The structural and cohesion funds--an opportunity for Romania.

Popa, Ancuca ; Stoiciu, Andreea

I. The structural and cohesion funds as a tool of cohesion policy

At the budgetary level, the member states contribute to the budget of the European Union and receive a certain ratio from the budget. The funds are distributed to the member states by means of two funds: Structural Funds and Cohesion Fund, and two complementary actions European Fund for Agriculture and Rural Development and European Fisheries Fund.

The Structural and the Cohesion Fund are financial instruments of the policy of economic and social cohesion. The Structural Funds are granted so that each member states to reach a minimum level of infrastructure development in proportion to the European standards, the investments being orientated towards the economic growth, the employment and the development of the regions less developed. The Cohesion Funds aim to reduce the differences between the European regions, financing projects in environmental protection and trans-European transport networks, projects concerning the sustainable development.

Financial instruments have been used for delivering investments for Structural Funds since the programming period 1994-1999. Their relative importance has increased during the current programming period 2007-2013. In the light of the current economic situation and the increasing scarcity of public resources, financial instruments are expected to play an even stronger role in cohesion policy in the next programming period 2014-2020.

In May 2004, ten countries join to EU, of which eight were post-communist countries; and two other countries (Romania and Bulgaria) joined in 2007. The countries that joined the EU in 2004 received an amount of 24.4 billion euros as structural funds for the period 2004 - 2006. The amount allocated (175 billion euro) to the new member states for the period 2007 - 2013 is considerably higher than in the first period 2004 - 2006.

The funds allocated to support the cohesion policy were limited to 0.45% of the EU GDP, which made Spain, Portugal, Greece and many other new EU members to demand an increase of this level considering the requirements for financing the accomplishment of the cohesion policy goals. The reaction of the states which were net contributors (Germany, Great Britain, Sweden, Austria and the Netherlands) to this proposal was not in favour of increasing this level. The methodology of allocation restricted the transfer of European funds to just 4% of the member states GDP. In order to facilitate the fund absorption by the new member states - Romania and Bulgaria - the highest level of co-financing from structural funds was increased from 80% to 85%, some procedures and regulations became more flexible and the financing rule "n+2" became "n+3" for 2007 - 2010. The funds spent according to the n+2/ n+ 3 principles, assume that Commission's funds can not be indefinitely available to the member state, but rather there is a deadline until these amounts can be spent. Even if, it is discussed about a multi-annual allocation, this does not mean that the member state may use the funds anytime during those seven years, because there is an annual allocation which was initially established and clearly defined for each Operational Programme. Also, within each Operational Programme, Priority axis and key areas of intervention a certain amount was allocated for the entire period (2007-2013); and the allocated amounts are in concordance with the annual forecast.

The general requirements for managing the EU funds are defined by EU regulations, but the countries are free to find their own solutions according to this framework. Nanu, Buziernescu, Spulbar (2010) identify two models within the new member states: Baltic countries, which establish the management round the Ministry of Finance which actuates both as payment authority and as management authority, and the Central Europe countries which ground on framework-systems less centralized, where the payment and management authorities are situated within the structure of some distinct institutions (the payment authority is always situated within the Ministry of Finance).

It is difficult to determine which model is more efficient: the leaders of the absorption process - Slovenia and Estonia - represent different models. However, there are two general lessons (Rosenberg, Sierhej, 2007): the first underlines that in the beginning the frameworks were over-regulated, usually in order to prevent the inadequate use of the European funds, and the second lesson indicates that the absorption process is aided by the existence of some powerful central management authority. Indeed, some countries seem to have learnt these lessons. For instance, at the end of 2005, Poland created a new ministry regarding the regional development, in order to consolidate the surveillance of the funds which in the beginning had been distributed to different ministries. At the end of 2011, Romania also created a new ministry regarding the European affaires in order to speed up the absorption process.

II. The effects of the European funds on cohesion countries

Structural funds represent an important resource to develop the new member states, but there are some problems associated with them. One of the most important is the absorption capacity. Most member states have experienced difficulties in absorbing European funds, especially in the first years after accession. The global economic crisis produced contractions among different European countries, but most affected were the new member states.

An introspection of the literature regarding the absorption of European structural and cohesion funds reveals a lack of adequate conceptual framework while the subject of better ways to manage these funds is less addressed. As the explanation could not be related to the lack of interest in studying such a problem, the reasons are essentially linked to its relative novelty, to the difficulties in assessing the impact of structural funds on the convergence of EU countries in the long term, to construction of appropriate indicators, including for the measurement of the absorption capacity (Georgescu, 2010). Most often, the absorption capacity is understood as the extent to which a member state is able to spend the financial resources allocated from European funds, in an effective and efficient manner.

UNDP (United Nations Development Programme) made a comparative analysis of the absorption of structural funds in Ireland, Portugal, Czech Republic and Poland. The experiences of the new member states show that the absorption of the structural funds requires a solid preparation of central administration in order to establish the national frameworks of solid policies, the coordination between ministries, well made national programmes and the implementing ability. The partnership with local and regional governments, private business sectors and non/governmental organization are also essential.

Voinea et al. (2010) take into account the administrative component of absorbing capacity as a determining factor in creating an institutional environment which supports the application and the approving of the projects that are intended to be funded. The authors believe that designing an active informing policy is extremely important. Furthermore, it is also considered that ministerial coordination and partnerships between local authorities, nongovernmental sector, private and civil society within democratic mechanisms that take into account the needs and priorities of all stakeholders, is the main base for an intrinsic social capital.

Several studies have been conducted to analyze the relation between European structural policy and convergence of member states by economists. Some of them are negative on convergence within the EU, but some of them have positive findings on convergence. Ederveen, de Groot, Nahuis (2002), in a study on the effects of European funds on the 13 beneficiary countries, have found that there is a different efficiency depending on country's institutional framework. Thus, in 10 out of 13 analyzed countries, could not be established a direct correlation between the European support and improved performance in terms of economic growth. Dall'erba S., Le Gallo (2003), using the formal tools of spatial econometrics, show that structural funds have positively benefited to the growth in the least developed regions suffer from the small extent of regional spillover effects. Beugelsdijk, Eijffinger (2005) studied empirically on the effectiveness of structural policy in the EU for the old 15 member states. In this study, the convergence of the old member states was tested for the period 1995 - 2001 by touching on the problem of moral hazard. They conclude that structural funds do indeed appear to have had a positive impact and poorer counties like Greece appear to have caught up with the richer countries. Secondly, according to their results, users of structural funds in some cases are not really eligible and may therefore use the funds inefficiently.

Bradly (2004) emphasizes the importance of taking account of other factors; the research suggests that the direct impacts of the structural funds in isolation are modest, and that the real long term benefits of EU cohesion policy are associated with the responsiveness of lagging economies to external opportunities for trade and investment.

Varga, Veld (2009) provide a model-based analysis of the potential macro-economic impact of European Union Structural and Cohesion Funds payments on the economies of the new member states. The model simulations indicate that this can lead to significant gains in output, both in the short as well as in the long run. Regarding Romania, most of the structural funds (19.2 billion) are for "Convergence" objective, through the seven operational programs - established by an official document, the National Strategic Framework. This focuses mainly on increasing economic competitiveness, human resources development, transport and environment development, regional development, technical assistance, public administration and European territorial cooperation.

Romania can't praise in terms of its performances regarding the absorption capacity. Within unfavourable absorption factors, Voinea et al. (2010) highlight the poor operation of justice, failure to comply with competition principles, low capacity of institutions involved in this process, lack of adequate coordination between them, the allocation of money which is often in disagreement with real economy.

Taking into consideration these aspects, it should be mentioned the fact that 40% of Romania's population belongs to rural environment and this fact involves a low degree of information and involvement. The resilience to change is another factor which diminishes the percentage of funding absorption. In terms of predicted flows of structural mechanisms, distortions of the truth and the unprofessional are additional unsuccessful factors.

Romania has recorded progresses on most levels, but this effort is prolific only on long term and requires perseverance and patience, constant political support granted to the relevant authorities and also independently from the political changes.

Most of the empirical results and the economic situation of the member states benefiting from the structural funds demonstrate that the impact and the importance of structural funding cannot be neglected.

The way in which Romania will benefit from cohesion policy in the multi-yearly absorption 2007 - 2013 programming period it depends on public-private partnership and civil society and the favourable environment built in order to support the absorption of European funding. On the other hand, structural funds do not represent the most important issue, even in the case of a high degree of absorption because the main problem is maintaining their efficiency when there is lack of consistent reforms.

III. The future of the European funds - the programming period 2014 - 2020

For 2014 - 2020 programming period, the member states have to take into consideration the new framework of structural and cohesion funds when they are designing the operational programs. The European Commission has decided that the cohesion policy remains the essential package of the future financial package and it emphasizes the primary role in order to support Europe 2020 Strategy.

Europe 2020 Strategy is a strategic document of the European Union regarding the economic and social area, in the context of the European model of social market economy. In this document, the fundamental directions of economic and social development of the European Union in the 21st century have been designed. In order to highlight the priorities of Europe 2020 Strategy, we have briefly presented them in comparison with the Lisbon Agenda 2010.

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Although Lisbon Agenda results are not satisfactory, Europe 2020 Strategy has not decreased ambitions regarding the objectives / targets. Thus, the European Commission proposes the following main objectives (targets):

* 75% of the population aged between 20 and 64 should have a job;

* 3% of EU GDP should be invested in research and development (R&D];

* Objectives "20/20/20" climate / energy would be met (including the increase of the emission reductions of greenhouse gas, from 1990 to 30% if conditions are right)

* Early school dropout rate would be reduced below 10% and at least 40% of younger generation should have higher education;

* The number of people at risk of poverty would be reduced by 20 million.

In order to achieve these objectives, the European Commission presented, in June 2011, the EU budget for the 2014-2020 period.

It can be noticed that EC is also paying a lot of attention to cohesion policy during 2014 - 2020 period.

The newest element is represented by Connecting Europe Facility for transport, energy and ITC, which worth 40 billion euros plus 10 billion euros ring fenced inside the Cohesion Fund.

The European Commission also wants a more coherent use of structural and cohesion funds. To increase the effectiveness of cohesion spending, it is considered 3 categories of regions (according to GDP/capita): less developed regions (< 75% of EU average), transition regions (75 - 90%) and competitiveness regions (>90%).

Transition regions and competitiveness regions would be required to focus the entire allocation of cohesion funding (except for the ESF) primarily on energy efficiency and renewable energy; SME competitiveness and innovation. In these regions, investments in energy efficiency and renewable energy will be at least 20%. Convergence regions will be able to devote their allocation to a wider range of objectives reflecting their broader range of development needs.

To encourage and increase the use of financial instruments in cohesion policy for the 2014-2020 programming period, the Commission's proposals:

--offer greater flexibility to EU Member States and regions in terms of target sectors and implementation structures;

--provide a stable implementation framework founded on a clear and detailed set of rules, building on existing guidance and experiences on the ground;

--capture synergies between financial instruments and other forms of support, such as grants; and

--ensure compatibility with financial instruments set up and implemented at EU level under direct management rules.

Experience with the current financial framework indicates that many Member States have difficulties in absorbing large volumes of EU funds over a limited period of time. Furthermore, the fiscal situation in some Member States has made it more difficult to release funds to provide national co-financing. In order to facilitate the absorption of funding, the Commission is proposing a number of steps:

* to fix at 2.5 % of GDP the capping rates for cohesion allocations;

* capping co-financing rates at the level of each priority axis within the operational programmes at 75-85 % in less developed regions and outermost regions; 75 % for European Territorial Cooperation programmes; 60 % in transition regions; and 50 % in more developed regions;

* to include certain conditions in the Partnership Contracts regarding the improvement of administrative capacity.

In order to highlight the goals of structural and cohesion funds, we have presented the two programming periods in a comparative manner.

Comparing the two programming periods, the Commission's proposal for the programming period 2014 - 2020 provides greater flexibility for Member States and managing authorities when designing programmes, both to choose between delivering investments through grants and financial instruments, and to select the most suitable financial instrument. It also gives more clarity and certainty in the legal framework for financial instruments.

From a budgetary perspective, the strengthening of financial instruments, as catalysts of public and private resources, will help Member

States and regions to achieve the strategic investment levels needed to implement the Europe 2020 Strategy.

Moreover, with financial instruments being applied more widely and being well-tailored to the specific needs of regions and their target recipients, access to finance can be significantly improved for the benefit of a wide range of socio-economic stakeholder. For example it can encourage enterprises to invest in innovation, households wishing to improve the energy efficiency performance of their dwelling, individuals pursuing their business ideas, as well as public infrastructure or productive investment projects that meet the strategic objectives of cohesion policy and deliver the expected outputs of its programmes.

Conclusions

The recent studies based on the impact of cohesion policy are very optimistic, but they also warn that expectations should be regarded cautiously due to the fact that there are many limitations. The predictions can become reality only if some hypotheses regarding the quality factors involved in implementation process are confirmed.

Romania has the change to step into the project of second modernization, throughout the full benefits of structural and cohesion European funds.

Even if Romania was among first member states whose operational programs were approved by the European Commission, the implementation of agreed strategy was not easy. This happened because of the specific type of problems relating to the implementation process of a new and complex funding system.

For successfully absorb and benefit from the EC funding, Romania should guide itself by the "money for projects" principle.

Thus, the new National Strategic Framework for 2014-2020 period should include a modernization strategy, based on best practices experience and project oriented approach, ready-to-implement through specific operational programs.

Acknowledgement:

This work was supported by the project "Post-Doctoral Studies in Economics: training program for elite researchers - SPODE" co-funded from the European Social Fund through the Development of Human Resources Operational Programme 2007 - 2013, contract no. POSDRU/89/1.5/S/61755.

References

(1.) Beugelsdijk Eijffinger, The Effectiveness of Structural Policy in the European Union: An Emprical Analysis for the EU 15 in 1995-2001, p.37-51, 2005

(2.) Bradley John, Edgar Morgenroth, A Study of the Macroeconomic Impact of the Reform of EU Cohesion Policy, Economic and Social Research Institute, Dublin, 2004

(3.) Dall'erba Sandy, Le Gallo Julie, Regional Convergence and the impact of European structural funds over 1989 - 1999: a spatial econometric analysis, Discussion Paper, The Regional Economics Applications Laboratory

(4.) Dinga Ene, BaltareCu Camelia, Prelipcean Gabriela, The new European strategy for growth and jobs (Europe 2020): goals, instruments to monitor its implementation, institutional resources, implementation recommendation, Study no. 2, European Institute of Romania, Bucharest, 2010;

(5.) Ederveen S., de Groot H., Nahuis R. (2002), Fertile Soil for Structural Funds ? A panel data analysis of the conditional effectiveness of European Cohesion Policy, Tinberger Discussion Paper

(6.) European Commission, Cohesion Policy 2014 - 2020, Investing in growth and jobs, 2011

(7.) Georgescu George, Determinats of increasing EU Funds absorption capacity in Romania, Institute of National Economy, 2010

(8.) Nanu R., Buziernescu R., Spulbar C., The experiences of the new member states in the structural funds field. Lessons for Romania, Universitatea din Craiova, 2010

(9.) Rosenberg C.B., Sierhej, Interpreting EU Funds Data for Macroeconomic Analysis in the New Member States", International Monetary Fund, WP/07/77

(10.) Varga Janos, Veld Jan, A Model-based Assessment of the Macroeconomic Impact of EU Structural Funds on the New Member States, 2009

(11.) Voinea L. et al., Reindustrializarea Romaniei: politici si strategii, Grupul de Economie Aplicata, 2010.

AncuCa POPA,

Ministry of Economy, Trade and Business Environment

Managing Authority for the Sectorial Operational Programme

"Increase of Economic Competitiveness", Bucharest, Romania

Romanian Academy, POSDRU/89/1.5/S/61755

E-mail: ancutzapp@yahoo.com

Andreea STOICIU

Institute of Management and Sustainable Development

Director of the Institute of Management and Sustainable Development,

Bucharest, Romania; Coordinator of the UN C7 Subgroup e-Government for

Sustainable Development

Table 1. Cohesion policy architecture

2007-2013                            2014-2020

Objectives        Funds      Goals         Category of   Funds
                                           regions
Convergence       ERDF       Investment    Less          ERDF
                  ESF        in Growth     developed     ESF
                             and Jobs      regions
Convergence                                Transition
phasing out                                regions
Regional
Competitiveness
and Employment
phasing in
                  Cohesion                               Cohesion
                  Fund                                   Fund
Regional          ERDF                     More          ERDF
Competitiveness   ESF                      developed     ESF
and Employment                             regions
European          ERDF       European                    ERDF
Territorial                  Territorial
Cooperation                  Cooperation

Source: DG Regio information - authors' concept

Figure 1. Financial allocation on operational programmes

Technical         0.9
Assistance,
Regional         19.4
Development,
Environment      23.5
Transport,       23.7
Competitivety,   13.3
Administrative    1.1
capacity,
Human            18.1
Resources
Development,

Source: Operational Programmes, authors' own processing

Note: Table made from pie chart.

Figure 3. Comparative data concerning the EU budget for
the period 2007-2013/2014-2020

                       2007-2013   2014-2020

Cohesion Policy        35,6        34

Other policies (agriculture,        64,4                   62
research, citizenship etc)

Connecting Europe Facility       0                        4

Figure 4. The funds allocation for the period 2014 - 2020

                            Budget         Population
                            allocation %   covered (in million)

More developed regions      15,80%         307,1%

Transition regions          11,60%         72,4

Less developed regions/MS   68,70%         119,2

Source: DG Regio information - authors' concept