protection in the Amsterdam Treaty, the COR believes the Cohesion Fund is a key means of further addressing the needs of the Member States in the areas of environmental protection, particularly in the field of protection and management of water resources, as well as the collection, treatment and recycling of waste.

2.4. The Committee of the Regions recognizes that the changes proposed are in the interests of efficiency, equity and greater protection of the environment, and that the minor nature of the changes reflects the relative success of the Cohesion Fund and its operation to date. However, the Committee of the Regions has a number of concerns regarding: general funding considerations, the greater use of private funding, some aspects of the Polluter-Pays Principle and a number of the proposed changes relating to financial management.

2.5. A number of the proposed amendments to the regulation increase the environmental dimension of the Cohesion Fund. The Committee of the Regions fully agrees with a greater emphasis on ensuring that the impact of projects on the environment are fully assessed, that any alternatives are adequately appraised and that attempts are made to introduce suitably designed, fiscal measures and charges which impose the costs of pollution and environmental damage on those responsible for these.

2.6. The Committee of the Regions recognizes that efforts to promote growth and convergence of productive capacity and real income levels within the Cohesion countries can place the environment at risk, but would point out that real costs do exist for the Cohesion countries in efforts to balance this growth with environmental protection measures. While welcoming the increased emphasis on the Polluter-Pays Principle, the Committee of the Regions believes there is a need for further guidelines on how this provision will be operated in practice.

2.7. While recognizing that the financial changes proposed are in the interest of efficiency and simplicity, the Committee of the Regions is concerned that proposed amendments may have implications for local and regional authorities as implementing agencies.

2.8. The Committee of the Regions is particularly concerned regarding the possible decommitment of any unspent funds from the Cohesion Fund budget. The Committee of the Regions calls for a revision of the terms of this provision to ensure that unspent funds can be redirected to other worthy cohesion projects.

2.9. The Committee of the Regions notes that the Commission proposes the amendment not only of Regulation 1164/94 which requires a unanimous vote in the Council, but also the Annexes which need a qualified majority. The Committee of the Regions would hope that amendments to the Annexes would not undermine the philosophy of the Cohesion Fund by introducing changes which would not be subject to a unanimous vote by Council.

3. Specific comments

3.1. Scope and operation of the Cohesion Fund (Article 2)

3.1.1. While the Committee of the Regions supports the idea of applying the eligibility criteria strictly, there may be a need to consider a transitional arrangement after 2003. Unlike, the revised Structural Funds regulation, in the present Cohesion regulation there is no possibility of phasing out of support, and it is stated that not only new projects but stages of projects (where important projects are split into stages) will no longer be funded once the eligibility criteria is exceeded. The Committee considers that an abrupt suspension of Cohesion Fund support would have an adverse effect on many regions. It may be appropriate for a transitional period for phasing out support after the mid term review in 2003, in order to cushion the cohesion countries from economic and social shocks, to consolidate their progress and to facilitate further adjustment to the new conditions. By introducing some limited transitional arrangements after 2003 the progress made in the Cohesion countries can be safeguarded.

3.2. Macroeconomic conditionality (Article 6)

3.2.1. The Committee of the Regions concurs with the Commission's continued emphasis on Conditionality. It considers that it is necessary to continue macro-economic policies geared towards stability and growth. The conditionality principle must be implemented without disrupting development in the Cohesion countries.

3.3. Greater use of other sources of complementary private finance (Article 7)

3.3.1. The Committee of the Regions would accept that the proposed amendments to the Regulation would ensure that greater private funding is utilized in large scale projects which have potential for generating revenue. This would increase the leverage of and multiplier effect of Community funding. The Committee of the Regions recognizes that it is useful to encourage private investment, in order to make structural policies more efficient and to promote the multiplier effect. The COR has already made this point in its opinion on 'Views of the Regional and Local Authorities on Arrangements for European Structural Policy` ().

3.3.2. The Committee of the Regions would however, point out that the interests of private and regional/local operators may well differ and that this could stand in the way of private sector funding. There are often difficulties in encouraging such investment in transport and environmental services in certain more peripheral areas of countries. There is also a need to ensure that there is an equitable provision of infrastructure and services and it should be noted that in some cases local and regional authorities are best placed to provide (finance) and maintain this type of infrastructure.

3.3.3. The Committee of the Regions believes that public private partnerships should be encouraged, but that notwithstanding a commitment to such partnerships, that the decisions regarding the revenue generating potential of the projects and their suitability for private involvement should be made at Member State level in conjunction with input from the local and regional authorities involved.

3.4. Environmental issues: Better application of the Polluter Pays Principle (Article 7) and fuller assessment of alternatives and environmental impact (Article B)

3.4.1. The Committee of the Regions considers that protecting and enhancing the environment, as well as reducing the disparities in the environmental situations of different regions, are necessary preconditions for a successful cohesion policy. Thus the COR welcomes the enhanced consideration of environmental issues in the Cohesion Fund.

3.4.2. In this regard the Committee of the Regions reiterates the point made in its opinion on Cohesion Policy and the Environment () that it is important that the Commission ensures that the 50/50 divide between environment and transport infrastructure, be maintained and monitored, in order to achieve environmental sustainability. However, in order to ensure that the needs and circumstances of each region can be accommodated, it must remain possible to make exceptions in duly justified cases and apply the Regulation with some flexibility in the balance.

3.4.3. The Committee welcomes the amendments made which allow the Commission to adjust the rate of assistance for the Cohesion Fund so as to encourage the Polluter-Pays Principle, thus reducing the disincentive to the cohesion countries in applying a proper pricing policy.

However, in assessing the new emphasis on the Polluter-Pays Principle in the Regulation there is some clarification required. Firstly, there is a need for clarification regarding the determination of the rate of assistance. A decision on the rate of assistance should be taken in consultation with the Member State and the relevant regional and local authorities. Secondly, while the Polluter-Pays Principle is a key element of current EU environmental policy, the full implementation of the principle could be onerous for many of the Cohesion countries, where there has been less emphasis on the implementation of charges. The COR believes it is therefore necessary that the application of the Polluter-Pays Principle is considered obligatory, but the possibility must remain to make exceptions for cases where it is evident that the local conditions do not yet allow for the (full) implementation of the principle.

In the light of these concerns the Committee of the Regions would like to see further thought on the manner in which the Commission will implement this element of the Regulation. The Committee of the Regions considers that there is a need for the introduction of Community Guidelines on the Polluter-Pays Principle and its application to different projects.

3.4.4. The Committee of the Regions believes that the amended Regulation in proposing a fuller assessment of alternatives not chosen and of environmental impact, will go some way to ensuring that infrastructural and ultimately economic development does not occur at the expense of an intact environment. The Committee of the Regions does however, consider that assessing alternatives in a full and complete manner could have negative implications on the financial and staffing resources of regional and local authorities and would like to see guidelines regarding the number of alternatives to be assessed and the level of assessment required.

3.5. Financial control (Article 12)

3.5.1. The Committee of the Regions welcomes the proposed changes in the interests of applying the principle of subsidiarity. It is recognized that the devolution of power is accompanied by more responsibility on behalf of the Member States.

3.6. Clarification of concepts (Article A)

3.6.1. The implementing provisions will be amended to include definitions of terms such as project, group of projects and stages of projects. The Committee of the Regions welcomes this clarification, and hopes that it facilitates the financing of major projects and that it prompts a more strategic approach towards infrastructure provision in the Member States.

3.6.2. However, the Committee of the Regions points out that because of the situation in several of the cohesion countries a number of the projects, particularly those in the environmental arena, have been of small size but have a significant impact on environmental quality. There is thus a need to ensure that such definitions do not jeopardize the funding of smaller - though vitally important projects (which are provided for under Article 10 Paragraph 3 of Regulation (EC) No 1164/94). We thus suggest that the paragraph defining a project Article A Paragraph 2(a) be revised to state that all the criteria set down in Article 10 paragraph 5 of Regulation (EC) No 1164/94 be complied with rather that only the first criterion as proposed by the Commission. This will ensure that not only the social and economic benefits of a project will be considered in defining a project but that local authorities' own priorities will be considered, together with its contribution to and compatibility with other Community policies.

3.7. Financial management (Article C, Article D)

3.7.1. The Committee of the Regions commends the fact that the Cohesion Fund Regulation is to be amended rather than being replaced and that the administrative arrangements will remain largely the same. This will allow a seamless passage into the new period and will result in uninterrupted implementation of the Regulation from its initial introduction in 1994.

3.7.2. The Committee of the Regions welcomes the proposal that the Commission will give budget commitments at the beginning of every financial year. This will remove some of the uncertainty regarding financial commitments, it will allow regional and local authorities to better co-ordinate their own budget lines and will allow those involved in the planning process to have a relatively clear idea of the amount of Community financial assistance they can expect.

3.7.3. The Commission proposes the introduction of measures to penalize projects where work has not been implemented, to allow monies committed to such projects to be reallocated. The amended Regulation will allow the cancellation of financing to a project not started after a period of two years of its expected start date, except in duly justified cases. The COR agrees about the necessity for (a) tighter controls on projects' starting dates, and (b) for ensuring that funds may be reallocated. These are important preconditions for effective use of resources and for the continued legitimacy of funding.

The COR points out that local and regional authorities may experience difficulties and delays in moving a major infrastructural project through planning and legal procedures, compulsory purchase and public consultation. In particular, unforeseen delays can arise due to third party intervention in procedures, which could delay the start date of work on the project.

The Committee of the Regions would urge that in recognition of these difficulties the Commission would give a commitment to consider the particular circumstances surrounding each project and exercise a degree of flexibility with regard to the implementation of this proposal.

3.7.4. The amendments recommend that payments will not favour the first year of the project. The Commission proposes giving an advance of not greater than 10 % assistance in the first year. The Committee of the Regions considers that the reduction in the ceiling of the initial advance from 50 % to 10 % may put pressure on Exchequer budgets and on local and regional authority budgets (particularly those where resources are constrained) in initial stages of a project.

3.7.5. The Committee of the Regions also considers that the amount to be held over as a final payment (20 % in most cases 10 % in important projects) also places an excessive burden on the budgets of local administrations.

3.7.6. The Committee of the Regions feels that the period 'of two months after receipt of an admissible application for Payment` within which payment is to be made by the Commission should be mandatory rather than a 'general rule`.

3.7.7. The proposed amendments to the Regulation suggest that following the first advance, payment will be made/reimbursed on receipt of certified expenditure. The reimbursements will be dependent on the project's fulfilment of certain conditions, including its progress in terms of specified monitoring indicators. The Committee believes that the introduction of more rigorous financial management and monitoring could place pressure on local authorities and regional authorities given the tight timescales now specified for reporting and the greater level of detail to be provided in such reports. The Committee of the Regions while recognizing the benefits of closer monitoring and more detailed reporting, would submit that the timeframes introduced will place an undue administrative and financial burden on local and regional authorities.

3.8. Monitoring and Evaluation (Article F)

3.8.1. The Committee of the Regions stresses the importance of involving regional and local authorities on Monitoring Committees. It is vital that evaluation and monitoring be regarded as an expression of partnership (as it is in the Structural funds) and that local and regional authorities should be engaged at all phases of the Cohesion Fund from priority setting to monitoring and evaluation.

3.8.2. Given the costs involved for national, regional and local authorities in the monitoring and evaluation of projects funded under the Cohesion Fund the Committee of the Regions would like to see some of these expenditure costs being considered as eligible expenditure.

3.8.3. The Committee of the Regions welcomes the addition of information on the impact of the Fund on employment as an element of the Commission's annual report on the Fund.

4. Conclusions

4.1. The Committee of the Regions welcomes the Commission proposal to continue Cohesion Fund support and believes that the fund will continue to play a fruitful role in addressing the infrastructural deficit which exists in the four beneficiary Member States. The COR also commends the decision to amend rather than replace the existing Regulation and believes that this will allow for a seamless transition between the two periods of financing.

4.2. While welcoming the greater emphasis on public private-partnerships the COR believes that decisions regarding the revenue generating potential of projects and their suitability for private funding should be made at Member State level in consultation with the local and regional authorities involved.

4.3. The Committee of the Regions recommends that guidelines be introduced on the application of the Polluter-Pays Principle. The COR also recommends that notwithstanding the environmental worth of the Polluter-Pays Principle, the principle should not be a requirement of all projects and exceptions must be possible for cases where the implementation of the principle causes difficulties disproportionate to the benefits of the principle.

4.4. In the interests of gaining public support for the Polluter-Pays Principle particularly in the domestic sphere, the Committee of the Regions would urge the Commission to support the funding of information and awareness raising exercises (either from other sources or from the technical assistance tranche of the Fund). This would encourage changes in producer and consumer behaviour, which is a vital element in the introduction and maintenance of market based instruments.

4.5. The Committee of the Regions believes that the future funding of small scale projects should be safegaurded. The COR would argue that notwithstanding the need to finance large projects and to ensure a strategic approach to project development, a number of small scale projects may be of particular relevance in the Cohesion Countries. It is vitally important that the local administrations set their own priorities in this regard.

4.6. The Committee of the Regions is concerned by the decision of the Commission to decommit unspent funds from the Cohesion Fund. The Committee of the Regions believes that there is a need for some reconsideration of this issue. The Committee of the Regions is convinced that unspent funds should be channelled into other Cohesion Fund projects.

4.7. The Committee of the Regions expresses its concern regarding the reduction in the ceiling of the initial advance to projects from 50 % to 10 %. The COR calls upon the Commission to consider increasing the proposed initial advance from 10 % to 30 %, so as to ensure that sufficient funds are available in the initial stages of projects.

4.8. The COR also believes that the amount held over as a final payment should be no more than 5 % this would ensure that finance is available during the works process and would facilitate the progress of projects.

4.9. The COR agrees with the Commission that it is reasonable to cancel funding for those projects not started after a period of two years of their expected start dates. The COR supports the Commission view that in duly justified cases this will not occur and would urge the Commission to judge each project on a case by case basis and with flexibility.

4.10. Given the increased assessment, monitoring and evaluation commitments outlined in the amended Regulation, the Committee of the Regions would welcome the ability to include such assessment, monitoring and evaluation as eligible expenditure for co-financing by the Cohesion Fund.

4.11. The Committee of the Regions would urge the Commission to ensure that local and regional authorities are engaged at all phases of the Fund from priority setting to monitoring and evaluation.

4.12. Finally, given the procedures outlined in the regulation for amending both the Regulation and its Annexes, the COR would like an assurance that amendments to the Annexes would not undermine the philosophy of the Cohesion Fund by introducing changes which will not be subject to a unanimous vote in the Council.

4.13. The Committee of the Regions calls on the Commission to revise the proposal for Council Regulation amending the Regulation establishing a Cohesion Fund together with the proposal for a Council Regulation to amend Annex II to this Regulation and, in so doing, to take account of the Committee of the Region's suggestions.

Brussels, 19 November 1998.

The President of the Committee of the Regions

Manfred DAMMEYER

() OJ C 159, 26.5.1998, p. 7.

() OJ L 130, 25.5.1994, p. 1.

() OJ C 34, 3.2.1997, p. 22.

() OJ C 64, 27.2.1998, p. 5.

() CdR 131/97 fin - OJ C 64, 27.2.1998, p. 5.

() CdR 134/96 fin - OJ C 34, 3.2.1997, p. 22.