EIB Papers Volume 13. n°1/2008 - European Investment Bank

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Various empirical studies confirm that EU funds lead to ‘fiscal drag’ due to co-financing and additionality rules. 134 Volume13 N°1 2008 EIB PAPERS For infrastructure development, Structural and Cohesion Funds are the most important EU sources. EU funds most relevant to the provision of infrastructure are: (i) the Structural Funds (particularly the European Regional Development Fund and the European Social Fund); and (ii) the Cohesion Fund (Box 1 and Annex). 9 Both are grouped in the EU terminology under the heading “structural actions” and are aimed at fostering income convergence. Therefore, they account for a larger share of EU commitments in the less wealthy NMS. Structural and Cohesion Funds are set to increase substantially under the new EU financial perspective for 2007–13. The committed amounts for EU transfers under the new EU financial perspective range from 1.5 percent of GDP in Slovenia to over 3 percent of GDP in Hungary. EU funds require domestic co-financing and additionality. Depending on the domain, EU funds can be used to finance up to 75-85 percent of a project. The rest may come from domestic public or private sources. 10 Co-financing as such does not necessarily have an adverse impact on the budget since resources can be reallocated from existing budget lines. This is not possible, however, for Structural Funds, which are subject to additionality rules. These require that spending in a certain category, including co-financing, be higher than the average spending in the preceding two years. A similar additionality requirement does not exist for the Cohesion Fund, internal policies, or transitional expenditure. Although each NMS is a net receiver of EU transfers, the net impact on the country’s fiscal position depends on the substitution between transfers and existing expenditures. EU transfers impact both the revenue and the expenditure side of the budget. The net effect will critically depend on how much national spending can be substituted with EU-financed support. Some argue that EU transfers mainly lead to the restructuring of the national budgets because EU funding replaces existing national expenditure. For example, Hallet and Keereman (2005) estimate that, in 2004–06, EU transfers raised fiscal balances in NMS by 0.5 percent of GDP on average. Others, however, contend that co-financing requirements lead to additional spending and therefore may result in “fiscal drag.” For instance, recent IMF country reports for several NMS suggest a negative net budget impact, with estimates ranging from -0.1 percent of GDP in Romania to -2.6 percent of GDP in Bulgaria in 2007 (IMF 2006b, 2006c, 2006d, and 2007). Sommer (2003) and Kopits and Székely (2002) also estimate that the fiscal impact would be negative. More recently, Rosenberg and Sierhej (2007) undertook the first ex-post assessment, and concluded that EU funds may have led to a fiscal drag of about 0.5 percent of GDP. For some NMS (e.g., Hungary and Slovakia), this is the first study that uses actual post-accession budget data. In addition to their net fiscal impact, EU funds are likely to impact expenditure allocation patterns, with spending on EU programmes taking priority over domestically financed projects. This results from both the need to make room for co-financing requirements under tight fiscal budgets, and from additionality rules, which will necessarily displace other spending under a fixed expenditure envelope. In effect, ex-ante additionality tables for Structural Funds for the 2004-2006 period suggest that expenditure composition would be affected. Figure 8 suggests that the share of infrastructure spending in total spending would actually decline, with increasing allocations toward 9 Some countries also continue to have access to the pre-accession funds PHARE and ISPA, which also foster infrastructure development. The discussion in this section focuses only on EU funds available after accession. 10 The European Commission (2006) estimates that co-financing in 2004 amounted to about 0.3 percent of GDP in 2004 for the NMS, ranging from 0.1 percent of GDP in the wealthier NMS (Slovenia and Malta) to 0.6 percent of GDP in the poorer Baltic States that receive relatively more EU assistance.
Box 1. EU funding relevant to infrastructure development Funds for Objective 1a: Competitiveness for Growth and Employment The European Development Fund (ERDF) and the European Social Fund (ESF) are the key financing instruments for programmes under this heading, and many programmes are relevant for infrastructure development. • Eligibility: All EU member states and sub-national regions • Project financed: Infrastructure projects covered by the defined scope of the relevant programmes, such as the Trans-European Networks in energy, telecom, and transport, Marco Polo II (environment-friendly transport), the 7 th Research Framework Programme (including R&D infrastructure), and CIP (including energy). • Grant financing: Variable, depending on the project type and the income of the hosting countries or regions, but generally up to 50 percent of total eligible expenditure • Total budget available: About EUR 40 billion for infrastructure related programmes (2007-2013) Structural Funds Four types of structural funds were established to support structural economic and social development. The ERDF and ESF are the two types most relevant for infrastructure, and also the only two remaining structural instruments in the 2007-2013 framework. • Eligibility: All EU member states and sub-national regions can qualify for some type of structural funding. • Projects financed: The ERDF finances productive investment for more jobs, infrastructure, and small and medium-sized enterprises. The ESF funds programmes to develop human resource and labour market, such as vocational training, education and careers advice, and entrepreneurship support. • Grant financing: Variable, depending on the income of the hosting countries or regions, but generally up to 85 percent of total eligible expenditure. • Total budget available: EUR 195 billion (2000-2006); EUR 278 billion (2007-2013) Cohesion Fund The Cohesion Fund was established in 1993 to complement the structural funds. It helps less prosperous Member States reduce economic and social disparities in order to strengthen cohesion and solidarity in the EU, and mainly finances projects in environmental and transport infrastructure. • Eligibility: Member states with per capita GNI (measured in purchasing power parities) below 90 percent of the EU average and a programme designed to fulfil the conditions of economic convergence. The initial recipients are Ireland, Greece, Spain, and Portugal, but Ireland no longer qualifies since 2004. The eligibility also extends to the 10 new members joined in May 2004 and to Bulgaria and Romania joined in January 2007. • Projects financed: Projects in environmental or transport infrastructure. Energy efficiency or renewable energy projects may also qualify in 2007-2013. • Grant financing: Up to 85 percent of the total eligible expenditure • Total budget available: EUR 18 billion (2000-2006); EUR 70 billion (2007-2013) Sources: European Commission (2005a, 2005b) EIB PAPERS Volume13 N°1 2008 135
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Preface This year the European Inve
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Infrastructure investment, growth a
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Government investment is not the sa
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Different types of government inves
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Infrastructure accounts for one-thi
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A common feature for the new member
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The share of transport in governmen
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The proxies are subject to caveats.
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The shares of infrastructure and ho
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There have been marked differences
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Government transport investment has
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Transport and other infrastructure
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References 54 Volume13 N°1 2008 EI
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In some countries a shock to public
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The analysis accounts for long-run
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Table 1. Some VAR studies (publishe
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The ratio of private capital to GDP
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Denmark 68 Volume13 N°1 2008 EIB P
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There is no systematic pattern for
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High variability of the public-capi
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Has the impact of public capital on
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Productivity of public capital incr
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The impact of public capital on out
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